Real Estate Investment Trusts Raimon Land speaks to Mr. Sorachon Boonsong and Mr.
One of the main differences between PFPOs and REITs
Purachate Manussiripen of global law firm Baker & McKenzie.
regards taxation. As PFPOs are not taxable entities they are
When were REITs introduced to Thailand and how did they
tax on dividends. In contrast, investors in REITs are subject to
come about? Real estate investment trusts in Thailand have their origins in a
a 10% withholding tax, which is still considered fair in comparison with equivalent products in other markets.
financial tool known as a type one PFPO (property fund for public offering), which was introduced in response to
The loss of the tax benefits caused some resistance to REITs,
problems caused by the 1997 financial crisis.
but the change is inevitable. After 2013, the SEC will no longer allow the creation of PFPOs. Existing PFPOs will be
At that time, many real estate projects were in serious
allowed to remain, though they will be effectively frozen as
difficulty, and people were keen to find ways to attract
they will be unable to raise the additional funds needed to
foreign funds to help rescue them. The solution was to allow
grow. If they wish to expand, they will be required to convert
both Thai and foreign-invested companies to set up PFPOs.
to REITs.
These came in four types – one through four – though only type 1s were allowed to go public and raise funds through
The SEC, however, does not want there to be too many REITs,
IPOs (initial public offerings).
but rather favours a smaller number of large-scale funds, with investments in multiple properties. This is already the situation
While PFPOs evolved over time they have generally
in Singapore and Hong Kong.
remained small in size and have always been considered inflexible. Unlike REITS in other countries, which grow by
What are the benefits for developers and investors of the
investing in new projects, most PFPOs are limited to just one asset with no additional investment, so there is no potential
new REIT regulations? REITs offer much greater flexibility in terms of borrowing
for growth.
money. As well as raising funds from investors, the trusts can borrow up to 60% of their total value, as opposed to just 10%
The change came in 2007 with the introduction of the Trust
for PFPOs. Also, unlike a PFPO, which requires a
in Capital Market Transactions Act (or Trust Act), under which
licensed management company, developers can directly
the Securities and Exchange Commission (SEC) allowed for
manage REITs by acting as a REIT Manager and play a
the creation of REITs. Prior to this, all property funds in
much more active role in fund raising.
Thailand were set up in the form of mutual funds, which had to be managed by licensed asset management companies
Another advantage of REITs is that they offer greater flexibility
as they were affiliated to securities firms and commercial
on holdings. Under the rules governing PFPOs developers
banks. The introduction of trusts brought Thailand more in line
and investors are permitted to hold no more than one third of
with other countries and allowed for far greater flexibility in
the total units, while under the REIT structure the ceiling is set
terms of both management and investment opportunities.
at 50%.
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©2013 RAIMON LAND RESEARCH
free of tax, which also means that foreign investors pay no
