R.E.I.T.

DISCOVER AN EXCITING FINANCIAL PRODUCT THAT HAS

REVOLUTIONIZED THE WORLD OF PROPERTY & INVESTMENTS
A Real Estate Investment Trust (REIT, pronounced as “reet”) is a stock corporation created
for the purpose of owning and managing income-generating real estate such as office
buildings, residential condominiums, shopping centers, hotels, warehouses, hospitals, airports
and tollways. The Philippine REIT, under Republic Act No. 9856, otherwise known as the REIT
Act of 2009, requires REITs to list its shares of stock on the Philippine Stock Exchange or PSE.
The REIT distributes 90% of its distributable income to investors in the form of regular
dividends and receives special tax considerations as an incentive.

This investment instrument allows investors—especially small or retail investors—to

participate in the ownership of one or more income-generating real estate.

At the same time, property companies with predictable cash flows could form REITs to
facilitate the realization of their projected gains ahead of time. This translates to immediate
access to fresh capital, which may be plowed back to new projects and investments, thus
redounding to new jobs and consequently, economic development.

In REITrospect: A Brief History

According to the website, REITNet (http://www.reitnet.com/), REITs started in the 1880s. At that time,
investors in the United States of America could avert double taxation by investing in trusts since these
were not taxed at the corporate level if their revenues were divided among their investors.

In the 1930s, Americans lost this tax advantage when all passive investments were taxed initially at the
corporate level and subsequently as part of the individual incomes of the stockholders. REITs
experienced a revival in 1960 when President Dwight Eisenhower signed the REIT tax provision which
reinstated special tax considerations by identifying REITs as pass through entities, thus removing
double taxation. This law remains in force today with little revisions. REITs flourished further in the
1980s with the removal of specific real estate tax shelters. The US Tax Reform Act of 1986 enabled
REITs to manage their properties directly, and in 1993, pension funds were permitted to invest in
REITs. In 1999, US President Bill Clinton signed the REIT Modernization Act, which together with
earlier reforms, gave REITs a bigger boost in the market.

At present, there are more than 193 publicly traded REITs in the US, with assets surpassing $500
billion. In Australia, Listed Property Trust assets have reached A$106 billion. In Singapore, Property
Trust assets are valued at S$25 billion. REITs have also gained prominence in countries like Canada,
Hong Kong, Japan and Malaysia.

In the Philippines, the “REIT Act” became effective on February 9, 2010. With the REIT Act providing
the legal and regulatory framework for REITs , the development of the REIT industry in the country
should be fast tracked.
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FEATURES OF REITs

Form

The Philippine REIT, although designated as a “trust”, does not have the same technical meaning as
“trust” but is used for the sole purpose of adopting the internationally accepted term. The
Philippine REIT is in the “corporate” form. Countries that use the corporate form are: Japan, South
Korea, Germany, Belgium, and Israel.

Parties to a REIT

In order to manage its income-generating real estate and other investments, a REIT is required to
engage the services of an independent fund manager and a property manager. The fund manager
is tasked to execute the REIT’s investment strategies, while the property manager provides
property management services, lease management services, including rent collection, tenant
services, security and other similar services.

Functions

A REIT has all the powers of a corporation under the Corporation Code, and shall have the following basic functions:

a. Appoint a Fund Manager, a Property Manager and a Property Valuer;

b. Ensure that the financial and economic aspects are professionally managed;
c. Formulate the annual investment strategy and policy;
d. Determine its annual borrowing limit;
e. Determine the acquisition and disposition plan of real estate properties;
f. Implement appropriate policies and conduct due diligence reviews;
g. Formulate dividend policies;
h. Keep proper books and records;
i. Ensure that all documents are made available for inspection;
j. Ensure compliance with government regulations; and
k. Others (for more details, see REIT Act Implementing Rules and Regulations (IRR))

Activities and Allowable Investments of a REIT

REITs are allowed to make investments in the following:

1. Real estate;
2. Real estate-related assets;
3. Managed funds, debt, securities, and listed share issued by local or foreign non-property
corporations;
4. Government securities (issued in the Philippines and others);
5. Cash and its equivalent; and
6. Similar investments (see REIT Act IRR).
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TYPES OF REITs

Around the world, REITs are generally classified into three broad categories.

Philippine REITs are equity REITs. These are stock corporations which primarily invest
in and own a portfolio of income-generating real estate. Their revenues principally
come from rental income, toll fees, user’s fees and the like.

Mortgage REITs are another type of REITs which are not yet offered in the
Philippines. These deal in the investment in and ownership of mortgages secured by
real estate or the purchase of existing mortgages or mortgage-backed securities.
Their revenues are generated primarily from the interest earned from mortgage
loans.

There are also hybrid REITs which combine the investment strategies of both equity
LISTING
and PROCESS
mortgage REITs by FOR REITs
investing in both properties and mortgages.

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REITs FOR THE ISSUER

Benefits of Listing

In order to enjoy the incentives given by the law, the REIT should be listed on the stock
exchange, thereby providing a ready market for the buying and selling of REIT shares.

Incorporation of REITs

For a company to be able to offer REIT shares to the public, it should be incorporated as a
stock corporation established in accordance with the Corporation Code of the Philippines and
the rules and regulations promulgated by the Securities and Exchange Commission (SEC).

Registration of REIT shares of stock

The shares of stock of a REIT should also be registered with the SEC in accordance with the
Securities Regulation Code. No shares of stock of a REIT shall be offered for subscription or
sale except in accordance with a REIT Plan (prospectus) and other requirements of the SEC.

The REIT Plan shall include, among others, the following information:

a. Investment policy, restrictions and strategy;

b. The business plan for property investment and management covering the scope and
type of investments including the type(s) of real estate (e.g. leisure, residential,
commercial, or industrial);
c. General character and competitive conditions of all real estate held or intended to
be acquired;
d. Nature and risks of making property investments in each of the relevant locations,
including:
i. Demographics;
ii. State of the economy, economic risks and foreign
exchange risk;
iii. Political risks;
iv. Legal risks and tax considerations;
v. Policy risks;
e. Transaction
vi.history
Overviewof the relevant
of the property
property in the past three (3) years
market;
f. Dividend policy;
vii. Analysis of the specific property sector and the rental
g. Functions, duties
marketand responsibilities of the Property Manager and the Fund
Manager;
h. Use of proceeds;
i. Pro-forma financial statements which shall include information on Net Asset Value
and Net Asset Value per unit after the proposed public offering;
j. Other information required by the REIT IRR.
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General Criteria for Listing

a. Stock corporation incorporated in the Philippines for the purpose of

owning income-generating real estate assets;
b. Dividend policy of distributing regularly at least ninety percent (90%)
of its distributable income;
c. At least 1,000 public shareholders, each owning at least 50 shares of any
class of shares who in the aggregate own at least 1/3 of the outstanding capital stock;
d. Minimum paid-up capital of Php300 million;
e. At least 75% of the deposited property of the REIT must be invested in income-generating real
estate;
f. At least 1/3 of the board of directors of a REIT must be independent directors;
g. Appointment of a qualified fund manager and property manager;
h. Compliance with the fit and proper rule;
i. A newly formed REIT which invokes the track record or operating history of its income-generating real
estate assets shall submit audited financial statements and other supporting documents that
reflect the track record or operating history of the REIT’s income-generating real estate assets for
the applicable period;
j. All REIT shares of stock shall be issued in uncertificated form;
k. Other rules, regulations, policies, guidelines of the Exchange which are not inconsistent with the REIT
Act of 2009 and its IRR will apply to REITs.

Restrictions

a. A REIT may invest in income-generating real estate located outside the Philippines, provided, that
such investment does not exceed 40% of its deposited property, and only upon special authority
from the SEC, and after showing satisfactory proof that the valuation of the assets is fair and
reasonable.
b. REIT may invest not more than 5% of its investible funds in synthetic investment products and only
upon special authority from the appropriate regulatory authority.
c. A REIT must not undertake property development unless it intends to hold the developed property
upon completion. Property development should not exceed 10% of the deposited property.
d. At least 75% of the deposited property of the REIT must be invested in income-generating real
estate.
e. Not more than 15% of investible funds may be invested in any one security or fund, except
government securities where the limit is 25%.
f. Total borrowings and deferred payments of a REIT should not exceed 35% of its deposited property.
Percentage may be increased up to 70% under special circumstances.
g. Related party transactions must comply with certain requirements which include, among others,
disclosure and the unanimous vote of the independent directors of the REIT.
h. REITs must have a full valuation of its assets conducted by an independent appraisal company at
least once a year.
i. At least 1/3 of the board of directors of a REIT must be independent directors.
j. Directors or officers of the REIT, fund manager, property manager, distributor and other REIT
participants are subjected to the fit and proper rule.
k. REITs must comply with all of the reportorial and disclosure requirements under the REIT Law.
l. Compensation of executives of a REIT shall not exceed 10%.

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REITs FOR THE ISSUER

Tax Treatment at the REIT level

The corporate income tax rate of thirty percent (30%) will be imposed on the REIT’s taxable net
income, which is its gross income less allowable deductions and dividends distributed. To enjoy
the benefits under the REIT Act, a REIT should maintain its status as a publicly listed company,
whose shares are registered with the SEC and distributes at least 90% of its distributable income.

REITs also enjoy a lower creditable withholding tax

(CWT) rate of one percent (1%) for income payments.

Likewise, a REIT enjoys a 50% discount on the

applicable documentary stamp tax, registration and
annotation fees when it buys real property. This
incentive can be availed of by an unlisted REIT,
provided it is listed within two (2) years from the date
of the initial availment of the incentives, maintains its
status as a listed public company, whose shares are
registered with the SEC and distributes at least 90% of
its distributable income.

Original issuance of REIT shares of stock is subject to

the documentary stamp tax (“DST”). However, initial
public and secondary offering of shares are exempted
from the IPO tax.

Value added taxes shall apply to the REITs’ gross sales, the sale of real property or gross rental
income. A REIT is not a dealer in securities, thus, it shall not be subject to VAT on sale, exchange or
transfer of securities forming part of its real estate-related assets.

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 REITs FOR THE INVESTOR
Investment in a REIT shall be by way of subscription to or purchase of shares
of stock of a REIT. Owning REIT shares is like owning a financial security,
which enjoys the characteristics of both a fixed income instrument and a
variable income instrument.

It enjoys the relative safety of a fixed income instrument in that REIT stocks offer reliable and regular
dividends. So, an investor may expect to receive a portion of the REIT company profits at least yearly.

Market volatility provides an investment in REIT with the possibility of rewards through capital
appreciation. In other words, a shareholder may expect an increase in his REIT share price
whenever there is increased demand for it due to positive market perception. Conversely, a
decrease in share price may happen when the market turns negative.

Through REITs, small investors may also conveniently afford owning and transferring real estate with
the added advantage of liquidity. The investors now can dispose of real estate investments or rotate
his real estate portfolios with relative ease.

Diversification is another key advantage of a REIT investor because REITs offer features that are
distinct from bonds and stocks, which may uniquely enhance any portfolio.

Stringent regulation, listing, disclosure, transparency, maintenance compliance measures

implemented by both the PSE and the SEC also offer a high degree of protection for investors.

Tax Treatment at the Investor Level

When a shareholder receives dividends, they are taxed as ordinary income. It is therefore subject to a
final tax of ten percent (10%) unless:

Dividends are received by a non-resident alien individual or

non-resident foreign corporation which is not engaged in
trade or business in the Philippines and which is entitled
to claim a preferential withholding tax rate of less than
10% pursuant to any applicable tax treaty;

Dividends received by a domestic corporation or resident

foreign corporation or an overseas Filipino investor (OFI)
are exempt. In the case of OFIs, they are exempt from
the dividend tax for seven (7) years from the effectivity
of the tax regulations of the REIT Law.

Any sale or disposition of REIT shares in the secondary market is subject to a stock transaction tax of
0.5%, which is already a final tax. Moreover, disposition through the PSE shall be exempt from DST,
consistent with Republic Act No. 9648.

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SUMMARY

REITs were introduced into the Philippine market

essentially to broaden the participation of Filipinos in the
ownership of real estate – a way to democratize wealth. In
pursuit of this, government and the financial sector led by
the PSE, have worked hand in hand to provide an
environment of transparency and compliance with
investor protection, market integrity and confidence as the
end in view.

It is a bold move towards a fully developed capital market

where funds are easily mobilized and made more accessible.
With a robust capital market, the property industry may
expand exponentially to provide much needed employment,
additional tax payments and other benefits brought about
by increased economic activity.

Once in place, REITs may also serve as a model for the

development of similar financial products which may help
raise capital for infrastructure projects in the future.

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 CONTACTING the PSE

If you would like to know more about the Philippine Stock Exchange, you
may visit or call the PSE Public and Investor Relations Section at the 2/F
PSE Plaza, Ayala Triangle, Ayala Avenue, Makati City or through PSE
trunkline (632) 688-7600, telefax (632) 637-8818 or e-mail to
pirs@pse.com.ph.

You may also visit the PSE website at www.pse.com.ph.

Facebook Page: The Philippine Stock Exchange, Inc.
Twitter Account: PhStockExchange
Multiply Account: thephilstockexchange

DISCLAIMER & LIMITATIONS

Due to the number of sources from which the contents of this primer are obtained, there may be
omissions or inaccuracies in the content. Although the contents of this primer have been obtained
from sources believed to be reliable, they are provided to you as presented, without warranties of
any kind. PSE and its subsidiary, officers, directors, employees and representatives cannot and do not
make any representations and warranties regarding accuracy, timeliness, completeness,
non-infringement, merchantability, or fitness for any particular purpose, or any representations or
warranties arising from usage or custom or trade by operation of law. PSE and its officers, directors,
employees and representatives assume no responsibility for the consequences of any errors or
omissions.

In no event shall PSE or any of its subsidiary, officers, directors, employees and representatives be
liable to you or to anyone else for any claims, losses or damages caused in whole or in part by
contingencies beyond their control or negligence in compiling, interpreting, editing, or writing the
contents of this primer.

In no event shall PSE or any of its subsidiary, officers, directors, employees and representatives be
liable to you or to anyone else for any claims, losses, or damages, including, but not limited to direct,
consequential, special, incidental, punitive or indirect damages, arising out of or relating to this
primer or any of its content.
ACKNOWLEDGEMENT

The publication of this primer is made possible with

the support of all the divisions of
the Philippine Stock Exchange, Inc. and
the following contributors and sponsors.

TEXT, DESIGN AND LAYOUT

Leo G. Quinitio
Kathleen Therese B. Buenaobra
Mary Jane B. dela Rosa

PHOTOGRAPHY
Kathleen Therese B. Buenaobra

EDITORS
Atty. Val Antonio B. Suarez
Enrico M. Trinidad
Atty. Roel A. Refran
Jo Ann G. Bautista
Elizabeth S. Lacson

SPONSOR
The PSE Foundation, Inc.

REFERENCES

Implementing Rules and Regulations of Republic Act No. 9856,

The Real Estate Investment Act of 2009 as approved last May 13, 2010

Republic Act No. 9856, The Real Estate Investment Act of 2009

REITnet website (accessed May 2010): http://www.reitnet.com/

 For more information,
for Issuers, contact your underwriter now.
for Investors, contact your stockbroker now.