REIT for Investors: Understanding the Investment Tool with Potential

When it comes to investing to generate additional income, investors often look at traditional options such as stocks or bonds. However, there is another financial instrument worth paying attention to: REIT (Real Estate Investment Trust), or real estate investment trusts. Since entering the Thai stock market in 2018, REITs have become an attractive choice for investors seeking stable returns. Nevertheless, the performance of REITs has periods of excellent returns and challenging times, so thorough research is essential before making a decision.

Structure and Characteristics of REIT

REIT is a property fund established by investment managers to pool funds from various investors. It can raise capital by issuing investment units to the public. The assets held by a REIT must have specific qualities, such as generating steady income, including various types of real estate, communication networks, and buildings with tenants.

The income collected by REITs comes from leasing or rent payments from these assets, which are distributed to unit holders as dividends. These dividends are generally paid regularly and predictably, making REITs a good option for investors seeking consistent cash flow.

Incentives for Choosing REIT

Benefits for Asset Owners

Property owners who can generate income can benefit from the REIT structure by using existing assets, such as condominiums, warehouses, or hotels, as collateral to develop new projects by selling investment units to investors.

Benefits for Investors

Investors do not need large capital to invest directly in real estate. Instead, they can hold units in REITs at more accessible prices. Additionally, professional management teams oversee and allocate benefits under the supervision of relevant authorities, ensuring credibility.

Differences Between REIT and Property Fund

Although REITs and Property Funds seem similar, there are several important differences:

Structure and Regulation

Property Funds are traditional mutual funds, whereas REIT is a trust fund regulated by the Securities and Exchange Commission (SEC) and must be approved by the Stock Exchange.

Investment Scope

Property Funds are limited to investing only in assets listed on the SEC’s approved list and cannot invest abroad. In contrast, REIT has greater flexibility, allowing investments in foreign assets and real estate development, provided it does not exceed 10% of total assets.

Distribution and Management of Units

Property Funds evaluate and distribute units like typical mutual funds and do not require retail shareholders. Conversely, REIT must have at least 15% retail investors and hold annual unit holder meetings, similar to publicly listed companies.

Currently, Thailand no longer issues new Property Funds, as the regulation mandates using the REIT format instead. Additionally, REITs can include Infrastructure Funds.

Classification of REITs

Classification Based on Asset Rights

REIT with Freehold rights (Freehold) owns the property outright and can generate income from rent and other sources. The value of units can also increase with the appreciation of the assets, such as through additional construction.

REIT with Leasehold rights (Leasehold) does not own the assets but has the right to receive income from long-term leases. When the lease ends, the assets are no longer held, so the value of this type of REIT’s units gradually decreases as the end date approaches.

Classification Based on Investment Type

Direct Investment REIT owns or has rights directly in real estate and generates income from those assets.

Indirect Investment REIT holds shares in other companies, which in turn invest in income-generating real estate.

Classification Based on Real Estate Business Type

Retail REIT invests in shopping centers, department stores, and retail outlets.

Residential REIT invests in residential-related assets such as hotels, condominiums, apartments, and dormitories.

Healthcare REIT invests in health facilities like hospitals, health centers, and senior housing.

Office REIT invests in office spaces.

Infrastructure REIT invests in infrastructure such as communication networks and energy pipelines.

Factors Affecting REIT Value and Returns

The value of a REIT depends on two main aspects:

Asset Value

Changes in the assets themselves affect rental rates and income. For example, a Leasehold REIT’s value will gradually decline as the lease approaches its end. Additionally, economic conditions, area development, and new constructions can increase asset value, thereby increasing the REIT’s unit value.

( Expected Income Stream

The expected income influences the dividends received by unit holders. Variables such as demand for space, tourism conditions, and overall economic health play significant roles. For instance, if unemployment decreases and employment increases, Office REITs will generate higher income. Conversely, during crises, tourism declines, impacting Hospitality REITs.

Strengths and Weaknesses of Investing in REIT

) Advantages of Investing in REIT

High Liquidity: REITs are easily traded on the stock exchange, allowing quick transfer of ownership, unlike direct real estate investments, which involve more complex processes.

Risk Diversification Tool: REITs help diversify an investment portfolio by adding real estate exposure without large upfront capital.

Transparency: REITs are regulated by relevant authorities, with offerings, registration, and disclosures adhering to strict standards.

Steady Cash Flow: REITs tend to generate regular and predictable dividends.

Limitations of Investing in REIT

Dividend Tax: Dividends from REITs are subject to a 10% withholding tax or can be offset against annual income tax, depending on the investor’s choice.

Interest Rate Sensitivity: REITs are sensitive to changes in interest rates. When rates rise, investors may prefer fixed-yield options, leading to a decline in REIT prices.

Examples of REITs in the Thai Market

CPN Retail Growth ###CPNREIT### is a Leasehold REIT managing Central shopping malls, office buildings, and the Hilton Pattaya hotel. The latest dividend yield is 8.35% per year based on the current price of 9.85 baht.

IMPACT (IMPACT) is a Freehold REIT owning land, buildings, and four IMPACT exhibition centers in Muang Thong Thani, with utilities included. The dividend yield is 4.69% per year at a price of 12.80 baht.

WHA Premium Growth (WHART) is a REIT with both Freehold and Leasehold assets, investing in warehouses. The dividend yield is 7.63% per year at a price of 9.50 baht.

JASIF (JASIF) is a Freehold Infrastructure Fund owning 1,680,500 fiber kilometers, generating income from lease agreements with TTTBB. It offers a high dividend yield of 13.73% per year at a price of 6.70 baht.

Summary: REIT for Income-Focused Investors

REIT is a financial instrument suitable for investors seeking additional income beyond fixed deposits, providing dividends from rental income and other benefits derived from the properties held. Like other financial tools, REITs have advantages and disadvantages that investors should carefully study before investing to achieve their desired returns and meet their conditions.