Thai Reit proposals offer greater flexibility

Thailand’s Securities and Exchange Commission (SEC) is drafting a regulatory framework to establish real estate investment trusts (Reits).

It may be in force late this year or early next and is expected to boost the country’s $2.43 billion property fund market.

Reits are expected to provide greater flexibility in establishing and managing real estate investments than the current Thailand Property Fund for Public Offering (PFPO) regime, according to law firm Baker & McKenzie.

PFPOs – also known as Type 1 Property Fund – were introduced in 2002, but have not been popular due to their many restrictions. The SEC proposes that the regime be discontinued, albeit allowing PFPOs to convert to Reits.

The SEC hopes to finalise the new rules by the end of November, says Sorachon Boonsong, a partner at Baker & McKenzie in Bangkok. Given that normally 30-60 days is allowed before the regulations come into force, the commission is hoping to have them in place by early next year and expects to have firms setting up Reits by then.

There are a few key differences between the draft framework proposal circulated in September last year and the new proposals, notes Boonsong. Firstly, the borrowing or leverage ratio limitation has been raised from 30% to 50%. That’s a huge difference from the PFPO rules, which only allowed 10%. This will provide more opportunities for Reit portfolios to benefit from debt leveraging.

Another issue regards property-ownership limits – once properties are transferred to a Reit, the property owners can own up to 50% of the Reit (up from 33% previously, as also stipulated by the PFPO). That should make it easier to source properties for Reits, as it's likely to be more attractive to those property owners who wish to retain a significant ownership interest in the underlying real estate portfolio after its transfer to a trust.

Thirdly, the latest draft allows Reits more flexibility to invest in different kinds of property – in that it provides a list of assets they cannot invest in, rather than listing only those that are permissible, as is the case with the PFPO. Further, the Reits would be allowed to invest overseas, as long as the Reit is not buying freehold property.

One other issue is still under discussion and concerns whether Reit owners are offered the same tax incentives as PFPO owners are offered.

It’s anticipated that quite a number of Reits will launch once the framework is implemented.

One issue, however, is that Thai owners of property tend to want full control of their real estate, says Boonsong. If they want to transfer property to a Reit but can only own a small amount of a fund, they feel they don’t have enough control. But the increase of the level of permitted ownership by the property owners to 50% may make them more comfortable about transferring to a Reit.

The proposed Thai framework fits quite well with the existing structure and framework for Reits in other regional markets such as Hong Kong and Singapore, says Milton Cheng, Asia-Pacific head of the Reits practice at Baker & McKenzie. It’s fairly consistent with rules on areas such as gearing limits, the use of trustees in the structure and so on, he adds.

Peter Mitchell, Singapore-based chief executive of the Asia Pacific Real Estate Association (Aprea), was surprised by the speed of progress on the rules. “[The latest Thai Reit framework approval] has come out of the blue, as the authorities seemed to be giving priority to setting up a framework for infrastructure funds ahead of Reits.”

The last high-level activity was in September 2009, when Aprea responded to a draft Reit framework proposal, he says. The association had made a number of comments on what would need to be done for the rules to reflect what international investors would be looking for.

“One issue was that the 2009 proposal was based on a relatively new concept of trust law that Thailand introduced a couple of years ago,” says Mitchell. “We felt a lot more work needed to be done to stipulate in the Reit law what the duties of trustee are, as there is no body of general law on the responsibilities of trustees in Thailand, as there is in, say, Australia and Singapore.”

A finalised Thai Reit law is likely to be a catalyst for Aprea to set up a Thailand chapter. This will follow the Philippines chapter Aprea established earlier this month. “The Philippines real estate market is a unique and growing market, with Reits around the corner, which domestic and overseas investors cannot afford to ignore,” says Mitchell.

The Philippines chapter’s board comprises: Francis Lim, partner at Accra Law; Jaime Ysmael, chief finance officer at Ayala Land; Rick Santos, chairman of CB Richard Ellis Philippines; Roberto Panlilio, senior country officer at JP Morgan Chase Bank; Michael de Guzman, managing director at Macquarie; Frederick Go, chief operating officer at Robinsons Land Corporation; and Jeffrey Lim, CFO at SM Prime Holdings.