Capital Markets Spotlight: Philippines

Dechert’s International Capital Markets team reflects on two market-leading transactions from the Philippines in 2020.

A Ground-breaking New Listing Brings REITs to the Philippines

In 2009, the government of the Philippines passed Republic Act № 9856, otherwise known as the Real Estate Investment Trust (REIT) Act of 2009 (the “REIT Law”). Modelled on the successful REIT regimes both of neighbours in the ASEAN region and other leading jurisdictions, the REIT Law was intended to provide a legal and regulatory framework for Philippines real estate investment vehicles. A real estate investment trust is a company that owns, operates or finances income-generating real estate. Similar to mutual funds, REITs pool the capital of investors, making it possible for individual investors to earn dividends from real estate investments without needing to buy, manage or finance any properties directly. At the time the REIT Law passed, many in the Philippines real estate industry expected the new regulation to trigger a wave of REIT listings across the country.

In the decade following the introduction of the REIT law, however, not a single REIT listing occurred. The Philippines real estate industry had ignored the REIT Law on the basis that the administrative regulations implementing the REIT Law issued by the Philippines Securities and Exchange Commission (the “SEC”) were non-commercial. Unreasonable regulatory restrictions were largely to blame for would-be sponsors and investors aborting plans to set up REITs in the country. As a result, for more than ten years interest in Philippines REITs went cold.

So, it was a surprise to many observers when out of this void stepped AREIT, Inc. (“AREIT”) to list on the Philippine Stock Exchange (the “PSE”). The initial public offering, which occurred on 13 August 2020, raised ₱12.34 billion with shares two times oversubscribed. AREIT operates as a real estate investment trust that principally invests in income-generating real estate in prime locations in either Metro Manila or key provinces in the Philippines. At its listing, AREIT’s property portfolio consisted of three commercial buildings in Makati City, Metro Manila, each of which is an accredited investment property with a high-quality tenant base. Ayala Land, Inc. (“Ayala Land”), the real estate arm of Ayala Corporation, which is the oldest and largest conglomerate in the Philippines acted as sponsor to AREIT, lending the credibility of the Ayala brand to this new venture. Ayala Land is, in its own right, a preeminent player in the Philippines real estate industry with a focus on strategic landbank management, residential development, shopping centres, and hotels and resorts.

The impact of this deal has been substantial, as AREIT literally helped rewrite the rules for REIT listing in the Philippines. In the process of reviewing AREIT’s preliminary REIT Plan, marking the first ever such document to be submitted to the SEC, the SEC reconsidered the implementing regulations and, on 20 January 2020, issued Memorandum Circular № 1, Series of 2020 on the Revised Implementing Rules and Regulations of the REIT Law. The memorandum set forth significant amendments to the Implementing Rules and Regulations (“IRR”) of the REIT Law, many of which were in direct response to issues that had arisen in the preparation of the AREIT preliminary REIT plan.

Key provisions in the revised IRR, which became effective on 7 February 2020, include:

• A significant reduction in the minimum public ownership requirement of a REIT to one-third of the outstanding capital of the REIT, with at least 1,000 public shareholders each owning at least 50 shares.
  
  
• The addition of a requirement for any sponsor or promoter who contributes income-generating Real Estate to a REIT to reinvest a portion of any proceeds realized by the sponsor or promoter from the sale or transfer of any of its income-generating real estate to the REIT.  
  
  
• Amendments to the requirements for REIT Fund Managers, such that:
  
  
  • (i) a majority of the members of the board of directors of a REIT Fund Manager must be independent directors; 
  • (ii) the directors of the REIT (including the independent directors) must not occupy more than 49% of the board of directors of the REIT Fund Manager; and 
  • (iii) the REIT Fund Manager’s chief executive officer and at least two of its full-time professional employees must have a track record and experience in financial management and in the real estate industry for at least three years prior to their employment.
    
    
• Amendments to the requirements for REIT Property Managers include that:
  
  
  • (i) a majority of the members of the board of directors of a REIT Property Manager must be independent directors;
  • (ii) the board of directors of the REIT (including the independent directors) must not occupy more than 49% of the board of directors of the REIT Property Manager; and
  • (iii) a REIT Property Manager must employ any one of a real estate consultant, a real estate appraiser, or a real estate assessor and at least two responsible officers of the REIT Property Manager must have at least three year track record in property portfolio management.

AREIT re-submitted its preliminary REIT plan, revised to conform with the IRR, to the PSE and SEC, immediately upon the new SEC rules becoming effective.

The successful public offering of AREIT, one of only two listings on the PSE in 2020, has resuscitated the interest of the Philippines real estate industry in REITs. Expectations now are that, with AREIT’s achievement as an example, the REIT market will expand as other Philippines conglomerates convert some of their real-estate portfolios into REITs and try to tap this new market. Indeed, recent news reports indicate that at least three other real estate companies have expressed significant interest in forming and listing their own REITs on the PSE.

The growth of the REIT market in the Philippines is well timed. Future Philippines REIT listings have the potential to positively impact the PSE’s recovery from the worst economic effects of the COVID-19 pandemic on the bourse. Looking farther into the future, REITs are now poised to serve as viable avenues for investment in real estate in a country that is experiencing rapid economic development with an outsized effect on real estate demand, sales, and profits.

The Dechert team, with lawyers in Singapore and Hong Kong, acted as international transaction counsel, and, notably, prepared the REIT Plan, another entry in Dechert’s growing list of “first of their kind” transactions list. The AREIT transaction has been recognised at a number of industry awards, including winning “Best of South East Asia” at the FinanceAsia Achievement Awards 2020, “Equity Market Deal of the Year” at the ALB Philippine Law Awards 2020 and “Best IPO in the Philippines” at The Asset Country Awards 2020.

An Award-Winning Sustainability Bond Debut Issuance

In July 2020, Dechert’s International Capital Markets team advised on another Philippines issuance: the issuance by Manila Water Company Inc. (“Manila Water”) of its U.S.$500 million 4.375% Senior Sustainability Notes due 2030. This was the company’s debut issuance and the first sustainability bond by a corporate issuer out of the Philippines in accordance with the ASEAN Sustainability Bond Standard, scooping an award for “Best Sustainability Bond – Corporate” in the Philippines by The Asset Country Awards 2020. The Notes are listed on the Singapore Exchange (SGX).

Manila Water is the primary provider of water and used water services to more than six million people in the East Zone of Metro Manila, a concession it has held for more than 20 years, making it a leading regional player in the industry and one of the largest private water companies in the world. Proceeds from the bond issuance are to be used to help finance projects in Manila Water’s sustainable financing framework, including advances in water and wastewater management, terrestrial and aquatic biodiversity conservation and affordable basic infrastructure.

This transaction was notably among the fastest debut bond issuances ever conducted, completed within three weeks from start to launch, demonstrating Dechert’s strong track record in advising on innovative capital markets transactions in emerging markets and transactions by debut issuers. It also demonstrates Dechert’s continued commitment to support sustainable finance and projects.

The Dechert-team was comprised of lawyers across three offices, Singapore, London and Hong Kong, with the team leveraging different time zones to provide near-round the clock assistance to the Manila Water team, showcasing Dechert’s seamless collaboration across its global network.