Press Release
July 27, 2010

The 2nd Annual REIT Pacific Philippine Summit 2010
New World Hotel, Makati City

27 July 2010, 9:05 AM

Senator Edgardo J. Angara
Guest of Honor

The financial turmoil that gripped the global economy - unparalleled by any past financial crisis since the Great Depression - emphasizes the value of a strong capital market as a safeguard against booms and busts in the system.

During the 14th Congress, the Senate took the initiative in enacting badly needed reforms in our financial system which would build up financial capacity and expand the capital market, allowing the Philippines to deal with the financial crisis on its own terms.

We reformed the Philippine Deposit Insurance Corporation (PDIC) charter (RA 9576) to expand and extend its protection to bank depositors, providing wider deposit insurance coverage.

The Credit Information System Act (RA9510), meanwhile, seeks to improve the overall availability of credit especially to micro, small and medium-scale enterprises. It will make credit more cost-effective and reduce excessive dependence on collaterals to secure credit facilities.

We also created the Personal Equity And Retirement Account (PERA) (RA 9505), a supplementary private retirement plan for all public and private employees that especially targets overseas Filipino workers (OFWs). By attracting voluntary long-term savings, it will promote capital market development.

The Pre-Need Code (RA 9829) provides the much-needed regulatory framework and institutional solution to the pre-need industry's major stumbling blocks. Its aims are two-fold: protect the planholders and at the same time keep the pre-need industry viable.

Finally, we passed the Real Estate Investment Trust (REIT) law (RA 9856), a structural reform that can inject liquidity and stability into the property market by allowing real estate owners to register income-generating property in the stock exchange market. It seeks to broaden the participation of Filipinos in ownership of real estate in the country, and to use the capital market as an instrument to help finance and develop infrastructure projects.

Key features of REIT

The REIT law provides a structure for real estate investments similar to how mutual funds manage stock investments. Apart from minimizing investment risks, REIT levels the playing field for property actors by allowing both small and large investors the opportunity to participate directly in the ownership and financing of large-scale real, estate projects at affordable rates of investment.

REIT's introduction in the country is expected to facilitate more foreign direct investments. It allows for cross-border investments that will encourage strategic foreign investments in the capital market. Successes of REITs in Australia, Hong Kong, Japan and Singapore have encouraged more investors in REITs.

Further, investors also enjoy the assurance of a fair, transparent and efficient market for buying and selling the REIT securities, because the REIT law will require the listing of the REIT stocks in the local stock exchange. Therefore, it is easier to buy or sell the REIT shares than to directly buy and sell real properties.

Bright prospects for Asian REITs

The US remains the largest REIT market in the world at the end of 2009.[1] Japan started introducing REITs into its market as early as 2001, which spurred the introduction of REITs to other developed countries in Asia like South Korea, Hong Kong, Taiwan, and Singapore. Malaysia and Thailand then followed in 2003 with their respective REIT offerings.

The market capitalization of REITs in Asia posted a 34.5% year-on-year growth at the end of 2009, with Japan being the biggest market at USD29.5 billion at the end of 2009 (CBRE, 2010). In the whole of Asia, the market capitalization of Real Estate Investment Trusts (REIT) total at least US$50 billion.

Ernst and Young's Global REIT Report 2010 says Real Investment Trusts (REIT) are leading the recovery of property markets from the global financial crisis. REIT markets across the globe have registered positive rates of return for 2009.

The Global REIT Report 2010 report also highlighted the fact that Asian markets have outperformed other REIT markets in the world. The rates of return for South Korea, Malaysia and Hong Kong were all in positive territory over the last three years. And while Singapore has registered a negative 4.2 rate of return during the financial crisis, it has now strongly bounced back.

Financial experts predict this upturn will continue for the next three to four years, and the number of REITs in Asia could more than double. Due to the recent credit crunch, investors are now more risk-averse, favoring safer instruments such as REITs.

The timing for REITs in the Philippines has never been as favorable as now. The influx of remittances from Overseas Filipino Workers, the boom of tourism, and the growing number of offshoring businesses in the country all contribute to the strong real estate industry we have today. In the fourth quarter of 2006, real property sector had a 22.7% growth, making it the highest growing sub-sector within the services

Moreover, our economy is poised for a financial rebound supported by improved business optimism and investor confidence. Multilateral organizations and global think tanks have forecast better GDP numbers for the local economy.

Our Development Budget Coordination Committee has even forecast a bullish 5 to 6 percent of economic growth this year, driven by strong consumption. They have likewise assured us that the Greek crisis will have no significant impact on our economy. Our strong Gross International Reserves or GIR position, at record levels, makes this so. The peso, unlike the euro, has gained strength in the last two years, at least. Needless to say, with the economy barely spared from the subprime crisis, it has no place to go but up.

Another reason that works to our advantage is that Asia is playing a key role in the global recovery. And this role will catapult Asian REITs to the fore as new markets, such as the Philippines, India and Pakistan, open up for REITs. There's a dramatic shift in REIT formation away from North America and toward Asia as institutional and retail investors alike steer clear of REITs in recent crisis-stricken markets. According to Doug Naismith, a managing director of European Personal Investments for Fidelity International, the expansion of existing REITs markets and formation of new ones could make the REITs industry grow to $1 trillion this year.

Finally, our stock market has catered to a single product since the year it was established with the exception of a few variants that have come and go based on the local market's appetite. Having said this, there is room for the stock market to grow through REITs which are expected to boost trading activity in the stock market.

The benefits brought on by REITs come from practically all sides. It provides real estate companies with an alternative medium to raise needed funds for their expansion and other projects. Likewise, it adds to the menu of alternative instruments investors can choose from. With the public actively trading REIT shares, our market liquidity should improve.

Last May, the Implementing Rules and Regulations (IRR) of REIT was approved by the Securities and Exchange Commission (SEC). Some of the tax incentives enjoyed by REITs include a reduction in the documentary stamp tax, deduction of dividend payments from gross earnings to determine the income tax, and a lower creditable withholding tax.

Several companies have already unveiled plans to avail of REITs to raise capital for real property ventures. SM Prime Holdings Inc., intends to raise US$600 million while Ayala Land Inc. US$300 to US$400 million. Other property developers, such as Shang Properties and JG Summit, have also announced interest in joining the REIT bandwagon.

These developments show the bright future of REITs, and the strategic investments it will attract. REIT will allow the country to participate in the property investment market, facilitate more foreign direct investments in the country, as well as cushion and serve as a safe haven in our capital market against the repercussions of a global financial crisis. #

[1] . According to Bloomberg statistics, the market capitalization in the US reached USD271.9 billion by the end of 2009, along with a one-year return of 28% (Kalwarski, 2010)

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