Bangkok--7 Aug--Fitch Ratings
Fitch Ratings expects the number and the assets under management of property investment funds in Thailand to continue to grow in 2014 and 2015. This will be supported by the funds’ attractive returns relative to bank deposits and fixed income investments, an increase in the number of new properties for rent and developers’ rising need for funds. Regulatory changes to move towards a real estate investment trust structure for these funds will also have a positive impact on the sector’s growth.
Property investment funds have expanded rapidly in the past two years in Thailand. The market capitalisation of property funds listed on the Stock Exchange of Thailand rose to THB243.0bn (USD7.5bn) at end-2013 from THB96.5bn at end-2011, while the number of funds increased to 46 from 33. Funds investing in office buildings accounted for 35% of the total market capitalisation, while those investing in retails properties made up 32%, warehouses and factories accounted for 15%, and hotels and serviced apartments accounted for 10%.
Retail space in Bangkok and its suburbs is likely to increase by 700,000-800,000 square meters (sqm) in 2014, up about 11%-12% yoy. The increase is partly driven by the completion of projects delayed from the previous year, when the amount of retail space rose by just 120,000 sqm. (2012: about 500,000 sqm). Demand for retail properties is likely to continue to increase, although political instability in 4Q13 to 2Q14 disrupted business activity in many sectors. Fitch expects the occupancy rate for retail properties in Bangkok and its suburbs to fall in 2014, although it is likely to remain strong at above 90%.
Fitch expects warehouse and factory space for rent in Thailand to continue to increase by about 800,000 sqm in 2014, following an increase of 860,000-870,000 sqm in 2013. The new supply of warehouse and factory space for rent - plus sales of existing properties by developers - will likely support an increase in assets under management of the property investment funds. About 40%-60% of the new warehouse and factory space in Thailand in each of the past two years were sold to property investment funds. Two major developers plan to sell warehouse and factory assets valued at a total of THB10bn this year, similar to the amount of sales in 2013.
Thailand is moving towards a real estate investment trust (REIT) structure for funds that invest in property. Regulations have been changed to disallow the establishment of new funds under the old property fund structure and to prevent existing property funds from raising more capital. However, existing property funds have an option to convert to the REIT structure.
Under the new regulatory framework, a REIT can have borrowings of up to 35% (and up to 60%, if being rated at investment grade) of its asset value. In addition, investment in incomplete projects can account for up to 10% of its asset value. REITs can also invest in offshore properties. On the other hand, the previous property fund structure allowed borrowings of up to 10% of the fund’s net asset value and did not allow investment in incomplete projects as well as offshore properties. Therefore, REITs under the new framework are likely to be a more attractive funding tool for the developers of properties for lease than the previous property fund structure, and hence this may reduce developers’ need to rely on bank financing. The first REIT under the new regulatory framework is likely to be launched in September or October of this year.