A primer to understanding the P-REIT

(First of five parts)

 On Dec. 17, 2009, Republic Act 9856 otherwise known as AN ACT PROVIDING THE LEGAL FRAMEWORK FOR REAL ESTATE INVESTMENT TRUST AND FOR OTHER PURPOSES or The Real Estate Investment Trust (REIT) Act of 2009 lapsed into law without the signature of President Arroyo. Its implementing rules and regulations were approved by the Securities and Exchange Commission (SEC) on May 13, 2010, while the Listing Rules for REITs were approved by the Philippine Stock Exchange on June 23, 2010. The last step in making the long awaited Philippine REIT (P-REIT) an actuality is the issuance of the REIT tax regulation by the Bureau of Internal Revenue (BIR) which, as of press time, is still being drafted by said agency.

The intent of the passage of R.A. 9856 is to level the playing field in the Philippine property sector by giving small and medium scale investors an opportunity to invest in real estate property. Through the introduction of the P-REIT, individuals and small companies can pool together their individual funds and directly buy prime real estate that were previously afforded only by big property companies with large cash balances. In addition, because of the special tax circumstances of the P-REIT, its small investors are placed at par with the large investors that enjoy the financial advantages of doing business through large conglomerates.

History of the REIT

It was with this same purpose that the REIT was first introduced as an investment vehicle for small investors in the US during the 1960’s. Traditionally, the only way of investing in real estate is to invest in the physical brick and mortar of the property. As such, only wealthy individuals and corporations, who had the required financial resources, can invest in significant real estate projects like shopping malls, industrial parks and healthcare facilities. To change this, the US Congress therefore passed a law creating the Real Estate Investment Trust or the REIT. This law exempted the REIT from the income taxes regularly imposed on companies provided certain criterions were met. The law’s objective was to provide financial incentives for the people to pool their resources and form companies which will own significant real estate thereby providing the average man the same investing opportunities only available to the rich. (Kennon, J, Real Estate Investing through REITs, The Benefits of Property Ownership without the Hassle [internet] U.S: About.com. Available at: http://beginnersinvest.about.com/od/reit/a/aa101404_5.htm. [Accessed: Aug. 26, 2010])

Today, the original concept of the REIT still remains. The REIT can now be a company, trust or arrangement that is widely-owned, which invests in real estate on a long-term basis with its revenue derived principally from rental income. It distributes most of its income yearly, and in general, does not pay income tax on income derived from its real estate investment and distributed to its unitholders. It normally operates in a specific area of expertise such as residential, retail, office, industrial, hotel and resort REITs, etc. In Europe it is generally organized as a corporation. In Asia, it is a trust and in US and Japan, it can either be trust or corporation. (Nouel, Luis: The Tax Treaty Treatment of REITs – The Alternative Provisions Included in the Commentaries on the 2008 OECD Model, European Taxation 2008, S.477-483)

(To be continued)

(Evelyn Garcia-Cantre is a Senior Manager of Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])