Are Thai REITs better than property funds?

December 13, 2017 / By  

In the wake of the 1997 Asian Financial Crisis, the Stock Exchange of Thailand (SET) introduced a new securitised investment vehicle, Property Funds for Public Offering (PFPO), to encourage fresh capital flows into real estate assets.

Launched in 2003 and ending in 2013, the PFPO scheme supported investment in dozens of assets spanning more than five million square metres. As of 31 October 2017, PFPO has a market capitalisation of THB 249 billion (US$7.6 billion).

In 2014, the Stock Exchange of Thailand launched a new REIT scheme based in large part on the Singaporean REIT model to replace the outmoded and illiquid PFPO vehicle. Since its introduction, total REIT market capitalisation has reached THB 85 billion (US$2.6 billion) across two million square metres of assets.

Measured by asset size, industrial REITs presently constitute about half of the market, followed by specialty assets (e.g., MICE facilities) and office properties.

Figure 1 – PFPO and REIT asset portfolio size (sqm) by sector
Source: JLL Research, Stock Exchange of Thailand

Figure 2 – Current market capitalisation of PFPOs and REITs by year of disposition
Source: JLL Research, Stock Exchange of Thailand

We address some common queries from investors below:

The newer REIT vehicle comes with a number of tradeoffs that have been thoroughly discussed in the market, however an open question remains: are REITs really a better vehicle? 

REITs require a minimum free float of 15 per cent of total units issued, offer higher gearing ratios and a wider range of investible asset classes than PFPO within a revised tax framework that de-emphasises using the vehicle as a tax shelter (which was common under the PFPO scheme). In theory these differences should support healthy liquidity and growth.

REIT guidelines are also more stringent with respect to valuations / asset pricing and good governance. Whereas PFPO acquisition pricing could be up to 10 per cent higher than the assessed value, REITs are limited to not more than 5 per cent of the assessed value.

In terms of governance, REITs are required to hold annual general meetings (of shareholders) whereas PFPO are not. That said, there are no discernable differences in terms the amount or detail of information disclosed.

So how have REITs performed? Have they taken up higher gearing and are they trading better? Is transparency improving?

We find the average gearing of REITs to be 20 per cent while average gearing for PFPO remains below 5 per cent; well below the 10 per cent regulatory limit.

Figure 3 – PFPO (grey) and REIT (red) dividend yield and gearing, end-2017
(PFPOs and REITs with market capitalisation above US$180 million)
Source: Bloomberg, company announcements

REITs with higher market capitalisation and trading liquidity tend to trade better, however they typically do so at tighter yields than funds, adjusting for size.

In the US$200-600 million market capitalisation range, REITs trade at a 5.6 per cent dividend yield, compared to 6.2 per cent for PFPO. Potentially, the market expects REITs to acquire more assets that could be accretive to earnings.

Figure 4 – PFPO (grey) and REIT (red) dividend yield and market capitalisation, end-2017
(PFPOs and REITs with market capitalisation above US$180 million)
Source: Bloomberg, company announcements

REITs are gearing up more and trading better however they have yet to make a significant impact on market transparency. Thailand currently ranks 38th globally in JLL’s Global Real Estate Transparency Index, having consistently but marginally improving over the last 13 years we have published the index.

Going forward, we expect more REITs to result in higher transparency for the market by providing periodic independent valuation, clarity into ownership structures, and most importantly, more accessible market and benchmarking data.

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