With the recent successful initial public offering of the Impact Growth Real Estate Investment Trust this month, the official introduction of Thailand's newest property investment vehicle, the Real Estate Investment Trust (REIT), has been making waves throughout investor circles.
Making things clear: A model of a high-end condominium, just the type of project that will attract the newly launched REITs.
But what are REITs and why are they poised to become an important part of Thailand's property sector and capital markets?
The Stock Exchange of Thailand introduced property funds (also known as PFPOs, or property funds for public offering) in Thailand in 2003 as a new indirect investment vehicle in an attempt to ease the lack of liquidity in capital markets after the 1997 financial crisis.
The number of property funds that trade on the SET has since grown to 48. Their total market capitalisation has increased by an average of 60.1% per year and now stands at 277.8 billion baht. These funds hold a wide variety of freehold and leasehold assets, including office buildings, shopping centres, warehouses, hotels and more.
As Thailand's property and capital markets matured and evolved, and in recognition of widespread sentiment that the property fund scheme had run its course, the SET started planning for the introduction of REITs in 2007, and they were formally introduced in January this year. Building on the successes and lessons learned from the PFPO scheme, REITs have been designed to replace property funds with a more effective, attractive and transparent investment vehicle.
The differences: Unlike property funds, REITs can wholly own a property holding business and can invest in both ongoing and new, or "greenfield", projects (with limitations), and 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, while property funds were limited to 10%. They are also allowed to issue debentures. REIT management is open to asset management companies as well as experienced property firms and entities that meet eligibility criteria, whereas property funds were restricted to asset management firms.
Whereas property funds were not required to hold annual shareholder meetings, REITs must hold meetings annually within four months of the end of a financial year, the same as other listed SET companies. Also, REIT regulations dictate that a shareholder resolution is required for all transactions of significant size, unlike property funds, which had no such requirements.
Under the REIT structure, underlying assets are subject to valuations every two years or after significant changes in the assets to ensure transparency, whereas valuation regulations under the property fund structure were more lax.
Looking forward: So far, publicly announced REITs have been well received by the investment community. Among known upcoming listings are four planned IPOs with an estimated capitalisation of more than 37 billion baht at launch. The first Thai REIT, the aforementioned Impact Growth Real Estate Investment Trust, comprises four assets, including the Impact Arena, convention centres and multiple exhibition halls with a combined gross floor area of 480,000m². It was substantially overbooked within the first few days of the initial reservation period.
Given the Trust's strong early performance and the fact that foreign investors were prohibited from acquiring a stake, it is clear that there is significant demand for such assets within the domestic market, suggesting that future Trust IPOs which tap into the international pool of investor demand could reap even more benefits.
With the conventional property fund registration window closing on Dec 31, 2013, asset owners rushed to submit applications to the SEC and SET. With the heightened rush of last-minute applications, there remains a backlog of potential funds in the pipeline nine months into 2014, with several new property funds launching in recent months.
As the approval time frame is uncertain for those assets that were submitted for PFPO consideration, some asset owners are choosing to put their assets into REITs instead, though the backlog for REIT approval is reportedly nearly one year long.
The first Thai REIT has tested previously uncharted waters and proven to be successful, another reason the pipeline for registration is filled with entities looking to securitise their assets. The REIT structure naturally complements assets with large and continuous streams of cash flows. This explains the concentration of upcoming REITs in logistics and warehouses, hospitality and retail assets.
As the REIT vehicle matures, we expect that increased information disclosure requirements should improve property market transparency. In fact, Thailand has seen continued improvement in property transparency over the past several years thanks to greater availability of market data.
These listed vehicles are subject to strict governance and regulation, as well as regular and standardised reporting, thus providing more transparency to Thailand's property market. The recent introduction of REITs into Thailand which will gradually supplant the current property funds is reinforcing this trend.
According to JLL's biannual Global Real Estate Transparency Index, Thailand's property market improved its global ranking from 39th in 2012 and 2010 to 36th place in 2014. Among seven Asean countries covered in the 2014 index — Indonesia, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam — Thailand ranks third after Singapore and Malaysia.
Higher transparency will translate into higher investor confidence. Foreign investors who continue to look for attractive yields, liquidity and lower risks should find Thai REITs an improvement over their property fund predecessors. The transition to REITs is a significant positive step forward and should encourage future growth across the different property market sectors.
Andrew Gulbrandson is the head of research at the international property consultancy JLL and oversees the firm's Thailand property intelligence centre. He can be reached by phone on 02-624-6400, or by email at andrew.gulbrandson@ap.jll.com. For more insights, visit www.joneslanglasalle.co.th.