The introduction of real estate investment trusts (REITs) in Thailand is expected to generate new interest in the already active market.
The Securities and Exchange Commission (SEC) is currently laying the groundwork for the launch of the new real estate trust funds. In mid-October, the SEC announced it was close to finalising a regulatory framework for REITs that would align the market with international standards. It is anticipated that Thailand’s REITs will offer shares to investors in completed property projects, mostly in the commercial segment, with rental profits distributed as dividends. In turn, the funds raised would be used for further property acquisitions or development.
The new REIT structure was developed following the poor uptake of the Property Fund for Public Offering (PFPO), which was introduced by the SEC in 2002 but not well received because of its limiting regulations. In a statement issued on October 11, the SEC said the new REITs would be more flexible than earlier property funds, allowing investments in any kind of property and offering greater incentives for investors.
As set out by the SEC, REITs will be regulated in a manner similar to those of listed companies, with standards set for related-party transactions, good corporate governance and a requirement for independent directors. The REIT framework will involve the use of trusts as investment vehicles and the listing of trust certificates on the Stock Exchange of Thailand.
Among the many features of the new funding structure is the ability to leverage debt of up to 50% of net asset value (NAV), a vast improvement on the 10% restriction in place under the PFPOs. This increase in the ceiling for borrowing restrictions will allow those operating REITs to unlock the value of the assets held in the fund. The SEC has also raised the limit that persons in the same group can hold, the new level being a maximum of 50% of the total trust certificates sold, compared to just 33% of PFPOs.
REITs will be able to invest in any type of real property that can generate rental revenue, barring properties that are used for immoral or illegal activities. The new regulations are also expected to clarify some of the taxation issues surrounding property investments, with the SEC saying it was conducting talks with the Revenue Department on the tax charge format for REIT fund transactions. The market regulator said it was aiming to ease regulations to allow existing property funds to transform into REIT funds in the future.
While there has been no hard deadline set for establishing the tax regime under which REITs will operate, the regulations for the funds are expected to be in place by the end of the year.
It is hoped that the REITs will have the effects of attracting both local and international investors. Thai groups, especially those in the hospitality sector, stand to gain big should they inject existing assets into REITs. This would enable them to take advantage of favourable interest rates and allow them to use the proceeds for overseas expansions into single and multiple assets.
Meanwhile, overseas institutions would have the opportunity to re-enter Thailand on the back of a more generally accepted finance structure. The new capital mechanism is sure to be welcomed both by local property investors and in the wider market. However, it is possible this could lead to a rise in speculative growth driven developments that could undermine fundamentals, and there is also some concern that Thailand may have missed the boat somewhat by taking so long to establish REITs.
Most countries in the region have had REITs as an investment option for some time, with the latest to codify the property trusts being the Philippines, where legislation was enacted in December 2009. With most Asian stock markets expanding over the past year, and with REITs in other countries doing well, Thailand’s real estate developers may regret not having access to property trusts.
It is unclear how much investors will embrace REITs once they are launched on the Thai market, though with the real estate sector still gathering momentum there is the potential for the new investment vehicle to get off to a fast start.