Investing in the real state is very common here in the Philippines. People buy lands, houses, condominiums, and some put up their own buildings. These properties can provide a steady flow of income through rentals or sell it for a higher price since real estate values tend to increase over time.
But investing in real estate can cost hundreds of thousands and even millions. So how can low and middle-income earners invest in real estate without spending a hefty amount of money? The answer is through REITs.
What are REITs?
REITs or Real Estate Investment Trusts are companies that own, operate, or finance income-generating real estates assets such as office buildings, hospitals, warehouses, malls, highways, and the like.
It is a type of investment instrument that provides a return to investors derived from the rental income of the underlying real estate asset. Returns are distributed to the investors in the form of dividends.
How do REITs work in the Philippines?
First, a real estate company forms a REIT and they need to identify which of their properties will be part of it.
Second, after securing the necessary approval from the government, the REIT will list its shares on the Philippine Stock Exchange (PSE). This will allow us, the retail investors, to invest in their real estate properties by buying shares or units of their REIT just like stocks.
Third, REITs will use the proceeds of the sale of shares to operate and manage their existing properties or to buy more properties.
Lastly, Investors will receive regular cash dividends based on the earnings of the REIT.
Why Invest in REITs?
Though there are a lot of investment options where you can park your money, I will provide you the reasons why REITs are worth a try.
1. Guaranteed Dividends
REITs are required by the law to pay at least 90% of their earnings as cash dividends to investors. Although the dividend rate will depend on the REIT’s income, dividend yields of REITs are usually higher compared to yields of time deposits and bonds which are just around 2-4% interest per annum.
You don’t need a big capital to start investing in REITs. It follows the board lot system being used in PSE. So for instance, if the price of the REIT per share is P20, following the board lot, you are only required to buy a minimum of 100 shares which is a total of P2,000. But to maximize the fees associated with buying, you should buy at least P8,000 worth of shares or what they call the 8K rule.
3. Professionally Managed
REIT assets are managed by real estate professionals. Once they give out dividends, expenses and taxes are already deducted. So you get the benefits of a part-owner of the properties without the works and headaches of operating and managing them.
This type of investment is liquid. It means that you can easily access or convert your investment into cash. Since REITs will be traded on the PSE, you can easily sell your shares if you need your money. This is not possible when investing in bonds or time deposits since you need to wait for their maturity.
5. Price Appreciation
REITs will set a price per share once they offer it to investors, and this price can go up and down, just like regular stocks. This means that on top of the dividend payouts, you can also make profits by selling the REIT when its share price goes up due to growing demand or if the value of the properties goes up.
If you’re an OFW, another benefit you can enjoy by investing in REITs is that your dividend earnings will be tax-exempted for the next seven years starting this year, 2020.
How to Invest in REITs?
Investing in REIT shall be by way of subscription or purchase of shares of stock of the REIT company.
REITs will be offered first via Initial Public Offering (IPO) during a specified period. During this time you can buy shares through PSE EASy (https://easy.pse.com.ph/)
PSE EASy is an online system (website & mobile app) developed by the Philippine Stock Exchange to make investing in Initial Public Offerings (IPOs) more convenient. This will allow local small investors (LSIs) to purchase the latest IPO shares in the stock market.
To register for PSE Easy, you need to have an existing stock broker account. This is also where your shares will be credited. To register, click this link. https://easy.pse.com.ph/
Once the REIT is listed in the PSE, you can buy shares of it like buying your regular stocks. Investors will need an account with a REIT eligible stockbroker.
What are the best REITs to invest in?
The legal framework for REITs in the Philippines or the REIT law has been existing since 2009. However, there have been no REIT listings because of certain issues in the original implementing rules and regulations (IRR) which failed to entice real estate companies in participating.
This year, the government decided to address those issues and do revisions on the REIT law. As a result, major real estate companies have expressed intent to do REIT listing.
Ayala Land Inc. (ALI) was the first real estate company who expressed their interest to do a REIT listing. This July 2020, the Securities and Exchange Commission (SEC) and the PSE already approved their application to do an IPO under the ticker name AREIT.
AREIT’s shares will be listed in PSE on August 13, 2020, and will be priced at P27 per share. The portfolio of AREIT consists of three office buildings in Makati City: 24-storey commercial building Solaris One, two-tower mixed-use development Ayala North Exchange and five-storey commercial office McKinley Exchange.
ALI intends to use the proceeds from the REIT offering to buy Teleperformance Cebu and to invest in other real estate properties in Metro Manila and key regions.
Based on its prospectus, AREIT is projecting a dividend yield of 4.85% this year and 5.85% percent for next year.
Are REITs better than stocks?
As you’ve noticed, there are a lot of similarities between REITs and stocks. So which of them is better to invest in?
The most notable difference between the two is that REITs provide guaranteed dividends, while stocks are not. So if you want an investment that provides guaranteed returns, then REITs are better for you.
In terms of price appreciation, REITs are not as volatile as those high-flying stocks. So if you’re into trading, and you want to earn more by profiting on price fluctuations, then stocks are better for you.
REITs can give you a stable income because of its regular dividend payouts but don’t expect to gain much especially if your investment is just a couple of thousands.
In stocks, it can give you higher returns even with small capital. But the risk is also higher since there is no guarantee that the stock price will go up, and it can also result in a loss if the stock price goes down.
Think of REITs as low risk with good returns and stocks as high risk with high returns. So choosing between the two will depend on your risk appetite.
If you’re not yet ready to invest in the upcoming listing of AREIT, and you want to observe first, don’t worry because another real estate company will soon join the REIT market.
Injap Sia’s Double Dragon Properties Corp. (DD) said it is preparing to file its REIT listing application with the SEC and the PSE in August 2020 and is targeting to list the DDMP REIT by October 2020.
With these moves of the property giants, we can expect a lot more REIT listing in the coming years.
Through REITs, owning a real estate property for passive income is not just a dream anymore. With this investment vehicle, we can ride the booming real estate industry in our country and benefit from it.