Thai Property – all REIT on the night?


Investing in Thai property schemes can be done through regulated, exchange-based funds.

One thing that makes me shudder working in the financial services business is when I receive a glossy brochure on my desk, telling me how much money I’m going to make on the latest new housing project.

For a start I’m wary about anything that gives me an annual return figure (before I even know what it is). When the pamphlet uses that dreadful term guaranteed return, the alarm bells really start ringing. Then, if the buildings aren’t even complete, I start screaming!

In such schemes, investors stand to gain based on the rental income and/or increases in the future value of the planned developments. Yet, in spite of all the wonderful numbers cited on the brochures, can we actually know what the real value is?

Shares, bonds, commodities and currencies, for example, all have regulated markets with quoted prices which can be verified and referenced live in real time -in other words  price discovery. We know at any time at what value these assets can currently be sold. However, when the building hasn’t yet been finished, price discovery is somewhere between very limited and non-existent. There’s no readily verifiable market value that can be tracked on Bloomberg screens. In the absence of price discovery, the promoters and managers of such funds make projected returns on investment by using a model. Hence such structures are known as mark-to-model schemes.

There have been several examples in the recent years, where such schemes have promised investors a steady rate of return. Because the return is based purely on the model, the price goes up in a straight line no matter if, in reality, the underlying assets are appreciating or deprecating in value. So when investors decide they want their money back, such funds are often unable to meet all the redemption requests.

However, there are ways of investing in property which do offer price discovery – market-traded property funds and real estate investment trusts, or REITs. These generally allow both small and large-scale investors to buy in, and trading is done on a regulated exchange, so there is an accurate up-to-date price.1

Property funds were made available on the Stock Exchange of Thailand in 2003, as a new indirect investment vehicle, in an attempt to ease the lack of liquidity in capital markets after the 1997 financial crisis.2

Since the beginning of this year, Thai property funds have risen 28%, possibly aided by one particular IPO between two projects; but could also be partly down to demand for the funds from property fund ‘funds of funds’ offered by some of Thailand’s asset managers. These have seen increasing popularity due to their steady inflow of dividends, bringing performance above most SET50-based mutual funds. As property funds are relatively illiquid, it’s not difficult to push up the price with continued buying.

Two years ago, the Thai SEC introduced REITs to offer something more effective, attractive and transparent.3 REITs – a form of product regulated by America’s SEC since the 1960s4 – are structured in a trust fund and can leverage to a maximum of 35% of its net asset value (NAV); whereas a property fund is managed by a jurisdiction, much like a typical freehold condo, and can leverage up to only 10% of NAV. As it’s a relatively new phenomenon, there aren’t many REITS available yet in Thailand – the majority of listed structures are still property funds;5 although that will eventually change as future IPOs must be REITs.6

The Net Asset Value (NAV) is supposedly based on the years on the lease – typically whatever is remaining of a 30-year lease. It is vital to check the details of each one on a case-by-case basis. Property valuation firms re-value the assets regularly (each quarter in many cases) and it’s good to look back and see the trends – this depends more on occupancy forecasts, rental prices or room rates than land or building values.7

Of course there are different schemes, involving different types of property: for example: residential, offices and shopping centres. These can then be broken down into sub-categories, such as high-end/low-end, condominiums/town houses, area, etc. Normally, there’d always be one segment in one area experiencing a softening of price, whilst another sees strength. So, it’s worthwhile being aware of what is over-priced and what is still good value yet on the move up.

On analysis based on their discounts to regularly published NAVs,8 the listed property fund market seems to assume NAVs are generally overvalued for almost all office, infrastructure and industrial-estate-based funds. Shopping centres appear to be seen as growth opportunities and are therefore at a slight premium to their published NAV.9

Looking at Bangkok, our analysis showed that the property fund sector appeared to be undervalued, when making a simple comparison of what yield buyers could achieve if they bought, for example, an office condo or a residential dwelling, then rented each one out.  This took into account freehold and leasehold properties.10

Overall there doesn’t seem to be a hugely compelling case for any sector within the Thai property market right now. Any lack of investment trend may not be a bad thing though: Thailand doesn’t appear to have the same overvaluation issues11 as developed markets such as Canada, the UK or Australia12 or regional markets such as Singapore.13 However, Thailand remains vulnerable to contagion from effects such as a China property bubble burst or deterioration in economic macro-economic conditions, as well as to more specific local risks.

Although property is generally a long-term investment, REITs enable capital market liquidity and participation because they’re traded on an exchange. Also, owning property often has the dual function of somewhere to live and an investment. For that reason, it’s worth considering real estate as a relatively small part of your investment portfolio. That said, long-term developed property markets have historically shown 2 attractive features:

1) An ability to yield positive total returns in 3 of the 4 seasons of Kondratieff long-wave seasons.14

2) The ability to achieve long-term capital increases in value in line with inflation plus an attractive rental income.15

Of course, there’s no one-size-fits-all solution for property investment. In fact, property itself doesn’t meet everyone’s investment needs or objectives. Before investing, it’s vital to plan out what you want to achieve and the timeline in which you aim to do it. A regulated, fee-based, independent financial advisor can guide you through the steps and suggest investments which best suit you.



2 SEC Thailand





7 & MBMG IA analysis

8 & MBMG IA analysis

9 MBMG IA analysis

10 & MBMG IA analysis

11 MBMG IA analysis




15 The Hand of Gov – Professor Steve Keen, for CLSA capital markets

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup