Real Estate Investment Trusts

Raimon Land speaks to Mr. Sorachon Boonsong and Mr. Purachate Manussiripen of global law firm Baker & McKenzie.

When were REITs introduced to Thailand and how did they come about?

Real estate investment trusts in Thailand have their origins in a financial tool known as a type one PFPO (property fund for public offering), which was introduced in response to problems caused by the 1997 financial crisis.

At that time, many real estate projects were in serious difficulty, and people were keen to find ways to attract foreign funds to help rescue them. The solution was to allow both Thai and foreign-invested companies to set up PFPOs. These came in four types – one through four – though only type 1s were allowed to go public and raise funds through IPOs (initial public offerings).

While PFPOs evolved over time they have generally remained small in size and have always been considered inflexible. Unlike REITS in other countries, which grow by investing in new projects, most PFPOs are limited to just one asset with no additional investment, so there is no potential for growth.

The change came in 2007 with the introduction of the Trust in Capital Market Transactions Act (or Trust Act), under which the Securities and Exchange Commission (SEC) allowed for the creation of REITs. Prior to this, all property funds in Thailand were set up in the form of mutual funds, which had to be managed by licensed asset management companies as they were affiliated to securities firms and commercial banks. The introduction of trusts brought Thailand more in line with other countries and allowed for far greater flexibility in terms of both management and investment opportunities. One of the main differences between PFPOs and REITs regards taxation. As PFPOs are not taxable entities they are free of tax, which also means that foreign investors pay no tax on dividends. In contrast, investors in REITs are subject to a 10% withholding tax, which is still considered fair in comparison with equivalent products in other markets.

The loss of the tax benefits caused some resistance to REITs, but the change is inevitable. After 2013, the SEC will no longer allow the creation of PFPOs. Existing PFPOs will be allowed to remain, though they will be effectively frozen as they will be unable to raise the additional funds needed to grow. If they wish to expand, they will be required to convert to REITs.

The SEC, however, does not want there to be too many REITs, but rather favours a smaller number of large-scale funds, with investments in multiple properties. This is already the situation in Singapore and Hong Kong.

What are the benefits for developers and investors of the new REIT regulations?

REITs offer much greater flexibility in terms of borrowing money. As well as raising funds from investors, the trusts can borrow up to 60% of their total value, as opposed to just 10% for PFPOs. Also, unlike a PFPO, which requires a licensed management company, developers can directly manage REITs by acting as a REIT Manager and play a much more active role in fund raising.

Another advantage of REITs is that they offer greater flexibility on holdings. Under the rules governing PFPOs developers and investors are permitted to hold no more than one third of the total units, while under the REIT structure the ceiling is set at 50%.