In the Philippines, we have developers like Ayala, Megaworld, Filinvest, Robinsons and Vista Land list their respective REITs (SM Prime being conspicuously absent). But why would they do that? Why not just hold on to their commercial properties and collect the rent?

They are not being generous and decided one day to share their rental income with us, ordinary investors. It actually makes business sense for them to transfer their mature properties to a REIT. The short explanation – is tied up capital. If a developer has a 5 billion peso building, then that’s 5 billion tied up in that building. Sure they earn rental income from it but the serious money is found in property development. Let’s say the building owner decided to create a REIT and transferred the aforementioned building to that REIT. It then sells 1/3 of the REIT to investors netting them 1.6 billion pesos. On one hand, they lose 1/3 of the rental income as it is now paid to the REIT investors. The upside, however, is that they were able to unlock 1.6 billion pesos which can be used in their respective property development business. Again, property development is where serious money is made. I would not be surprised if they earn billions more from the 1.6 billion capital that they raised from the REIT. They buy empty land, build and then sell. Last time I checked, studio condos were in the 3 million peso range; multiply that by how many you can fit in a plot of land then you start to see the staggering amount of money made in property development.

There are also several tax privileges afforded to REITs such as being able to acquire properties without paying VAT and a 50% discount on documentary stamp tax (DST).

REITs are good for the mega developers but it is also good for us, ordinary investors. Earning money through rental income is still possible on your own but let’s face it – we will never have the capital to buy a prime piece of land in BGC, build a 20-storey building, rent it out and collect income. But we can buy shares of a REIT that owns properties in prime locations and collect quarterly dividends as a share of the rental income.