You are using an outdated browser and your browsing experience will not be optimal. Please update to the latest version of Microsoft Edge, Google Chrome or Mozilla Firefox. Install Microsoft Edge

December 13, 2013

Real Estate Investment Trusts in Thailand

Subscribe to Updates
Bangkok Post, Corporate Counsellor Column

The evolution of real property financing in Thailand—from primarily bank loans to rigid property funds to the proposed real estate investment trusts (REITs)—reflects the liberalisation of the Thai market, the need for alternative funding options, and the need for the country to maintain its regional competitiveness.

The Capital Market Supervisory Board under the Securities and Exchange Commission (SEC) issued regulations last year governing the issuance and offering of REITs in Thailand. The regulations took effect on Jan 1 this year.

Development of REITs: In the past, Thailand’s commercial real estate market was funded primarily by bank loans, secondary offerings and initial public offerings, and to a limited extent, private equity. Previous attempts to broaden financing options through the Property Fund for Public Offering (PFPO) channel proved to be ineffectual and unpopular due to its many restrictions.

One glaring absence from the list of financing options is the REIT—long prized in the United States for its flexibility and deduction of shareholder dividends from taxable corporate income. The lack of the REIT financing option in Thailand became all the more apparent when demand for commercial and residential real estate projects increased (due to very low interest rates) during the recovery of the property sector from 2003 onward.

Recognising the limitations of PFPOs, the SEC approved the new regulatory framework for establishing REITs in 2010 and has since followed up by issuing the regulations now in effect.

REIT regulations: The new REIT regulations are expected to provide a modernised vehicle for financing real estate investments, while also providing the flexibility that has made the funds popular at the international level. Additionally, REITs will likely replace existing PFPOs altogether. Establishing a new PFPO or increasing registered capital in an existing one has not been possible during the one-year period following the issuance of REIT regulations.

Converting an existing property fund to a REIT, however, will be possible. The grace period for the existing property funds to raise funds and borrow for investment expansion is effective until the end of 2013, but as the launch of the REITs seems to have run behind schedule, the deadline is likely to be extended.

The REIT regulations contemplate a trust fund structure (not a juristic structure as in existing property funds), whereby the trustee will have the legal right over the fund in terms of ownership and/or properties. Trust certificates will be listed on the Stock Exchange of Thailand. Thus, when forming and operating a REIT, one will need to take into account existing SEC rules regarding, for example, investment in properties, corporate governance, and management restrictions. REIT managers (which can be companies) will manage the REITs, for which they will be required to hold licences issued by the SEC.

Other features of the REIT regulations will ease the limitations seen in the old property fund rules, including the following:

  • A REIT can leverage up to 35% of its net asset value (NAV) of assets and up to 60% of its NAV for credit rating of investment grade, whereas the current property fund regulations allow only for leveraging 10% of the NAV.
  • The holding restriction for affiliated companies will be increased to 50% of the total trust certificates sold, up from one-third under the PFPO regulations.
  • REITs will be permitted to invest in a broad spectrum of real property types, and barred only from investing in immoral or illegal businesses, while a PFPO is permitted to invest only in certain types of real estate projects.The SEC and the Revenue Department are now finalising the tax structure for REITs.

High hopes for Thailand’s REITs: The hope is that the new REIT option will attract foreign investment to fuel Thailand’s property fund market while maintaining the country’s credit ratings. The creation of the REIT will provide another means for financing real estate, thereby reducing the need to rely primarily on Thai banks as a source of long-term capital. Finally, large institutional investors seeking real estate exposure will be able to purchase a diversified product in line with their risk appetite.

With the right blend of tax incentives, strong oversight, and a flexible investment framework, Thailand may begin to see growth rates in REITs nearing the levels seen in other parts of Asia such as Japan, South Korea, and Singapore.

REITs are expected to drive continued growth in the Thai real estate market and, at the very least, the REIT system is a significant upgrade from the PFPO system, representing an important step in the evolution of Thailand’s capital market and financing system.

Download Full Article
Related Professionals

Practices

Real Estate

Location

RELATED INSIGHTS​ 

February 23, 2021
As many are already aware, following the change of government in Myanmar on February 1, 2021, a draft Cyber Security Law was proposed which attracted widespread criticism. However, less attention has been paid to significant amendments to two existing laws, some of which have a similar effect to parts of the draft Cyber Security Law. In other words, while the draft Cyber Security Law has not progressed further and is under public scrutiny, significant elements of it have found their way into law in Myanmar by other routes. Because these amendments are already law, it is very important that individuals and businesses in Myanmar understand their implications. Amendments to the Law Protecting the Privacy and Security of Citizens The Law Protecting the Privacy and Security of Citizens (2017), or the “Privacy Law,” was amended on February 13, 2021, less than two weeks after the military government came into power. These amendments chiefly address the power of the government to conduct searches, seizures, and arrests; to extend detention without judicial oversight; and to carry out broad surveillance and investigation activities that could intrude on individual privacy. The amendments accomplish this by suspending various sections of the Privacy Law for as long as the State Administration Council (the military body now governing Myanmar) is in power. The suspended sections include the following: Section 5: Search, seizure, and arrest without civilian observation The relevant part of Section 5 of the Privacy Law states, “The responsible authorities shall … when acting in accordance with existing law, not enter into a person’s residence or a room used as a residence, or a building, compound or building in a compound, for the purpose of search, seizure, or arrest, unless accompanied by minimum of two witnesses who should comprise Ward or Village Tract Administrators…”. The suspension
Read More
February 22, 2021
Following the recent imposition of sanctions on Myanmar individuals and companies by the US, the UK and Canada have now imposed new sanctions. As with the US sanctions, these new measures impact UK and Canadian citizens and companies, and non-UK and non-Canadian companies and citizens with interests in those jurisdictions. The EU has indicated that it is planning to issue similar sanctions in the near future. New UK Sanctions In addition to the 16 individuals already sanctioned by the UK government, on February 18, 2021, the UK government announced that three individuals have been sanctioned for serious human rights violations and are now subject to asset freezes and travel bans. The full list of Myanmar individuals and companies sanctioned by the UK is available on the website of the Office of Financial Sanctions Implementation. Breaches of UK financial sanctions are criminal offences punishable in the UK by up to 7 years imprisonment and heavy fines. New Canadian Sanctions Also on February 18, timed to coincide with the UK sanctions, new Canadian sanctions were imposed on nine individuals. As with the UK, Canada already had a number of individuals in the Myanmar military on its sanctions list, and the new additions bring the total number of individuals sanctioned by Canada to 54. All assets of these individuals in Canada are now frozen, and they are banned from travelling to Canada. Canadian businesses or entities may not do business with any of the 54 individuals. Full details of the impact of the sanctions are available on the Government of Canada’s website, as is a database of the Myanmar individuals and companies subject to them. Breach of Canadian sanctions carries with it up to 5 years’ imprisonment in Canada and/or a large fine. Other Countries The EU is reportedly drawing up sanctions
Read More
February 9, 2021
On January 26, 2021, the Thai government passed a resolution to reduce the government fees that are generally collected for the registration of a sale and mortgage of immovable property. The details of this were subsequently set out in two notifications issued by the Ministry of Interior and published in the Government Gazette on February 2, 2021, taking effect the following day. The notifications will remain in effect through December 31, 2021. These two notifications, which are part of the government’s relief efforts to soften the economic fallout of the COVID-19 pandemic, specify that government fees for the registration of a sale and mortgage of immovable property are reduced to 0.01% of the official assessed sale price (reduced from 2%) and 0.01% of the mortgage amount (reduced from 1%). In order to qualify for the reduced rates, the sale and mortgage must be registered at the same time, and the sale price and mortgage amount must not exceed THB 3 million (approximately USD 100,000). The reduced rates only apply to the sale and mortgage of detached houses, semi-detached houses, row houses, commercial buildings, and condominium units, and they must be sold by a licensed developer or authorized government authority. For more information on these notifications, or on any aspect of the Thai government’s COVID-19 relief measures, please contact Tilleke & Gibbins at [email protected] or +66 2056 5555.
Read More
February 2, 2021
The Royal Decree on Land and Building Tax Reduction (No. 2) B.E. 2564, which we previously noted was under consideration, has been officially promulgated. The royal decree, which was announced and published in Thailand’s Government Gazette on January 31, 2021, and came into effect the following day, will effectively reduce land and building tax payments by 90% in 2021 for the following types of land and buildings: Land or buildings used for agricultural purposes; Land or buildings used for residential purposes; Land or buildings used for other purposes; and Vacant or unused land or buildings. Owners of the above types of land or buildings are therefore only required to pay 10% of the land and building tax normally owed for 2021. The royal decree follows the Ministry of Interior’s recent announcement of an extension for the payment of land and building tax in 2021, which will now be due by June 30, 2021 (extended from April 30, 2021). For more details on these measures, or on any aspect relating to Thailand’s land and building tax, please contact Chaiwat Keratisuthisathorn at [email protected] or +66 2056 5507.
Read More