In the News: 2005

A New Milestone in Thai Property Investment

The Asset
September 2005

Thailand’s real estate investment trust (REIT) market reached a new milestone following the offering of a property fund for the first time to international investors.

In a ground-breaking deal in August, Thailand’s largest commercial property developer Central Pattana launched the CPN Retail Growth Property Fund (CPNRF) and raised about 10.91 billion baht (US$264.56 million) by selling 1.09 billion units through an initial public offering at 10 baht per unit.  Of the total, 67% of the units went to local and foreign investors, while 33% was taken up by Central Pattana, which agreed to a lock-up period of one year following the date of the listing of the fund.

In Thailand, what is called REIT in other countries is referred to as property fund for public offer (PFPO).  This is a relatively new investment product in Thailand and there are only six such funds listed on the Stock Exchange of Thailand (SET) before the CPNRF with a total market capitalization of 6.5 billion baht.  These funds are sold mainly to individual domestic retail investors.

There are some differences, though, between PFPO and REITs.  For instance, PFPO does not allow gearing, but REITs can borrow, say 35% in Singapore.

The CPNRF deal is the second largest IPO in Thailand this year after the 12.1 billion baht offering by Glow Energy in April.  DBS Bank, acting through its wholly-owned subsidiary DBS Vickers Securities Thailand, and TMB Bank, are the joint financial advisers, lead managers and bookrunners for the CPNRF transaction.  Macquarie Securities (Thailand) acted as the senior co-manager, while Bualuang Securities, Thanachart Securities, Phatra Securities are the co-managers.

Proceeds from the IPO will be used to purchase certain buildings and leasehold rights on two shopping malls, namely Central Plaza Rama II and Central Plaza Ratchada Rama III, that will comprise the initial assets of the fund.  The CPNRF will have a 20-year leasehold right on Central Plaza Rama II and an effective 90-year leasehold right on Central Plaza Ratchada Rama III.  “This is a right way to start a new REIT market with suburban retail properties because of the stability of the income,” says Stephen Finch, managing director for debt capital markets at DBS Bank.

The CPNRF made a strong market debut on August 23 with the brisk investor demand lifting its unit price up by 9% to close at 10.90 per baht.  It opened at 10.30 baht and hit an intraday high of 11.10.  A total of 163 million units were traded.  Following its listing, the CPNRF is now the biggest listed property fund in Thailand.

The transaction is a significant step forward in the development of the country’s property fund market as it marks the debut of the first Thai PFPO in the international REIT market.  The CPNRF offering generated enthusiastic support from international investors in Singapore, Hong Kong, Australia and Europe.

Based on the offer size of 7.31 billion baht, the fund attracted subscriptions and indications of interest amounting to about 34 billion baht, of which 28 billion baht came from more than 130 overseas institutional investors.  The buyers include insurance companies, pension funds and fund managers.

Narumol Noi-am, senior vice-president at TMB Bank, attributes the strong overseas demand to the quality of the assets and the reputation of Central Pattana as a property manager.  She also notes that the CPNRF, besides being a large offering, gives a higher yield compared with other REITs.

“There was a very strong reception for this product,” adds Finch.  “We spent a lot of time educating investors about the PFPO market in Thailand and explained to them in what way it is different from the REIT markets in Singapore and Hong Kong, so that they can appreciate where the differences arise.  There is no gearing in the Thai PFPO and it is 100% equity yield.  Earnings from the fund are also free from withholding tax.”

The CPNRF offers a yield of 7.30% in 2005 – equivalent to about 300bp over the 10-year Thai government bonds – and 7.60% in 2006.  Narumol says Central Pattana shares offer a dividend yield of 2.23%, while the property development sector offers 3.96%.

Similar to REITs, the fund is required to pay at least 90% of the net profit as dividend, but Finch says the management company promised to make a 100% payout for the first year.  In comparison, REITs in Singapore are now yielding 4.5% to 5%, depending on the asset class, since it is now a well-developed market.

Pricing benchmark

In pricing the deal, Narumol says they relied on the bookbuilding process from big institutional investors.  “We also use the valuation from the two property appraisal companies as a benchmark for pricing,” she adds.  Under the Thai PFPO, it is required that the assets should be appraised by two property appraisal companies. 

As a result of the strong demand as well as the “small-lot-first” allocation mechanism regulated by the Thai Securities and Exchange Commission, the largest allocation per subscription is about 52.9 million baht.  At the close of the subscription period on August 9th,  there were 1,400 subscriptions of 50 million baht or smaller and about 88 subscriptions greater than 50 million baht.

As Finch points out, the allocation mechanism favours the small investors.  “It is very different from the typical bookbuilding process where you identify the top-tier investors and look at the allocation ratios that are reasonable across the different classes of investors,” he says.  “It means that the small investors, including retail investors and small institutions, are fully or close to fully allocated, whereas the larger institutional investors are getting smaller allocations compared with their orders.  In order to encourage more foreign capital to support the Thai property market, we would encourage a change in this allocation methodology.”

The CPNRF may increase its capital by offering additional investment units for sale.  Finch says the fund manager would be looking at opportunities to acquire additional properties from Central Pattana and from third parties.

Incorporated in June 1980, Central Pattana is engaged in the development of large and comprehensive shopping complexes.  It is majority owned by Central Holding Company and members of the Chirathivat family, which has more than 50 years of experience in the retail business in Thailand.

To enhance the growth of the fund, the management company will hold regular reviews on the suitability of the tenant mix and zoning arrangement of leasable area to increase rental income.  Such reviews will include conducting studies and research on market trends and consumer behaviour to tailor the tenant mix to the market demand.

The management company will try to diversify the tenant base in terms of both types of business and the categories of tenants to balance the fund’s portfolio exposure to avoid excessive impact from the operation of any category of tenant.