In my previous article, I mentioned the regulatory limitations that necessitate Property Funds to transform into REITs in order to achieve further growth through additional investments, as well as to raise funds and borrow more. At the beginning of 2023, the Cabinet approved tax benefits for the transformation from Property Funds to REITs, which will be effective until December 31, 2024 (this legislation is still being processed by the relevant government agencies). These benefits will significantly reduce the costs associated with the transformation.

However, not all of the 32 existing Property Funds in the market are suitable for conversion into REITs. The primary advantage of this transformation is the ability to invest in additional assets and to utilize loans, either fully or partially, for investment purposes. Generally, borrowing costs are lower than fundraising, which increases returns for unit holders (Leverage). Since Property Funds can borrow up to 10% of their Net Asset Value (NAV), they can still borrow more according to REIT criteria, which allows borrowing up to 35% of Total Asset Value (TAV). Property Funds that have the potential for transformation should meet the following criteria:

  1. Property Funds have a main asset seller (Sponsor) with assets to offer REIT for investment after the transformation, such as FUTUREPF, which has a sponsor, Rangsit Plaza Co., Ltd., that owns the Future Park and ZPELL centers, and QHHR, which has a sponsor, Quality House Public Co., Ltd., managing assets under the Centre Point brand. Property Funds with a high proportion of units held by the sponsor also have a greater chance of the sponsor being interested in providing additional assets after the transformation into a REIT (the maximum holding of any single unit holder in a Property Fund cannot exceed 33.33% of the total units).
  2. Property Funds have a large asset size, providing more room for borrowing, such as LPF, which has

a Total Asset Value of approximately 32,144 million (as of April 30, 2023), allowing for borrowing and liabilities exceeding 10 billion, which can be reinvested to generate additional returns.

  1. Property Funds can merge or combine with REITs already in the market. Property Funds with quality assets but small sizes and unclear plans for additional investments can benefit from transformation, allowing existing Property Fund unit holders to receive units in other trusts.

Thus, Property Funds with transformation potential based on sponsor factors and large fund sizes include:

List of Property Funds with Total Asset Value (TAV) in the top 20

The transformation of Property Funds and their potential for growth through additional investments can help increase dividend returns, which may attract more investor interest. Currently, there is only one Property Fund, the Quality House Hotel and Residence Property Fund QHHR, that has announced plans to transform into the REIT QHHRREIT, proposing a transformation plan alongside additional asset investments, which is expected to yield higher returns post-transformation and investment.

Diagram showing the structure of the trust QHHRREIT after transformation and additional investment