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COV I D -19 ASI D E, P H I L I P P I N E S
R EI T I S S U E S R E M A I N
Another year has passed without a
Philippine REIT being launched and since
we wrote the article, “Are REITs Finally
About To Take Off In The Philippines?”
This means it has now been 11 years
since REIT legislation was passed, and all
we can say today is that we are certainly
closer than a year ago with some positive
developments. However, don’t hold
your breath. A run of adverse global and
Philippine-specific events has clouded the
outlook culminating in Covid-19 which has
put everything on hold.
There have been periods over the past
decade when launching a REIT in the
Philippines would have been a lot easier,
particularly during the 2017-18 period.
However, and even once we are through
the Covid-19 freeze, we are not in one
of those periods now. That is unless the
developer sponsors are willing to reflect
the risks in the pricing of their REITs,
which is very unlikely. One avenue to get
the first REIT launched would be for the
REIT sponsor to place shares to local,
yield-starved pension funds that might
not be as sensitive to pricing than regional
investors.
THE LANDSCAPE IS
F I N A L LY R E A DY
Makati, Philippines. Photo by Christian Paul Del Rosario from Pexels
Development of REITs in the Philippines has gained pace in
recent months. Conglomerate Ayala has applied to be the
country’s first and the float is expected to raise roughly 15
billion pesos (US$294 million). While its plans may be side-
tracked by the pandemic, concerns remain on whether the
country’s REIT regime could see success.
By Charles Isaac
Founding Partner, B&I Capital
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The good news is that the last remaining
hurdle, Minimum Public Ownership (MPO)
has been cleared. As a reminder, the MPO
was initially proposed to be 67%, a level
that developers were unwilling to accept.
The Securities and Exchange Commission
(SEC) has said they would reduce the
MPO to 33% in the Implementing Rules
and Regulations (IRR). Our view is still
that the MPO issue was a red herring,
and the market should be left to decide
the appropriate level of public versus
related party ownership. For example,
if secondary trading liquidity is too low,
the REIT will tend to trade at a lower
valuation (higher yield) which means it
risks becoming a value trap that is unable
to grow successfully.
HEADWINDS: BPO
DECLINE, POGO
L EG A L I T Y, VO LC A N O
The Philippines has had a run of bad luck
that has hit the real estate market and
increased the perceived risk of investing
there.
Office demand has been hit on two fronts.
Firstly, the BPO industry is not growing
like it used to and has not recovered
the growth levels it saw before 2016.
In the immediate aftermath of Trump’s
2016 election, there was his call to bring
business back to the U.S.. which put many
BPO operators’ expansion plans on hold.
As it turned out, BPO operators did not
move operations to the U.S., but the risk
was out there, and this coincided with
risks around increasing automation and
growing cloud-based AI for call-cent
BPOs.
The second blow to office demand was
self-inflicted. The Philippine Offshore
Gaming Operators (POGOs), essentially
online gambling sites servicing Chinese
mainland gamblers, filled the growth gap
that had been left by the BPOs.
“The vast majority of POGO
workers are Chinese citizens,
often illegally in the Philippines.
The influx of Chinese POGOs
was unpopular with locals,
but their firms took up a lot
of office space and drove
condominium sales”.
The catch is that POGOs are conducting
a business that is illegal in China, and the
Chinese authorities are going after them
as offshore gambling revenues fall outside
the Chinese tax net. In the longer-term
interest of the reputation and health of the
Philippines, POGOs should not have been
allowed to grow to the size and influence
they reached.
As well as increasing pressure on the
Philippine authorities to clamp down on
POGOs, Covid-19 has meant that the
Chinese authorities can legally and with
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good reasons not allow Chinese POGO
workers to travel.
It feels like a distant memory, but even the
eruption of the Taal volcano in January
has added to the perceived risk of Manila
and sums up the situation. The eruption,
Taal’s first in 40 years, has died down but
the active volcano is less than 60kms from
Makati and BGC, Manila’s CBDs, where
the bulk of most REIT assets will be.
AYA L A’ S S ECO N DA RY-
LIQUIDITY CONCERN
Despite these negatives, Ayala Land
released the preliminary prospectus to
launch ‘AREIT’ in early February. AREIT
will be an office REIT, comprising three
assets worth 31 billion pesos or US$ 600
million in Makati.
It was good to see that Ayala decided on
a free-float of 49%, much higher than
the minimum of 33% under the newly