Property funds offer investors an alternative

Choosing which property fund to invest in may be a different ball game altogether from selecting a bond or equity fund.

For one, property funds in Thailand - at least the big ones - often invest in one property category such as shopping complexes or commercial buildings, and are therefore, in themselves, not as well diversified as mutual funds that invest in stocks. For instance, a terrorist scare or epidemic can turn shopping malls into urban graveyards. However, it is precisely a property fund's singularity that inves-tors are looking for to complement the volatility in the stock market.

Since the beginning of the year, in an equity market that is teetering from the effects of a global economic slowdown and cost-push inflation, almost all major asset-management companies have announced that they have a couple of property funds or more to be released to the market this year.

While a property fund is just another investment vehicle, as opposed to stocks, investors own a piece of a physical asset with an expectedly long life span and the potential of rental income and property appreciation.

With the 30-per-cent capital controls revoked, many fund managers can now breathe easy. Property funds can now take their place as the saviour to high inflation.

"Besides equities, with inflation at about 5 per cent, property funds' average yield of 6 to 9 per cent is a logical choice," said Kampol Adsavakulchai, SCB Asset Manage-ment executive vice president. As well, unlike stock dividend payments, yields from property funds do not count as income. Investors therefore need to pay only 10-per-cent capital gains tax.

As of May 12, the year-to-date return for CPN Retail Growth Property Fund, managed by TMB Asset Management, was 18.39 per cent. For a closed fund, market capitalisation was Bt11.4 billion on March 31.

Regardless of whether or not the property-fund sector will be worth hundred of billions of baht or more by the end of the year, for non-institutional investors the ability of the underlying asset to generate ap-

propriate income should be the main criterion in property-fund investment, according to Sopon Pornchokchai, president of the Agency for Real Estate Affairs. This is all the more important when most investment units are non-redeemable.

Like buying an apartment or leasing an office for yourself, when it comes to a property fund, investors must not forget the usual "location, location, location" mantra. An office building next to a six-lane highway may not be as attractive to a potential multinational tenant as one in central Bangkok.

Although most asset-management companies have similar plans to enter the property market - mainly in commercial buildings, hotels and resorts and serviced residential properties - many disagree on one fundamental issue: whether the property should be leasehold or freehold, assuming of course that the fund invests directly in the property.

Proponents of freehold property funds believe that investors stand a better chance of profiting from land appreciation, which, according to Natree Panassutrakorn, MFC Fund's senior property-fund manager, rose at a rate of 5 to 8 per cent a year nationwide following the 1997 financial crisis.

However, whether or not the fund sells the appreciated land for a profit would be at the discretion of the property-fund managers.

"Leasehold allows for more flexibility," said Kampol. "The returns for the freehold and leasehold properties are the same," he said. What matters though is that managers could pull out from the properties, if the conditions become unfavourable - a view echoed by Sopon.

"It is a misconception that a property owner will only sell bad assets," said Sopon. Investors ought to look at the value and earning potential of the underlying assets, he said.

Traditionally, property companies are highly geared, with a high level of debt capital relative to equity or total capital. Some developers may have stumbled on some financial hurdles, so a property fund is a good outlet for these companies to inject some of their distressed assets.

Liquidity, particularly the property's ability to match and service its debts to assets, is tantamount to the well-being of the funds' returns. Ideally it should be easier for investors to sound out if a certain property fund is well worth their hard-earned money by visiting the place themselves.

For example, investors of ING Fund's Major Cineplex Life Style Property Fund may find the lines queuing to see this year's Hollywood blockbusters a welcome sight.