July 28 (Bloomberg) — The Philippines’s plan to offer tax breaks for real estate investment trusts may boost the valuation of property stocks and offer a new avenue for fundraising, according to the nation’s second-best performing fund manager.

The Philippine Stock Exchange Property Index has risen 20 percent this year on expectations record-low borrowing costs and rising remittances will boost sales. The gauge is trading at 20.5 times reported earnings, almost twice the 11.5 times for the benchmark Philippine Stock Exchange Index, the widest gap between the two in 2 ½ years, data compiled by Bloomberg show.

“Property companies that turn to REITs should have higher valuations,” Francisco Sebastian, president at Manila-based First Metro Investment Corp., said in an interview in Manila yesterday. “Developers can grow earnings faster than before because REITs open another opportunity to raise money to pursue more projects and expand capital.”

Philippine developers rallied this year after the government signed into law a measure giving tax breaks to REITs to boost trading in the smallest among Asia Pacific’s 12 biggest equity markets. Real estate companies including Robinsons Land Corp., SM Prime Holdings Inc. and Ayala Land Inc. said yesterday they’ve hired banks to advise on property trusts.

REITs allow companies to separate their property development businesses from assets that generate rental income. Senator Edgardo Angara, who proposed the tax incentives for REITs, said the Philippines has $3 billion worth of “high grade” investment property assets that can be put into REITs.

‘Massively Erode’

The proposal faces opposition. The government needs to “tweak” its law on REITS because the tax breaks can “massively erode” the nation’s revenue base, Finance Secretary Cesar Purisima said in a speech in Manila yesterday. The Philippines has to be “smarter” in corporate tax breaks, he said.

Ayala Land, the nation’s biggest property developer, is targeting $300 million from selling shares in REITs, Chief Financial Officer Jaime Ysmael said in an interview yesterday, while SM Prime Holdings Inc., the largest shopping mall operator, is seeking $500 million, Chief Financial Officer Jeffrey Lim said.

“Investors banking on the passing and implementation of the regulations on REITs soon may be disappointed as the government said it wants to revisit the guidelines,” said Rico Gomez, who helps manage about $1 billion at Manila-based Rizal Commercial Banking Corp.

Robinsons Land, the second-biggest shopping mall operator, may raise $300 million from a REIT, the Philippine Star reported in May. President Frederick Go declined to comment on the size of the sale yesterday. He said the company hired Citigroup Inc. and DBS Group Holdings Ltd.

Macquarie Group Ltd. and CLSA Asia Pacific Markets are advising SM Prime, the company said, while JPMorgan Chase & Co. is representing Ayala Land, Ysmael said.

“There’s room for share prices to appreciate further” for listed companies that turn assets into trusts, said Sebastian, whose Save & Learn Equity Fund has gained 32 percent this year, the second-best performing Philippine stock fund. –Editors: Linus Chua, Richard Frost