An upbeat property sector, preference for yield-generating instruments and a need to attract foreign investment are factors supporting the development of Asia's REIT market. However, progress across the region remains patchy because of regulatory and tax issues.

Singapore is the leader in South-East Asia, having launched its first REIT a decade ago, with Malaysia following soon after. Singapore has 34 listed REITS and property trusts, while Malaysia has 15 REITs, but the rest of the region has lagged in adopting the asset class, leading developers from as far afield as India to list property trusts on the SGX.

Thailand already has a thriving property trust market and created a regulatory framework recently for real-estate companies to form REITs with the first deals expected soon.

On the other hand, tax issues have prevented REITs from taking off in the Philippines and India, even though both countries began related work years ago.

For now, the prospects for REITs are brightest in Thailand, where higher gearing limits and easier debt-financing rules have encouraged companies to consider them as an option.

Thailand's WHA Premium Factory and Warehouse Freehold and Leasehold Property Fund has obtained shareholder approval to convert itself into a REIT. A company source said that the conversion was likely to happen next year.

Under the Thai regulations, a REIT can have a maximum gearing of 35% of total asset value and the ceiling could be lifted to 60% if a particular REIT earns an investment-grade rating. On the other hand, a property fund is allowed a maximum gearing of 10% of net asset value. Unlike a property fund, a REIT can pledge its assets against the borrowing. Debt financing is also allowed at the time of the REIT's IPO.

The Philippines put in place the regulations for REITs in late 2009, but has not found any takers so far because of the high minimum public ownership rules and the value added tax on sponsors transferring assets to a trust.

Under the REIT rules in the Philippines, the minimum public holding immediately after the IPO must be 40%, rising to 67% within three years of listing. Sponsors, on the other hand, want the minimum public shareholding to be 33% as the Securities and Exchange Commission originally planned.

No concrete plans

Carol Mills, assistant vice president at developer Ayala Land, said the value-added tax was one of the issues holding back the development of the REIT market. "I don't see a quick resolution to the issue as governments everywhere want to increase revenue, given the current weak economic conditions," she said.

Ayala Land, Robinsons Land and SM Prime Holdings are among the Philippine companies that began work on REITs, but no concrete IPO plans have been unveiled.

India has again started making noises on developing its own REIT market, despite previous efforts not bearing fruit. In 2008, the Securities and Exchange Board of India came out with the draft regulations, but then withdrew them.

The government is revisiting this market to attract foreign investment indirectly in the real-estate sector, particularly at a time when the local currency is under severe pressure. There are restrictions on foreigners buying property directly in India, similar to some other Asian countries, including the Philippines.

"I don't see REITs happening soon in India. The biggest hurdle is a tax department that views any trust as a way to evade tax," said an official at a real-estate company.

Still, a banker working along with Sebi said India was expected to put in place a workable REIT framework over the next three months. "The government has seen what Singapore has done with the REIT market and doesn't want to lose the opportunity," he said.

As well as a favourable tax framework and issuer-friendly rules, size will also be a key to the success of new REIT offerings.

"The REIT market can take off only if there is liquidity and, for now, that looks hard in many Asian countries. Very few institutional investors are interested in buying into a REIT IPO smaller than US$200m-$300m," an ECM banker said.

By ifrasia.com

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