THE man has not even been inaugurated yet, and already every indication is that unless some powerful forces intervene, the term of President-elect Rodrigo Duterte will be a bloody, chaotic mess.
He has openly endorsed vigilantism, which has already caused an alarming spike in murders around the country, even before his term starts, made several implied warnings of an impending crackdown on the media (including the use of what is apparently his favorite solution to everything, summary executions), and raced to make unnecessarily friendly accommodations with the leadership of the country’s decades-old but otherwise irrelevant Communist rebellion.
Given all that, Duterte’s eventual longevity in office could probably be measured in months, if not for the unusually rational decision on his part to enlist the aid of several highly qualified Cabinet ministers, the current standout among them being his incoming Finance Secretary, former agriculture chief Carlos Dominguez.
Dominguez has distinguished himself already with his practical, common-sense point of view toward government finance, and the various initiatives that need to be undertaken to expand economic growth beyond the narrow focus on select macro indicators that characterized economic management—to the ultimate detriment of a wide segment of the Filipino people—under BS Aquino 3rd. Dominguez may not have all the right answers, but he has shown a keen interest in assessing any potentially worthwhile idea, and that has been a breath of fresh air compared to the defensive, risk-averse approach of the previous Administration.
The latest concept to attract Dominguez’ attention is the long-dormant provisions for the creation of Real Estate Investment Trusts, or Reits, an investment vehicle that has been growing in popularity over the last 20 years or so. The first Reit was formed in the US in the mid-1960s; they have been expanding in Asia since about 2001, when the first one was introduced in Japan. A law authorizing their creation was passed here about seven years ago, in the latter days of the Arroyo Administration, but due to the odd and completely unhelpful Pinoy habit of undemocratically writing legislation in implementing rules and regulations after a law has been passed, the idea has never gotten off the ground.
A Reit is a kind of security similar to a mutual fund, which invests in properties either through mortgages, ownership and leasing, or both, and is traded on exchanges like a stock. From an investor’s point of view, the asset is highly liquid, generally offers returns significantly higher than those that can be realized by ordinary equity or debt instrument investments, and comes with certain tax advantages—sometimes directly in the form of incentives offered by the government to encourage investment in Reits, but if not, as a function of their structure. A typical structure of a Reit is one owned by at least 100 shareholders (the minimum under US law), with no more than five accounting for an aggregate of 50 percent of the shares; at least 75 percent of the Reit’s investments must be in real es tate, and at least 75 percent of the Reit’s gross income must be derived from real estate investments.
For the Reit itself, the tax advantages are enormous. Because 90 percent of the earnings have to be distributed as dividends, which are, of course, legal deductions, the Reit pays very little in tax, with most of that burden being passed on to the investors. Since most Reits also have a dividend reinvestment mechanism, their capital for further investment generally remains high, and grows in step with the income growth of the individual property-related issues they hold.
There are basically two kinds of Reits. One invests in mortgages; it does not directly own or manage properties, but earns income on the property loans. The second kind does directly own or manage property, and derives most of its income from leases. In practice, the majority of Reits are hybrids, having investments in both.
Even though there is a law authorizing Reits, none have developed because the concept was sabotaged by the law’s IRR, which were largely developed under the Aquino Administration (the earliest draft was made during Arroyo’s term but was ‘revisited’ early on in Aquino’s presidency, during the time he was hell-bent on scrapping everything done by predecessor). According to the revised rules, a Reit in the Philippines must have a public float of 66 percent, double what was mandated by the original law. No primary investor—the one who would form the Reit by making an initial property investment to create the equity other shareholders would be buying—wants to take that risk for the sake of holding a non-controlling stake, and even from a public investor point of view, that sort of Reit would not be very appealing. Without a strong primary investor or investor consortium—one with a big enough stake to guarantee the Reit’s continuity should the entire public stake abandon it—the risk of loss of investment for any individual investor increases dramatically.
Developing a reasonable set of rules to allow Reits to finally take hold in the Philippine market, while it does perhaps increase the risk of overheating the property sector, can if approached sensibly lead to a big economic dividend. For one thing, it provides a way to actually capture some of the hot money flowing into the local financial markets; rather than staying “trapped at the top” of the economy, at least some of those inflows will pass through into hard investments in the property sector. Increased development in that sector will, in turn, force greater investment in infrastructure, which has a multiplier effect that extends across the entire economy.
With the potential economic benefits of initiatives like resurrecting Reit, the misanthropic behavior of the goblin who would be king is a lot less likely to get him in the sort of trouble that would see his term abruptly ended, an outcome that would do no one any good. People are willing to put up with a lot if the economy is in reasonably good shape—it is, after all, probably responsible for the remarkably stable full-term longevity of Duterte’s feckless predecessor—and under the guidance of Dominguez and his colleagues, it seems likely that some long-needed economic policy improvements may be in the offing. If that is indeed the case, that will keep the teeming millions happy and keep Duterte safely in his seat, which is by no means the worst scenario the country could face in the next few years.