Are you looking for investment opportunities featuring more attractive returns than savings accounts, tax-free and stable long term returns, and high liquidity? If you are looking for these options Real Estate Investment Trusts (REITs) are a new financial product that might offer the right solution for your investment needs.
A REIT is not really an investment innovation since it is similar to a property fund. Investors might be surprised to learn that CPNRF, the biggest property fund in Thailand with a market capitalization of more than 30 billion baht, is also the world's biggest property fund. This is true because property funds only exist in Thailand, while other countries have opted for REITs. Property funds were introduced to the market at a time when Thailand's trust laws were not quite ready for REITs. Thailand, therefore, opted to apply mutual fund legislation for property funds for many years.
With the increased readiness of trust laws, REITs will replace property funds in Thailand, and existing property funds will not be allowed to issue new shares or increase capital in 2014. Investment in REITs is another step between property funds and companies operating commercial rental space (e.g. department stores, hotels, factories, or warehouses). The 3 property-related investment categories can be outlined as follows:
|Property Fund||REIT||Companies operating space for rent|
|Assets||Specific property||Specific property or shares of property companies||Operating space for rent|
|Foreign investment||Not allowed||Allowed||Allowed|
|Management||Managed by asset management companies||Managed by asset management companies or specialized property management companies||Managed by specialized property management companies|
|Financial structure||Cannot acquire loans of over 10% of net asset value||Cannot acquire loans of over 35% of net asset value or 60% in case of being investment grade||No limit.|
|Dividend payment||Not less than 90% of net profit||Not less than 90% of net profit||Depending on company policy|
Investment in property funds and REITs contains similar features in terms of assets, which are specific to each entity. However, returns, risks, and growth rates will depend on the underlying assets. Because investment is made on completed property projects with satisfactory performance, returns are quite certain and not very vulnerable. Growth mainly originates from increases in rental fee or assets. On the other hand, investment in property companies is like investment in a business. Profits and losses are created from many property items, including those from business expansion and the purchase of new asset items, which can provide higher or more fluctuating returns. However, increased risk could arise from the purchase of empty land plots, project development, and the sale of assets. If one would like to invest in a REIT, what are the factors to consider?
It can therefore be said that REITs are more or less a new form of property fund. The new instrument is a transformation of mutual funds to trusts, which will be more attractive to foreign investors. REITs can be more expensive for some investors, due to decreased tax privileges for legal entity investors. However, investors should find its features more satisfactory. In the near future we should see the first REIT, and the first active REIT trading.