February 15, 2016
Flotation of first Thai REIT to own overseas property, coupled with relaxation of rules governing the vehicles, should spur rise in outward real estate investment, as pension funds also look overseas
Thai outbound investment into real estate is set to increase after the country’s first real estate investment trust to invest in foreign assets was listed on the Stock Exchange of Thailand in December.
MFC Industrial Real Estate Investment Trust raised THB975m ($27m) in the initial public offering. The REIT owns a single UK asset: Anchorage Point data centre in Greenwich, south London.
The 1,342m2 facility – which is let to BIS Co, a subsidiary of 6 Degrees Group, until 2033 – was bought in 2014 by CGD Digital Partners, a subsidiary of Country Group Developments (CGD), the real estate arm of the eponymous Thai conglomerate.
The REIT is managed by MFC Asset Management, while Palmer Capital Asia is asset manager. Country Group and CGD retain a combined stake of just under 27% of the REIT’s units.
The REIT acquired the London data centre from CGD for £26m ($37.1m), at a substantial premium to the appraised value of £22.5m – a fact that may encourage other Thai companies with overseas assets to seek a REIT exit.
Speaking after the REIT listed, Stock Exchange of Thailand president Kesara Manchusree said many Thai companies, especially those that own assets overseas, had expressed an interest in raising funds via REITs.
“I believe companies will be more enthusiastic about selling their valuable assets domestically and abroad to REITs. This trend will become clearer in 2016,” Manchusree added.
A conduit for Thai capital
Simon Tyrrell, managing partner of Palmer Capital Asia, says: “MFC Industrial REIT provides a legitimate conduit for Thai capital to access overseas direct real estate, paving the way for more Thai capital to enter the international real estate markets over the coming years.
“The variation of Thailand REIT rules to include international properties was first proposed in 2013; however, it has taken extensive lobbying and campaigning to create the form of regulations seen today.
“Thailand is the second largest economy in South East Asia, behind Indonesia, with a very low level of personal and corporate debt, resulting in material wealth among its citizens and industries.
“Capital controls have been in place since the Asian financial crisis in 1997, which has restricted outbound capital flows to a few selected parties. There is a lot of pent-up equity in Thailand for overseas investment.“
The new REIT can invest in a range of industrial properties and Palmer Capital will be sourcing new investments for it in future, Tyrrell says. These are most likely to be properties in the UK, which remains the favoured investment destination outside of Asia for Thai investors.
So far, Thai outbound investment has been minimal, with only $4bn invested in overseas real estate in the past five years, according to Real Capital Analytics.
However, Tyrrell says other Thai investors are already looking to follow CGD’s lead. “It will take time, as people will want to see how the new REIT trades,” he says. “But we know that other Thai investors are looking closely at overseas investments with the intention of listing them.”
Low yields a barrier to growth
One remaining barrier to the expansion of Thai REITs with overseas assets is the dividend requirement. On average, Thai REITs yield around 7%, with modest gearing, making it tough to find assets that are yield- accretive for investors.
In November, Thailand’s Government Pension Fund (GPF) was allowed to lift its overseas investment ceiling from 25% to 30% and also given the green light to boost real estate holdings from 8% to 12%.
GPF, which manages civil servants’ savings, is the country’s largest pension fund, with assets of around $14bn. It plans to gradually lift its overseas investments to up to 40%. Data for 2014 shows the fund had 1.4% of its assets in global property and 3.7% in domestic real estate. Nearly two- thirds of its holdings are in domestic bonds.
Thailand’s largest pension fund, the Social Security Office, which has $38bn of assets under management, has also indicated that it will increase its allocation to both real estate and overseas investment, but remains heavily invested in Thai government bonds.
NEW RULES HELP THAI REITS COME OF AGE
Thailand introduced real estate investment trust legislation in 2013 and has since refined its legislation.
Although the South East Asian nation has more REITs and similar vehicles than any country in the region – more than 50 – many are small, single-asset vehicles. The nation’s first true and largest REIT, Impact Growth REIT, raised THB15.7bn ($437.33m) in 2014.
Last year, the Thai government announced REIT tax concessions in the form of a waiver on taxes applied to REIT conversions; and, a waiver on personal unit holder taxes. These incentives will remain in place until the end of next year.
Peter Verwer, chief executive of APREA, says: “Despite a few kinks to be ironed out, many analysts believe the new measures give REITs an advantage over more traditional Thai property funds, particularly in relation to gearing and capital management opportunities.”