Are REITs better than property funds?

Are REITs better than property funds?

SET and company executives celebrate the first day of trading of AIM Industrial Growth Freehold and Leasehold Real Estate Investment Trust on the first day of trading on Jan 9. (Photo supplied by AIM Industrial Growth Freehold and Leasehold Real Estate Investment Trust)
SET and company executives celebrate the first day of trading of AIM Industrial Growth Freehold and Leasehold Real Estate Investment Trust on the first day of trading on Jan 9. (Photo supplied by AIM Industrial Growth Freehold and Leasehold Real Estate Investment Trust)

First introduced in 2014 to replace the Property Funds for Public Offering (PFPO) scheme, REITs have gained popularity and played an increasingly important role in Thailand's real estate industry.

Since its introduction, the total REIT market capitalisation has reached 85 billion baht across 2 million square metres of assets. However, an open question remains -- are REITs really a better vehicle than property funds?

JLL has made a comparative analysis to identify key advantages and disadvantages of REITs over property funds, focusing on not only the regulatory aspect but also the performances of the two real estate investment vehicles. Following are some of the key findings from the analysis:

Regulatory Requirements

  • REITs require a minimum free float of 15% of total units issued, offer higher gearing ratios and a wider range of investible asset classes than property funds within a revised tax framework that de-emphasises using the vehicle as a tax shelter (which was common under the PFPO scheme). In theory, these differences should support healthy liquidity and growth.
  • REIT guidelines are also more stringent with respect to valuations/asset pricing and good governance. Whereas property fund acquisition pricing could be up to 10% higher than the assessed value, REITs are limited to not more than 5% of the assessed value.
  • In terms of governance, REITs are required to hold annual general meetings (of shareholders) whereas property funds are not. That said, there are no discernible differences in terms the amount or detail of information disclosed.

Trading performance

REITs have an average gearing of 20% while the average gearing for property funds remains below 5%, well below the 10% regulatory limit.

While REITs with higher market capitalisation and trading liquidity tend to trade better, they typically do so at tighter yields than funds, adjusting for size.

In the US$200-600 million market capitalisation range, REITs trade at a 5.6% dividend yield, compared to 6.2% for property funds. Potentially, the market expects REITs to acquire more assets that could be accretive to earnings.

It's apparent that REITs are more flexible in terms of regulatory requirements, gear up more and trade better than property funds.

In a broader perspective, JLL expects REITs to benefit the Thai real estate industry more than PFPOs in the long run.  In the latest edition of JLL's Global Real Estate Transparency Index, Thailand ranks 38th globally, showing a gradual improvement over the last 13 years since the index was first published.

By providing periodic independent valuation, clarity into ownership structures, and most importantly, more accessible market and benchmarking data, REITs should help accelerate the improvement of country's real estate market transparency.


Chawan Ratapana is an assistant manager of research at JLL, focusing on Capital Markets and Investment research. For more insights, readers can contact him by email: Chawan.Ratapana@ap.jll.com or visit www.jll.co.th.

Do you like the content of this article?
COMMENT