Real Estate Investment Trusts (REITs) have become increasingly popular among both investors and developers since the listing of Thailand’s first REIT (Impact Growth REIT) in 2014. REITs offer investors relatively high and stable dividend yields in the current low-return environment, while helping developers recycle assets to fund future expansion.
They are attracting a number of long-term investor groups, including high net worth investors, mutual funds and insurance companies. REITs also provide investment exposure into real estate sectors which may be not be accessible via ordinary shares, such as direct office or logistics. Investor interest in REITs remains high due to a lack of attractive investment alternatives. Equity markets remain relatively volatile, while returns from fixed income and term deposits remain unappealing.
An attractive alternative to divest your assets
REITs provide developers and investors a more attractive alternative to property funds, which were discontinued as a vehicle for asset divestment. Property funds were first introduced to Thailand following the Asian Financial Crisis, so that failed companies could offload property assets. However, their adoption and popularity remained limited until 2005, when CPN Retail Growth Property Fund (CPNRF) and Ticon Property Fund (TFUND) were listed to great interest. Since 2014, approximately 12 REITs with a combined value of over THB 64 billion (US$ 1.9 billion) have been listed or converted from property funds.
How to REITs compare to property funds?
REITs are an attractive vehicle for developers to divest assets, offering greater flexibility in the type of real estate assets allowed relative to previous regulations on property funds.
REITs also allow for greater financial leverage and permit up to 10% of total assets to be directly invested into greenfield projects. The attractiveness of REITs as a divestment vehicle has enticed developers to divest prime real estate assets into recently listed REITs; such as GVREIT (Sathorn Square and Park Ventures) and TPRIME (Exchange Tower and Mercury Tower).
Source: Stock Exchange of Thailand
What investors should take note of
However, one key drawback is that all REIT unitholders are subject to tax, whereas foreign and institutional holders of property funds are generally tax-exempt. The flexibility of greater financial leverage can help to boost prospective yields for REITs, helping offset a higher tax rate.
Source: JLL Research, SETSMART
The future of REITs in Thailand remains bright
One REIT, GLANDRT, is currently in the pipeline to be listed in the near future. Given the strong investor appetite for REITs with office exposure, GLANDRT, which will contain the Ninth Tower and U-Place office buildings, is expected to garner much investor interest.
Additionally, Central Pattana PCL has announced its intention to convert CPN Retail Growth Leasehold Property Fund (CPNRF), Thailand’s largest and most liquid property fund, into a REIT by the end of 2017.
While CPNRF’s current market cap of US$1.2 billion is considerably smaller than the larger REITs in Singapore and Hong Kong (CapitaLand Mall Trust – US$5.1 billion and Link REIT – US$15.8 billion respectively), the upcoming REIT conversion will allow for future asset divestments and future growth.
The future of REITs in Thailand remains bright, given the added flexibility that REITs offer over the now-defunct property funds. We expect investor interest to continue to grow.
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