Property Fund

Property Fund presents investors with another opportunity to earn returns and ensure their financial security. Moreover, it helps investors distribute risk. Property Fund is considered to be an innovative instrument for the private sector to raise capitals, a main driving force behind the nation’s economy.

 

Introduction to Property Fund

Property Fund, simply known as “Type 1 Fund” is a type of mutual fund with the main purpose of investing in properties that generate regular incomes in form of rents such as office buildings or serviced apartments. The income generated from the properties would be distributed among the investors in form of dividends. The investors receive benefits in form of:
• Dividends from income generated by the property
• Capital gain from the sale of the unit trust in the stock exchange

 

Who sets up and manages Type 1 Fund

• Asset management companies are responsible for setting up and managing property funds
• Asset management companies could appoint a manager who is experienced in real estate to manage property fund
• Trustee will take care of assets of mutual fund and make sure that the assets linked with the fund are in good conditions.

 

Characteristics of Property Funds


- Close-end fund and must be registered in the stock exchange
- Each fund must have a minimum investment capital of 500 million baht
- Property funds could be set up in 2 ways :

The first method The fund must specify what type of properties it is planning to invest on or
The second method The fund must specify the type of the real estate and its location.

- The regular income earned from tenants must be at least 75 percent of the fund’s total revenue.
- The minimum of 90 percent of the annual profits must be paid out to unit holders in form of dividends.

 

Investment Conditions

Since the revenues and returns of Type 1 Fund depend on the invested properties, the investment conditions for Type 1 Fund are rather strict in order to mitigate risk for the investors as the followings:
1. The real estate must situated in Thailand.
2. An investment feasibility study has been conducted.
3. The investment must be made on properties which have been completely constructed or have at least 80 percent of the construction value completed.
4. The minimum of 75 percent of NAV must be invested in real estate.
5. The sale or rent of the real estate must be based on the appraised value.
6. Have other regulations to ensure the investors’ benefits such as the prohibition of sale of the disputed properties and insurance against loss.

 

Asset Appraisal

Since Type 1 Fund’s main assets are real estate properties without daily market value like other financial instruments, in order to provide investors with up-to-date information and the fund’s property value, it is required that:
• In a case of real estate transaction, the company must arrange property appraisal by an appraiser approved by the Securities and Exchange Commission and disclose such information to the investors
• The company must arrange property appraisal by an appraiser once every 2 years with annual reviews

 

Disclosure of Information

Type 1 Fund must disclose information on unit trust sales, property investment and data to the investors as the followings:
• Prospectus and the project information.
• The summary on the important information on the assets such as the price, the rent and the appraised value.
• Financial budget.
• The annual report which must show the details of the property, the current condition of the real estate industry , trend, expenses and the manager’s comment on the fund’s annual performance.

 

Calculation and Announcement of NAV

- NAV must be calculated twice a year, the last workdays of June and December, and announced within 45 days from those dates.
- The NAV calculation on the real estate property must base on the value evaluated by the appraisers.


The differences between Type 1 Fund and Real Estate Developers.

1. Investment on Type 1 Fund has a policy to specifically invest in property that returns a regular income while real estate developers are not restricted to only invest or doing business on real estate properties. At any rate, real estate developers have an advantage over investment diversification
2. Dividend payout: Type 1 Fund must pay dividends at a minimum of 90% of the annual net profit while real estate developers have their own policy on dividends which may be changed later
3. Incur debts: Type 1 Fund  cannot incur debt while real estate developers can
4. Property Management and Maintenance: Type 1 Fund must appoint a third party to manage and maintain the property, including the deeds and lease contracts, serve as the property caretaker as well as oversee the asset management firm’s fund

 

How the investors will benefit from Type 1 Fund investment

1. Investors could invest in property that returns a regular income through a property fund. The investors could receive returns as investment on securities. However, returns from Type 1 Fund is not as certain as securities but could change depending on the competition, the real estate market’s condition, trend and the economy
2. Another investment choice to help distribute risk
3. Investors enjoy higher degree of liquidity than direct investment on property


Risk factors on investment

Profits or returns from Type 1 Fund depend on the condition of the real estate market and the economy. Therefore, the unit of trust value may fall according to the property’s value. The fund may not be able to pay out dividends if it operates on loss.

 

What should investors do before investing?

• Study the detail of the property fund project and related factors. Investors should thoroughly study the prospectus; look over the investment policy and detail of the property to be invested by the fund, the management, the dividend policy, fees and other costs. Moreover, investors should study the factors that could influence the real estate market such as the economic growth, interest rate and the market cycle.
• Determine whether Type 1 Fund fit with the investment objective at an acceptable risk level. Type 1 Fund may be more suitable for the investors who seek regular income based on the real estate market.
• For any question, the investors should seek advice from the sale representative before making decision.

 

Type 1 Fund Trading

Investors could trade units of trust in Stock Exchange of Thailand. The trade prices could be premium or discount from NAV.

 

Caveats for Investors

• Since the main assets of Type 1 Fund are in real estate which often is just large single property, Type 1 Fund has a lower level of risk distribution than other types of mutual funds. The investors should understand the risk before making investment.
• Investing in unit trust is different from making cash deposit and involve higher risk. The investors could receive returns at the value more or less than the initial investment. Also since a property fund is focus on real estate which is a long-term investment, the investors should realize the associated risks and returns from the investment.

 

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