The REIT stuff

The previous administration had not only gotten the real-estate investment trust (REIT) wrong, but also bungled it big time, virtually killing it as an investment vehicle that would have democratized massive revenues, brought heretofore unattainable investments in prime assets within the reach of investors, and provided the property sector substantial incremental capital to increase both asset sizes and value.

Recently the REIT made headlines in the overseas business pages, as returns on most REITs in the United States between 2015 and this year broached the 11-percent return on investment (ROI) ceilings, with many REIT issues more than doubling the returns of the five-year REIT editions. Arrayed against similar financial instruments and investment options, those returns certainly deserve a second look.

The performance of REITs has debunked the odds, given the prevailing interest rates in the US and their prospects toward the end of 2016. Obviously the Americans had advantages we did not have.

One, they are accustomed to asset pooling and derivative financial instruments that optimized returns and averaged down risks.

Two, their economic managers were not bean-counting accountants with clerical mentalities, as had afflicted our economy in the last six years.

REITs were introduced to the local market as far back as 2009 under Republic Act 9856, which institutionalized these as investment vehicles at a time when the property sector was booming.

Prior to the REIT, to invest in property required exacting due diligences on an asset-by-asset basis for real property projects developed by publicly listed developers. As not all projects might be as prolific as the next one, risks remained high. While, indeed, there were synergisms within a major developer, these impact differently on the downstream projects and, thus, risks, rather than averaging out, were project-specific.

In contrast, through REIT developers are compelled to share a substantial amount of their income with REIT holders in return for cash investments the developer can employ as expansion capital. The economic multiplier effect is obvious.

Most of Asia have successful REIT portfolios, with the total Asian REIT market capitalization broaching $250 billion for a single quarter in 2014.

Unfortunately the absence of a viable local REIT vehicle has been identified as a critical reason our economy has not been a primary investment destination. This is because the Aquino bureaucracy imposed fatal conditions that turned the REIT zombie-like.

One is an extraneous tax inflicted on developers transferring assets into a REIT. The other is a bureaucratic imposition designed to virtually alienate and disenfranchise the primary developer from the total equity composition of a REIT.

As REITs are asset pools from which investment participation certificates are created, marketed and traded in the capital markets, they necessitate transferring individual assets into a portfolio on a tax-neutral basis. These transfers are not a taxable sales where gains are the objective. By its very nature, as nothing of value is added, even a value-added tax is inapplicable.

These simple facts are those that the myopic refuse to understand, blinded as they are by prospective collections that are totally unjustified absent any real revenues.

Fortunately, the new economic team of President Rodrigo R. Duterte had identified the resurrection of the REIT as a priority, going so far as to declare lower ceilings on equity dispersion as the optimal strategy in order to maintain both professional management and control over REIT-registered assets, as well as the critical inclusion of brand and equity goodwill in REIT valuation.

It is unfortunate that, in the case of REITs, its near-death experience might have been deliberate guised under a thin veil of stupidity and shortsightedness by previous economic managers. The Duterte team is attempting to right wrongs. For sure, the Duterte economic team indeed have the right stuff. On this Finance Secretary Carlos Dominguez III and the rest of Duterte’s better-enlightened team have our unequivocal support.