The Securities and Exchange Commission (SEC) has released the proposed amendments to the implementing rules and regulations (IRR) of Republic Act No. 9856 or the Real Estate Investment Trust (REIT) Act of 2009.
The proposed amendments will relax the minimum public ownership requirement, require the reinvestment in the Philippines of proceeds realized from the sale of REIT shares or other securities, enhance controls over related party transactions and impose administrative sanctions for violation of the applicable laws, rules and regulations.
“The proposed amendments align with our mandate to promote the development of the capital market toward the democratization of wealth and broadening of participation in the ownership of enterprises,” SEC Chairperson Emilio B. Aquino said.
“With the proposed amendments, we hope to develop a viable REIT market that will unlock a deep source of funding for more infrastructure projects in the country along with a lucrative investment opportunity for Filipinos.”
33% minimum public float
Under the draft amendment, the Commission adjusted the minimum public ownership requirement to the level prescribed by the REIT Act.
Section 8.1 of the REIT Act provides that a REIT must have at least 1,000 public shareholders each owning at least 50 shares of any class of shares and, in aggregate, at least one-third of the outstanding capital stock.
Section 5.1 (a), Rule 4 of the IRR currently requires that public shareholders own at least 40% of the outstanding capital stock of a REIT in its first year of listing. The REIT shall have raised its public float to 67% by the third year.
Reinvestment in the Philippines
The Commission also included a reinvestment requirement for the REIT sponsor or promoter in line with the policy to promote the development of the capital market and Filipino participation in the real estate industry.
A sponsor or promoter that contributes income-generating real estate to a REIT will have to reinvest in any real estate and/or infrastructure projects in the Philippines any proceeds from the sale of REIT shares or other securities issued in exchange for income-generating real estate transferred to the REIT and any money raised from the sale of income-generating real estate to the REIT.
Related party transactions
To protect the interests of investors, the Commission added a layer of review for related party transactions under Section 9, Rule 5 of the IRR.
The draft amendment requires the creation of a related party transactions committee. Majority of the committee members must be independent directors who shall vote unanimously in approving related party transactions.
The REIT will also have to comply with SEC Memorandum Circular No. 10, Series of 2019, which provides the Rules on Material Related Party Transactions for Publicly-Listed Companies.
SEC Memorandum Circular No. 10, Series of 2019 requires publicly listed companies to disclose their respective policies on material related party transactions and report such dealings within three days from their execution, among others.
Qualifications of fund, property managers
Moreover, the SEC will require entities intending to serve as REIT fund managers to secure a license from the Commission.
To ensure equal opportunities in the market, the SEC will impose the same minimum paid-up capital requirement of P10 million to domestic and foreign corporations. Currently, foreign corporations are required to have a higher paid-up capital of at least P100 million.
The SEC also seeks to relax the three-year track record requirement of a REIT fund manager by considering its experience in property management in the real estate industry or in the development of real estate industry.
A fund manager will be deemed compliant with the requirement if its chief executive officer, who shall be a resident of the Philippines, and a majority but not less than two of its full-time professional employees have a track record in financial management as well as in the real estate industry for at least three years prior to their employment.
Under the current rules, a fund manager must have a three-year track record in fund management, corporate finance or other finance-related functions. At least two responsible officers must also have at least five years of track record in fund management.
The Commission likewise adjusted to three years the required track record of the responsible officers of a REIT property manager. The responsible officers are currently required to have five years of experience in property portfolio management.
To ensure the independence of fund and property managers, the SEC will require that independent directors comprise majority of their respective boards of directors. At least two of the directors must have a working knowledge of the real estate industry as well as fund management, corporate finance or other relevant finance-related functions in the case of a fund manager.
The Commission will also limit the participation of REIT directors, sponsors and promoters in the decision-making of fund and property managers. They cannot occupy more than 49% of the board of the fund or property manager under the proposed amendment.
Administrative sanctions
The Commission will have the discretion to impose administrative sanctions in the event of violation of any of the provisions of the REIT Act, its IRR and other applicable rules under Republic Act No. 8799, or the Securities Regulation Code, and its IRR.
The full text of the proposed Amendments to Rules 4, 5 and 11 of the Implementing Rules and Regulations (IRR) of Republic Act No. 9856 or Real Estate Investment Trust (REIT) Act was made available on the SEC website through a notice issued on October 3.
Meanwhile, the full text of the proposed Amendments to the Requirements of a REIT Fund Manager and Property Manager under Rules 6 and 7 of the Implementing Rules and regulations of Republic Act No. 9856 or the Real Estate Investment Trust (REIT) Act was released through a notice on October 4.
All concerned may submit their comments on the proposed amendments by 12 noon of October 18 to Atty. Glory Grace Arugay and Ms. Gretchen Lagonoy of the Markets and Securities Regulation Department in Secretariat Building, PICC Complex, Roxas Boulevard, Pasay City. Comments may also be emailed to [email protected], [email protected] and [email protected].