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A Postscript on the REIT

(Article published in the Jun 30, 2010 issue of Manila Standard Today)   

 It was not surprising that out of the more than 80 who attended the Round-Table Discussion that the Romulo law office organized last week, on June 24, concerning R.A. No. 9856, only about 10 from the trust industry, by trust industry’s stalwart Raul Diaz own count, attended.  The present trust industry appears to be carrying some heavy baggage when it comes to real estate in general and to the Real Estate Investment Trust in particular.

 Time was, long before any of the current leaders of the trust industry was even born, what the trust department of banks mainly did was to manage real estate.  Banks were then primarily deposit-takers and money lenders; their most valued clients were the very wealthy and the very wealthy’s value consisted mainly in their real estate holdings.  Thus, the trust departments’ expertise was in collecting rents, supervising the repair of apartment buildings, dealing with delinquent tenants, seeing to the payment of real estate taxes, etc. 

 As such, the trust department personnel were seen as poor relations by the bank’s commercial banking officers; they were workers in a unit that made very little money, if not no money at all, for the bank’s shareholders.  But a respectable bank had to have a trust department to give its clients “full service” all under one roof, to keep their clients from being pulled away by the competition. 

 Some banks, at that time when the regulations were not that strict in keeping the trust department separate from the commercial banking arm of the institution, maximize the expertise of their trust people by also charging them with the duty of managing their foreclosed assets, which are naturally mostly real estate.  Hence, the name of some trust departments with such duties, was TAAD, short for Trust and Acquired Asset Department.


The inferiority psyche that was developed through decades of being considered merely “hewers of wood and carriers of water” of Philippine banking receded into the subconscious when Jose B. Fernandez embarked in what was then a revolutionary use of the trust department. At the Far East Bank and Trust Company, Jobo Fernandez developed to the full the capability of the trust department to marshal savings (in the same manner that deposit-taking gathered funds from the public) and plow them back into the economy in the form of investments in the equity of commercial companies.

 The users of funds thus had two sources: the traditional loans funded by deposits and the investments, either in their equity or in their debt-instruments, by the trust departments.  Of the two, the trust people were the flashier brood.  They spoke of income streams rather than of rentals; they managed portfolios and not bricks and mortar; they talked of the market without the smell of fish. 

 But real estate was eventually to rear its ugly head.  In the early 70s, a young man, with prayer in his lips and service in his heart, sold to Jobo Fernandez the idea of diversifying the holdings of the trusts under the bank’s management by investing a fraction of funds into a company that would, among other things, build condominiums.  The project would in effect be a way of “productive utilization”; for the owner of thereto for undeveloped land, it unlocked the value of the asset; for trustors and beneficiaries, it offered both capital appreciation (the real estate was expected to rise in value over time) as well as privileged enjoyment of the earned income or its actual use. 

 Thus FEREIT (for Far East Real Estate Investment Trust) was born. The entity was technically not a real estate investment trust and for that reason (I surmise) what the letters stood for was never spelled out.  Indeed, it was an honest to goodness realty development company whose shares were owned by many trusts managed by Far East Bank.

 For a while, condominiums rose swiftly one after another from the ground and the units were sold out before the first nail was bought.  There were the Marbellas in Manila and the Europas in Baguio.  Others followed suit; and the condominium fever raged all over the country. But then, for reasons we reserve for another day, the condominium frenzy did not last; investors shunned buying pieces of empty air, and FEREIT eventually faded into mere memory.

 Comes now the REIT looking so much like FEREIT but without the FE (Far East Bank, which had once upon a time boasted it was forever, had melted into BPI) and without the euphoria that attended the latter’s birth.  The REIT is much sober now and, with statutory and regulatory support, stands a chance of succeeding.

 But it must be able shake itself free from the horrors of its ghosts past. How soon, or how long, that will be depends to a major extent on how courageously those with funds would be willing to wrestle with the risk on the promise of the reward.  But such courage cannot be found in today’s trust officers.  They have their baggage to struggle with first.