REITs: Risks and Rewards
According to CBRE, a leading international property consultant company, although investing in property funds and real estate investment trusts (REITs) offer portfolio diversification and higher dividends compared to Thailand’s 10-year government bond yields, it is important to note that most individual REITs tend to focus on single asset classes that are prone to market-specific risks.
In Q4 2020, the impact of COVID-19 was the main contributing factor in the average total annual return of -15% from 59 property funds and REITs listed in The Stock Exchange of Thailand. Although the average total annual return in Q1 2021 bounced back to 7%, the recovery was not even across the board with some REITs performing better than others.
CBRE Research found that REITs with serviced apartments, retail centres and hotels as their main asset took the hardest hit, all of which had an average total annual return that decreased by more than 20% in 2020. This came as a result of travel restrictions that caused a sharp decline in the number of international tourists, thereby wiping out the key demand driver for these properties.
On the contrary, REITs with assets from the industrial sector, buffered by the growth of logistics and e-commerce in Thailand, were least impacted with a less than 10% decrease in average total annual return in 2020. “The improving convenience of online shopping and lockdown measures also acted as accelerants for e-commerce with greater potential for properties such as cold storage, warehouses, and data centres,” Mr. Rathawat Kuvijitrsuwan, Head of Research and Consulting, CBRE Thailand, added.
To help increase financial liquidity for businesses affected by the pandemic, the Securities and Exchange Commission (SEC) approved two key changes which allow REITs to temporarily operate other businesses and invest in assets with buy-back conditions from property owners.
Grande Royal Orchid Hospitality Real Estate Investment Trust (GROREIT), one of the five REITs under listing application as of April 2021, will be the first REIT with the new buy-back condition. GROREIT will acquire the Royal Orchid Sheraton Hotel and Towers at a total price of THB 4,498 million from Royal Orchid Hotel (Thailand) Public Company Limited. With the new regulations, the company has an option to buy assets back from GROREIT in the third and fourth year, and a buy-back obligation in the fifth year with up to 8% increase in the total price at THB 4,873 million.
Another REIT under listing application, INET Leasehold Real Estate Investment (INETREIT), will invest in freehold rights of data centre and substation buildings in Saraburi. This will be the second REIT listed in The Stock Exchange of Thailand that has a data centre as the main asset after MFC Industrial REIT (MIT). Moreover, KTBST Mixed Leasehold Real Estate Investment Trust (KTBSTMR) will be the first planned REIT to invest in projects across multiple sectors, including warehouses in Rich Asset, ST Bang-bor, and ST Bang-pa-in, offices in Summer Hub, and retail space in Summer Hill.
Mrs. Kulwadee Sawangsri, Head of Capital Markets - Investment and Land at CBRE Thailand comments, “In the uncertain time ahead, we will start to see REITs diversify their revenue streams and focus on properties with a more stable source of income. These changes will offer new opportunities for investors as well as existing and upcoming REITs in the market. Meanwhile, investors also need to be selective and invest in a broad asset class allocation to reduce market-specific risks.”