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​ 

October 28, 2022
The draft regulations referred to below were withdrawn from the legislative process on November 8, 2022.   On October 25, 2022, the Thai cabinet approved in principle a draft version of new ministerial regulations that permit certain types of foreign nationals to acquire land for residential use. These draft ministerial regulations represent an additional scheme that complements the existing ministerial regulations from 2002 prescribing rules, methods, and conditions for foreign nationals’ acquisition of land for residential purposes. These draft ministerial regulations aim to attract to Thailand foreign nationals who invest at least THB 40 million. The targeted foreign nationals consist of four groups: Wealthy individuals; Retirees; Foreign nationals who wish to work from Thailand; and Highly skilled expatriates. These four groups are eligible to acquire up to 1 rai (1,600 square meters) of land for use as their own residence in Bangkok, Pattaya City, a municipal area (khet thetsaban), or a designated residential area under the law governing city planning. The area must be situated outside any designated military safety zone. The THB 40 million minimum investment mentioned above may be any type of investment permitted under the ministerial regulations. Some examples include Thai government bonds, real estate or infrastructure mutual funds, real estate investment trusts (REITs), and share capital of Board of Investment (BOI) promoted entities (or a business eligible for BOI promotion). The investment must have been made before submission of the application for land ownership, and it must be maintained for at least three years. If the qualifications are met, the application for land ownership and the related supporting documents (including a certificate of investment issued by the relevant authorities) must be submitted to the director general of the Land Department for consideration and further submission to the Minister of Interior for approval. If approved, the applicant
Read More
August 18, 2022
Practical Law has published an updated online version of Agricultural Law in Thailand, a Q&A-style guide that provides detailed overviews of Thailand’s agriculture laws and regulations. The Thailand overview is one of approximately twenty such guides to jurisdictions worldwide, covering key practical issues related to the legal environment for agricultural operations. The Thailand section, which was written by lawyers at Tilleke & Gibbins, covers the following topics: Agricultural policy Acquisition of agricultural companies Acquisition of agricultural land Crop seed business Plant variety rights Genetically modified crops Animal and animal welfare issues Agricultural safety and product liability Practical Law, produced by Thomson Reuters, is a comprehensive global legal resource for business lawyers. The platform features a wide range of guides covering hundreds of jurisdictions and practice areas. The full Agricultural Law in Thailand chapter can be accessed on the Practical Law website.
Read More
August 2, 2022
Thailand has issued separate regulations temporarily exempting hotel operators and factory owners from paying their annual government fee. The special allowances are meant to mitigate the COVID-19-related financial impacts that have hit the hospitality and manufacturing sectors in Thailand. The exemption for hotel business operators came on July 8, 2022, when the Ministry of the Interior promulgated the Ministerial Regulation Re: Exemption from the Government Fee for Hotel Business Operators B.E. 2565 (2022). This regulation exempts hotel business operators from paying the annual government fee, which is at the rate of THB 40 per room, from July 1, 2022, to June 30, 2024. The exemption for factory business operators was laid out in the Ministry of Industry’s July 1, 2022, Ministerial Regulation Re: Exemption from Annual Government Fee for Factory Business Operators B.E. 2565 (2022). Under this regulation, operators of type 2 factories (which must notify the Ministry of Industry before operation) and type 3 factories (which must obtain a factory operation license before operation) as designated under the Factory Act B.E. 2535 and its amendments are relieved from paying the annual government fee from June 10, 2022, to June 9, 2023. This fee varies (ranging from THB 300 to THB 43,500 per year) depending on the horsepower of machinery used in the factory. For more information on these exemptions, please contact Tilleke & Gibbins at [email protected].
Read More
June 29, 2022
Thailand’s Ministry of Interior has extended the deadline for payment of the 2022 land and building tax by three months, from April 30, 2022, to July 31, 2022, in order to relieve the burden for taxpayers. The announcement was published in the Government Gazette on June 24, 2022. If payment is to be made in installments, the announcement also extends the deadline for each installment as follows: For more details on these measures, or any aspect of Thailand’s land and building tax, please contact Chaiwat Keratisuthisathorn at [email protected], or Sorawit Partomtanasarn at [email protected].
Read More