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Investors’ Perspectives
Another benefit of Thai REITs is that they allow for the inclusion of offshore assets. This is likely to be a major draw for the region’s key players that hold assets outside Thailand – TCC, Central and Dusit, for instance – as it will allow them to raise funds for their projects across the region without having to set up multiple REITs in different countries.
In terms of taxation, how do Thai REITs compare with those available in Singapore?
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This is a complicated issue and it’s hard to say whether Thailand or Singapore is better in tax terms. For investors there is not a lot of difference as unit holders in Thai REITs pay a withholding tax of 10%, which is about the same as in Singapore. For sponsors, however, Thailand is slightly less attractive, as companies that sponsor and sell assets to the trust are subject to capital gains tax, which is currently set at 20% of net profits.
Is it possible that Thailand REITs might adopt a structure that exempts sponsors from capital gains tax?
This is an interesting idea and one we have already raised. To make Thai REITs more attractive we must offer some form of tax benefit. At first we thought about reducing corporation tax rather than applying the standard 20% capital gains tax on net profit for sponsors. We also looked at the UK model, which sets a one-time tax of between 2% and 4% on the transfer of assets into an REIT, and the US format, which also
Raimon Land talks to Mr. Gancanapol “Pon” Van Compernolle, who co-manages the Private Portfolio Management Department of SCB Securities.
What was the impact of the global economic slowdown on Thailand?
Like all export-led economies, Thailand’s fortunes are interwoven with those of its trading partners. So when the United States, Europe and China were hit by the global slump, Thai exports slowed and its GDP and currency were affected accordingly. What matters going forward is how those trading partners are offers tax exemptions, but nothing has been decided yet.
How will the creation of the Asian Economic Community affect Thai REITs?
I don’t see a direct link between the AEC and Thai REITs. While I think the AEC will benefit cross-border trade and foreign direct investment, I don’t see it having any real direct impact on REITs. Indirectly, however, I assume there will be an effect. The creation of the AEC will see an increase in the flow of people across the region and that in turn will spur the development of more real estate assets, such as hotels, apartments and factories. It is quite likely therefore that some of those assets will be incorporated within REITs.
Which sectors are likely to benefit most from the new REITs?
The regulations allow almost all types of property to be transferred into an REIT, which means there will be little change from PFPOs in that regard. The exceptions are certain residential projects, including condominiums, which cannot be included within an REIT, so for them there will be no change. The properties most likely to be transferred are income-generating units such as offices, serviced apartments, hospital buildings, warehouses, retail units and hotels, while the holders of other eligible types of assets will need time to consider the pros and cons of the new structure before making any decisions.
able to recover and how Thailand’s key industries –automotive and electronics – perform in the coming years.
In contrast, Thailand’s tourism industry has remained strong, with some sources forecasting 20% growth for this year. But the risks remain. If people around the world are earning less, it’s inevitable that they will travel less. Also, the appreciation of the baht has made Thailand a much more expensive destination than it was a decade ago.
How do you see the Thai economy performing over the next five to ten years?
I think Thailand will be fine. Despite suffering a number of tragedies and crises in the past decade such as the tsunami, the bird- and pig-flu outbreaks, floods, the global financial meltdown, and protests by various colour–coded political groups – the economy has still managed to grow on average 4% to 5% a year. Thus if you looked at Thailand as if it were a company with an average growth rate of 4%–5%, it has a very clean balance sheet as its debt ratio is only 44% of GDP while in Japan the corresponding figure is 290%, and in Europe
and the US it’s about 100%. That said, Thailand’s debt ratio is creeping up due to the government’s massive spending plans, but if it can be maintained below 80% everything should be fine, and finally management of the country, while not perfect, has been sufficient enough to allow industries to grow.
In comparison to other countries within ASEAN (Association of Southeast Asian Nations) Thailand is strong. As a logistics hub for the region it has plenty of growth opportunities, and with a healthy agricultural sector it has no need to import any major foodstuffs to feed its people. Perhaps its biggest weakness is education where there is room for improvement, though overall the country is in a good state.
I also think the government‘s infrastructure plans are a fantastic idea. The country really needs this kind of long-term investment. Over the past 40 years Thailand has changed dramatically, but its infrastructure has not kept pace. That means that logistic costs are still incredibly high because everything is transported by truck.
How do you think the United States’ decision to phase out QE3 will impact the Thai economy?
Though some people might disagree, I think the Fed has done a fantastic job in reducing the US budget deficit and helping its economy to recover from the global slump. As a result it is confident it can begin phasing out its massive spending plan. Everyone predicted that the Quantitative Easing programmes would result in massive inflation and a weakened dollar, but that didn’t happen. Most of the talk now is about rising interest rates and I agree that this is likely. For example, 10-year US government bonds are currently trading at about 2.5% though the historical rate is somewhere between 3% and 4%. If the rate does go up to that level it won’t be a bad thing as some may suggest because it demonstrates that the economy is improving.
Now the potential impact of this on the Thai economy could be potentially higher cost of debt and businesses that have borrowed too much over the past few years may have issues in servicing their loans. As for the Thai stock market, the increased liquidity and low funding costs have forced investors, whether they be institutional or individual, to search for yield over the past few years and as a result of this investors have been accepting a lower rate of return for the same amount of risk. Thus the worry we have is if interest rates begin to rise, the chase for yield will dissipate and this may result in a decrease in the Thai stock market on a short to mid-term basis.
How do Thai banks compare with their foreign counterparts in terms of liquidity and competitiveness?
The liquidity of Thai banks is not an issue. The average loan-todeposit ratio among domestic lenders is less than one, which is conservative. Similarly, the average capital ratio in Thailand is 16% compared to less than 10% for European banks.
In terms of competitiveness, when compared with the rest of ASEAN, Thai banks are somewhere in the middle, between the generally larger Malaysian lenders and those in the Philippines and Vietnam. The challenge for all ASEAN lenders – except for those in Singapore and Malaysia – is that they have never ventured beyond their national borders. On a global level, even the largest of Thailand’s banks would struggle to compete with a multinational US or European lender, due to its massively smaller scale.
Another barrier to competition is that the cost of funding for Thai banks is much higher than it is for, say, Singaporean or other foreign lenders. Thailand is also still very much focused on local banks and there are strict regulations governing the issue of new licences, which means we are unlikely to see a flood of foreign lenders opening branches here
How do you expect the formation of the AEC to affect the Thai economy?
The AEC is a fantastic story, and with the potential for the free flow of labour and goods, and zero trade tariffs, every member country should benefit. Over the past four years, many Thai companies have sought to take advantage of the global financial crisis by expanding overseas, so they are in a good position to exploit any opportunities provided by the creation of the economic community. On the down side, Thailand might face challenges on the labour front. Unemployment in Thailand is very low, though when the AEC is open for business, there is likely to be an influx of skilled workers from around the region who might well be willing to do the same jobs as Thai people for less money. This might be damaging for some local workers though it should really be seen as an opportunity to increase competitiveness.
What is the current state of the Thai stock market?
Due to the increase in foreign capital and higher volume trading in recent years, Thai stocks are now at their highest levels since 1996.
Despite the increased risk, people have been generally keener to invest in stocks and shares rather than settle for low interest rates from the banks. This is unlikely to change with a reduction of personal income tax rates next year and the government encouraging people to spend more. Also, the government’s two trillion baht infrastructure programme will ensure there is plenty of money in the economy, which should theoretically benefit everyone, leading to higher confidence, higher liquidity and higher asset prices – it’s a basic economic cycle.