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Real Estate Investment Trusts Thailand
Legal Alert
December 2009
For further information or assistance regarding this Alert, please contact:
Bangkok
Wittaya Luengsukcharoen, Partner wittaya.luengsukcharoen@bakernet.com
Theppachol Kosol, Partner theppachol.kosol@bakernet.com
Baker & McKenzie analyzes the next step for Thai REITs
The Securities and Exchange Commission of Thailand is currently drafting regulations that would govern the establishment and management of Thai REITs. This follows its notification that REITs may be established under the current trust laws of Thailand.
The proposed REIT regulations are expected to encourage real estate investments.
This Alert discusses the main features of the proposed REIT regulations and compares it with the existing regulations governing the Thailand Property Fund for Public Offering.
Yours sincerely,
Roy Melick
Chairman – Global Real Estate Group +61 2 8922 5138 roy.melick@bakernet.com
For further advice regarding Baker & McKenzie’s Global REITs practice, please contact:
Addison Braendel Partner, Chicago
addison.d.braendel@bakernet.com
Milton Cheng Partner, Hong Kong
milton.cheng@bakernet.com
Roy Melick Partner, Sydney
roy.melick@bakernet.com
Oliver Mesmin Partner, Paris
olivier.mesmin@bakernet.com
The Next Step for Thai REITs:
Moving Closer and Closer to the Traditional REITs
In 2002, Thailand’s Securities and Exchange Commission (SEC) introduced the Thailand Property Fund for Public Offering (PFPO). The PFPO was created as a recovery vehicle for distressed property assets resulting from the 1997 financial crisis. It is sometimes referred to as the Thailand Real Estate Investment Trust (REIT), as it is similar to the REITs used in other markets.
However, unlike REITs in other markets, the PFPO regulations are less flexible. As of 31 August 2009, there are only 25 PFPOs in the Thai market, having a Net Asset Value (NAV) of Baht 73,000 million (approximately USD 2,086 million).
The SEC has recently issued a notification prescribing that trusts may be established in the capital market through REITs, under the Trusts for Transactions in the Capital Market Act B.E. 2550 (2007) ("Trust Act"). The purpose of the notification is to build up market interest and appetite for investment in real estate through the capital market, as well as to permit the use of trusts as investment vehicles for capital market transactions.
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To further its goals, the SEC is in the process of drafting regulations governing the establishment and management of REITs ("Proposed REIT Regulations"). The Proposed REIT Regulations are expected to: (a) develop the structure of funds mobilization and investment in real property, so that they are in line with international practices; (b) offer the public an alternative to obtaining benefit from real estate investment, under a new form of financial instrument; and (c) provide greater flexibility in establishing and managing real estate investments.
According to the Proposed REIT Regulations, a REIT has to be established and managed as a trust transaction under the Trust Act, and shall have a specific structure. As a trust is not a tax entity, a REIT will not be subject to income tax. However, the holders of trust certificates will be subject to income tax upon receipt of dividends from a REIT, in a similar manner as unit holders of a PFPO.
The significant features of a REIT under the Proposed REIT Regulations, in comparison with that of a PFPO, are discussed below.
Issue PFPO REIT
1. Structure 2. General
Characteristics
3. Fund Size
4. Authorization Requirements
5. Establishment of Fund
Mutual Fund
Investment unit (a type of security)
Closed-end fund with no maturity – Investors cannot redeem the investment units until the PFPO is liquidated.
The investment units must be listed on the Stock Exchange of Thailand (SET) within 60 days of completion or the date they are offered to investors.
Baht 500 million Licensing of the mutual fund management company by the SEC
The mutual fund management company is responsible for seeking approval for establishment of the PFPO.
Prior to offering the investment
Trust
Trust Certificate (a type of security)
Closed-end trust with no maturity – Investors cannot redeem the trust certificate until the REIT is liquidated.
The REIT must be listed on the SET within 60 days of completion or the date they are offered to investors.
Baht 500 million
Licensing of the trustee by SEC
Licensing of the REIT management company
The licensed trustee will be responsible for seeking approval for a sales offering of trust certificates from the SEC.
Prior to offering
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6. Fund Management
7. Minimum Number of Investors
8. Unit/Trust Certificate Allocation
9. Holding Restrictions
units to investors and investing in property, the fund management company must submit a fund scheme and draft prospectus to the SEC for approval.
A licensed mutual fund management company
Upon IPO: 250 investors
After IPO: 35 investors (sanction for non-compliance: mandatory dissolution)
Not less than 50% of the total number of issued investment units must be offered for sale to the general public (IPO). The minority subscribers are allotted prior to other subscribers.
Persons in the same group shall not hold more than 1/3 of the total investment units sold.
the trust certificates to investors and investing in property, the trustee must file a registration statement for the trust certificate offering, a trust deed, and a draft prospectus with the SEC for approval.
A licensed REIT management company, appointed by the trustee
The trustee and licensed REIT management company cannot be related persons.
Upon IPO: 250 investors
After IPO:
150 investors with at least a 15% free float (sanction for non-compliance: warning shall be posted)
35 investors (sanction for non-compliance: mandatory dissolution)
REIT ≥ Baht 3 billion: free float ≥ 20%
REIT < Baht 3 billion: free float ≥ 25%
Persons in the same group shall not hold more than 50% of the total trust certificates sold.
A foreign limit of A foreign limit of
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10. Real Property Investment Ratio
11. Permissible Investments
12. Investment Restrictions
49% of the total investment units sold is imposed on freehold PFPOs.
Investment in real property or leasehold rights in real property ≥ 75% of NAV
Office buildings
Shopping complexes
Factory buildings for rent in industrial estates
Warehouses
Residential buildings, e.g. serviced apartments, condominiums, dormitories, and residential houses
Hotels
Convention centers or exhibition centers
Large distribution centers
Others, as specified by the SEC
Investment can only be made in real property that is 80%-100% complete.
Development of real property is not allowed.
Investment in vacant land is not allowed.
49% of the total share certificates sold is imposed on freehold REITs.
Investment in real property or leasehold rights in real property ≥ 75% of NAV
Investment can be made in real property that can generate rental revenue, except for those listed on the negative list, as follows:
real property involving illegal businesses;
real property that may have an environmental impact exceeding the legal limitation;
real property involving an "immoral business," such as massage parlors, night clubs, horse racing tracks, etc.; and
others, as specified by the SEC.
Investment can only be made in real property that is 80%-100% complete.
Only real property representing not more than 10% of NAV can be developed.
Investment shall not be made in vacant land, except:
→ investment for real property development
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13. Minimum Period of Real Property Holding
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