Conventional property funds expected to thrive despite competition from REITs, which are not as tax-friendly.
Property developers are moving to raise more capital via property funds before real estate investment trusts (REITs), a new fund type with more flexibility, become available in the Thai market next year.
REITs have two main features that make them more attractive than property funds to many investors. First, non-financial institutions can set up and manage the trusts, while only asset management companies can run property funds. As well, REITs can create debt.
However, early indications are that the tax treatment of REITs may not be competitive compared with neighbouring countries such as Malaysia or Singapore.
Win Phromphaet, investment head of the Social Security Office (SSO), said the flexibility and variety of REITs would benefit institutional investors such as the SSO. A manager can establish the trust, shop for variety of good properties from different locations or owners and buy them as assets of the trust. The mixture of developers, property types and locations will reduce business risk.
“But the tax issue has not finalised yet,” said Mr Win.
Virapan Pulges, managing director of the factory developer Ticon Industrial Connection, the issuer of Ticon Fund (TFUND) and TPark Logistics Property Fund (TLOGIS), said REITs rules may reduce the benefits of many participants — issuers, institutional and foreign investors — because withholding tax will not be waived. This makes REITs less attractive than property funds.
“Individual investors will not get any impact as they must pay 10% withholding tax on dividends received from the fund,” said Mr Virapan from the perspective of an investor.
From the viewpoint of the fund issuer, he said, REITs have higher flexibility as the property trust can raise funds by issuing bond when it sees high-potential properties it wants to buy. For a conventional property fund, increasing capital requires approval in a vote by unit holders and that can take six to seven months to arrange.
“But some investors do not want the property fund to create debt,” he said.
Mr Virapan added that the higher cost of unit holders, resulting from tax, may distort returns from REITs.
“If the tax issue is the only difference, we may set up REITs in Singapore and offer the unit trusts for sale in Thailand. Singapore allows property trusts to issue perpetual bonds as well,” he said.
Jotika Savananda, president of SCB Asset Management Co, said the tax treatment as outlined in the government’s draft REIT Act would make local trusts less attractive than those in Singapore or Malaysia.
She said Malaysia a few years ago revised its property fund rules to offer conditions similar to those now being proposed for Thai REITs. The new rules, coupled with no additional tax, led to rapid growth in the establishment of property trust funds in Malaysia.
Property funds in Thailand this year have been growing fast but for different reasons. Investor demand has grown because investments in property funds in Thailand offer higher dividend returns: around 6-7% per year against 2-3% in Malaysia and Singapore. On the supply side, more funds are emerging to meet demand and in anticipation of future rule changes.
According to the Stock Exchange of Thailand (SET), property funds raised a total of 30.03 billion baht during the first eight months of this year, of which 27.44 billion came from initial public offerings (IPOs) of new funds and 2.59 billion from the expansion of existing funds. The eight-month total was more than double the 14.46 billion baht that property funds raised in all of 2011.
Chanitr Charnchainarong, president of the Market for Alternative Investment (MAI), said the dramatic growth of property funds was partly driven by the fact that existing rules would be applied until 2013, a year after the REIT rules take effect.
For existing property funds traded on the stock exchange, earnings from rent and services rose by 8.23% in the first half of the year to 4.39 billion baht, from 4.05 billion in the same period last year. The net increase in assets rose by 11.65% to 3.459 billion baht.
Interim dividend payments in the first half totaled 4.152 billion baht, up 15.3% year-on-year.
There are currently 39 property funds listed on the SET with combined assets of 149.28 billion baht and average trading value of 110 million baht per day, up by 189.3% from the same period last year. The average yield was at 7.07% per year.
Five new property funds have been listed this year: UOB Freehold 8 Thonglor Property Fund (UOB8TF); Tesco Lotus Retail Growth Freehold and Leasehold Property Fund (TLGF); Land and Houses Freehold and Leasehold Property Fund (LHPF); Quality Houses Hotel and Residence Freehold and Leasehold Property Fund (QHHR); and CPN Commercial Growth Property Fund, which was launched on Sept 1.