REITS in Thailand: The Importance of REITs for Asian Property Investment
What is a REIT?
A real estate investment trust or REIT is used to describe a corporate entity investing in real estate, and can be publically or privately held. REITs are required to distribute most of their taxable income into the hands of investors. Usually a REIT is a company that owns and operates income-producing real estate including offices, serviced apartments, warehouses, hospitals, shopping centers, hotels and factory space.
Advantages for Investors
The REIT structure provides a real estate investment platform similar to the structure mutual funds provide for investment in stocks, enabling investors to invest in specific real estate types as a shareholder in the owner/operator of the building(s), with specific tax benefits regarding dividends. The main difference to investing in property development stocks is that a REIT focuses on design, construction and sale of the building(s); so the risk and profitability profiles as well as cashflow impact on each business are different.With the creation of tradeable REITs, large institutional investors seeking real estate exposure can diversify their portfolio, in line with their risk appetite.
What REITs Bring to Thailand
Since the recovery of the Thailand property sector in 2003 onwards, developers have been reliant on either bank financing or the relatively inflexible PFPO (Property Fund for Public Offering) structure which has had limited success to date.In October 11, 2010, the Securities and Exchange Commission of Thailand (SEC) approved the regulatory framework for establishing real estate investment trusts (REITs) in Thailand. For developers, REITs provide another means for financing real estate, thereby reducing the need to rely on bank financing. With the right blend of tax incentives, strong oversight, and a flexible investment framework, Thailand may begin to see growth rates in REITs nearing levels in other parts of Asia, such as Japan, South Korea and Singapore. REITs are expected to drive continued growth in the Thailand real estate market. At the very least, the REIT framework is a significant upgrade from the PFPO system. It is expected that REITs in Thailand will enjoy substantially more flexibility than the historic PFPO system; specifically:
-Ability to leverage up to 50% of its net asset value (NAV)
-Reduced holding restriction for affiliated companies will be increased to 50% of the total trust certificates sold
-Permitted to invest in a broad spectrum of real property types
SUMMARY
REITs are expected to drive continued growth in the Thailand real estate market. The currently proposed REIT framework is a significant upgrade from the PFPO system and represents an important step in the evolution of Thailand’s capital market and financing system for property. It is expected that the full roll out of REITs will be completed in the Thai market within 2013.