A Brief History

In 2003, the Stock Exchange of Thailand (SET) introduced property funds (PFPO) as a new investment vehicle in an attempt to ease the lack of liquidity in the capital markets following the 1997 financial crisis. Since their introduction, total market capitalisation of property funds has increased by an average of 60.1% per annum, and currently stands at THB 277,801 million (USD 8.6 billion).

With widespread sentiment that the property fund scheme had run its course, the SET began planning for the introduction of Real Estate Investment Trusts (REITs) as early as 2007.

As the registration window for new PFPOs came to a close at the end of 2013, many firms had already started to plan the listing of new assets via REITs. With the REIT vehicle being the only way to list a property in the capital markets moving forward, the backlog at some law firms handling the deals is reportedly at least one year long.
So far, publicly announced REITs have been well received by the investment community.

Among known listings are four planned IPOs with an estimated capitalisation of USD 1.2 billion at launch. The first Thai REIT (comprising four assets, including an arena, convention centres and multiple exhibition halls with a combined GFA of 480,000 sqm) is expected to launch in 3Q14 with a value of USD 300 million at IPO.

What’s New – Increasing Competition

Unlike PFPOs, REITs can wholly own a property holding business, invest in both ongoing and greenfield (with limitations) projects, and invest in both domestic and foreign income generating properties. Furthermore, there are fewer limitations on REITs in terms of the types of assets that can be included.

REITs can gear up to 35% (or 60% with an Investment Grade credit rating) of their net asset value, potentially allowing for higher returns, whereas PFPOs were limited to 10%. REITs are also allowed to issue debentures.

REIT management is open to asset management companies as well as experienced real estate firms and entities than meet eligibility criteria whereas PFPOs were restricted to asset management firms.

What’s New – Improving Transparency

Whereas PFPOs were not required to hold annual shareholder meetings, REITs must hold meetings annually within four months of the end of a fiscal year, the same as other listed SET companies. Moreover, REIT regulations dictate that a shareholder resolution is required for all transactions of significant size, unlike PFPOs, which had no such requirements.

Under the REIT structure, underlying assets are subject to valuations every two years or after significant changes in the asset(s) to ensure transparency whereas valuation regulations under the PFPO structure were more lax.

The Bottom Line

As the REIT vehicle matures, we expect that increased information disclosure requirements should boost market transparency as a whole. Foreign investors who continue to look for attractive yields and liquidity should find T-REITs an improvement over their PFPO predecessors. Higher gearing ability and increased transparency are expected to translate into higher liquidity and return figures.

On the whole, we believe that the transition to REITs is a significant positive step forward and should encourage future growth across the different property market sectors.

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