Property Funds

Property Funds offer investors another means to generate returns and build financial security. Moreover, it helps investors diversify risks. Property Funds are considered to be an innovative instrument to help the private sector raise capital, a major driving force behind the nation’s economy.

Introduction to Property Funds

A Property Fund, simply known as a “Type 1 Fund” is a type of mutual fund with the main purpose of investing in properties that generate regular income from rental of office building space or serviced apartments. The income generated from the properties would be distributed among investors in the form of dividends. Investors receive returns in the form of:

• Dividends from income generated by the properties
• Capital gains from the sale of the unit trusts on the stock exchange

Who sets up and manages Type 1 Funds

• Asset management companies establishes and manages property funds
• Asset management companies may appoint a property manager experienced in the real estate business to manage the assets held by the property fund
• Trustees safeguard the assets of the fund and ensure that the assets held by the fund are in good condition.

Characteristics of Property Funds

• Funds are close-ended and must be registered in the stock exchange
• Each fund must have a minimum investment capital of 500 million baht
• Property funds can be structured in 2 ways.

The first model: properties to be invested are clearly identified.
The second model: only the type and location of the properties are mentioned.

• Regular income earned from tenants must be at least 75% of the fund’s total revenue.
• At least 90% of annual profits must be paid out to unit holders in the form of dividends.

Investment Conditions
Since the revenues and returns of Type 1 Funds depend on the invested properties, the investment conditions imposed on Type 1 Funds are rather strict in order to mitigate risk to investors.

1. The property must locate in Thailand.
2. An investment feasibility study must have been conducted.
3. The investment must be on properties which have been completely constructed or have at least 80% of the construction value completed.
4. A minimum of 75% of NAV must be invested in property.
5. The sale or rental of the property must be based on the appraised value.
6. Other regulations are enforced to protect investors such as prohibiting the sale of disputed properties and requiring insurance against loss.

 
Asset Appraisal
Since Type 1 Fund’s main assets are real estate properties, they do not have daily updates of market value like other financial instruments.  To equip investors with the most up-to-date data to help with their investment decisions or estimate the fund’s property value, it is required that: 

• A purchase or sale of a property shall require that the asset management company arrange a property appraisal to be conducted by an appraiser approved by the Securities and Exchange Commission and disclose such information to the investors.
• The company must arrange a property appraisal to be conducted by such appraiser once every 2 years and audited every year.

Disclosure of Information
Type 1 Funds must disclose information on unit trust sales, property investment and data to investors as follows:

• Prospectus and project information.
• Summary of important highlights such as price of acquisition or lease, appraised value, etc.
• Financial statements.
• Annual reports which must show details of the property, the current condition of the real estate market, trends, expense ratios, and the trustee’s comments on the fund’s performance for the fiscal year.

Calculation and Announcement of NAV

• NAV must be calculated twice a year, on the final business day of June and December, and announced within 45 days from those dates.
• Calculation of NAV of assets which are properties must be based on valuations conducted by appraisers.

Differences between Type 1 Funds and Real Estate Developers

1. Type 1 Fund’s investment policies only target properties which generate regular income stream while real estate developers are not restricted solely to the property business. At any rate, real estate developers have an advantage by having greater      investment diversification.
2. Dividend payout: Type 1 Funds must pay dividends at a minimum of 90% of the annual net profit while real estate developers have their own dividend payout policy which may be changed later.
3. Debt leverage: Type 1 Funds cannot take on debt while real estate developers can.
4. Managing and safekeeping of assets: Type 1 Fund must appoint a third party as trustee to safekeep assets such as title deeds, lease contracts, etc., as well as auditing the assets and examining the asset management company’s performance in managing the fund.

How investors benefit from Type 1 Funds

1. Investors can invest in properties to generate regular income through a property fund, quite like receiving a steady income stream that a fixed income fund provides.  Note that the income stream from Type 1 Funds will not be as certain as fixed income securities, as income can be susceptible to the state of the property market as well as the economy.
2. An investment choice to help diversify risk.
3. Investors will have better liquidity investing in a Type 1 fund than if one were to invest in the property directly

Investment risks
 Profits or returns from Type 1 Funds are dependent on the state of the property market and the economy. The value of the unit trust may decline if the property’s value drops.  Furthermore, the fund may not be able to pay out dividends if it operates on a loss.

What should investors do before investing?

• Carefully examine the details of the property fund project and related factors. Investors should thoroughly study the prospectus, review 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 consider factors that could influence the real estate market such as economic growth, interest rates and the market cycle.
• Determine whether Type 1 Funds fit with your own investment objectives and whether the risks are acceptable. Type 1 Funds may be best suited for investors who seek regular income generated from the real estate market.
• If there are any queries, investors should seek advice from a sales representative before finalizing their decision.

Trading of Type 1 Fund units
 Investors can trade fund units on the Stock Exchange of Thailand. Note that traded prices can often be a premium or discount to NAV.

 
Caveats for Investors

• Since the main assets of Type 1 Funds are properties and often tend to be just one large property, these funds have less risk diversification than other types of mutual funds. Investors should consider this risk before making an investment.
• Investing in unit trusts differ from cash deposits and involve higher risks. Investors could end up with a final sum that is more or less than the initial capital invested. Furthermore, since a property fund focuses on real estate which is a long-term investment, investors should consider the relevant risks and returns from such investment.