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Higher returns expected to sustain growth of AUMs under property management funds

Fitch Ratings expects the number and the size of assets under the management of property investment funds in Thailand to continue to grow this year and next year.

It said this would 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 aimed at a shift towards a real estate investment trust structure for these funds will also have a positive impact on the sector’s growth, its said.

Fitch Ratings said property investment funds had expanded rapidly in the past two years in Thailand. The market capitalisation of property funds listed on the Stock Exchange of Thailand rose from Bt96.5 billion at the end of 2011 to Bt243 billion at the end of 2013, while the number of funds increased from 33 to 46.

Funds investing in office buildings accounted for 35 per cent of the total market capitalisation, while those investing in retails properties made up 32 per cent, warehouses and factories accounted for 15 per cent and hotels and serviced apartments accounted for 10 per cent.

Retail space in Bangkok and its suburbs was likely to increase by 700,000-800,000sq m this year, up about 12 per cent year on year.

Fitch Ratings said the increase was partly driven by the completion of projects delayed from the previous year, when the amount of retail space rose by just 120,000sq m. In 2012, it rose about 500,000sqm.

Demand for retail properties was likely to continue to increase, although political instability in the fourth quarter 2013 to the second quarter 2014 disrupted business activity in many sectors.

Fitch expects the occupancy rate for retail properties in Bangkok and its suburbs to fall this year, although it is likely to remain strong at above 90 per cent.

It expects warehouse and factory space for rent in Thailand to continue to increase by about 800,000sq m this year, following an increase of 860,000-870,000sq m in 2013.

Fitch said the new supply of warehouse and factory space for rent, plus sales of existing properties by developers, would likely support an increase in assets under management of the property investment funds.

About 40-60 per cent of the new warehouse and factory space in Thailand in each of the past two years was sold to property investment funds.

Two major developers planned to sell warehouse and factory assets valued at a total of Bt10 billion this year, similar to the amount of sales in 2013.

Fitch said Thailand was moving towards a real estate investment trust (REIT) structure for funds that invest in property.

Regulations had 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 had an option to convert to the REIT structure. Under the new regulatory framework, a REIT could have borrowings of up to 35 per cent, and up to 60 per cent if rated at investment grade, of its asset value.

In addition, Fitch said investment in incomplete projects could account for up to 10 per cent of its asset value. REITs could also invest in offshore properties.

The previous property fund structure allowed borrowings of up to 10 per cent of the fund's net asset value and did not allow investment in incomplete projects and offshore properties.

Therefore, Fitch said REITs under the new framework were likely to be a more attractive funding tool for developers of properties for lease than the previous property fund structure, and this might reduce the developers’ need to rely on bank financing.

The first REIT under the new regulatory framework is likely to be launched in September or October, it said.


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