Trusts and funds: Regulations provide for new investment vehicles

While Thailand hosts a dynamic market for property funds (PF), new rules from the Securities and Exchange Commission (SEC) covering new trusts and funds in 2012-13 paved the way for the kingdom’s first infrastructure fund (IFF) in April 2013 and a series of real estate investment trusts (REITs) that are currently under consideration. Whereas PFs have been used as instruments for disposing of mature assets with recurrent revenue, the new instruments allow for more aggressive leveraging for future developments. As PFs began to be phased out from the end of 2013, property developers have rushed to launch funds under the current structure given their greater tax incentives.

Property Funds

Issuers’ appetite for PFs has grown since the first launch in 2003. The SEC approved the structure of PFs for public offering (PFPO) in 2002 in a bid to stimulate a market still dormant following the Asian financial crisis. These funds can invest in both freeholds and leaseholds but can only borrow up to 10% of their total assets. An investment vehicle for mature assets yielding recurrent revenue, PFs are able to benefit from a reduced property transfer fee rate, from 2% to 0.01% of appraised asset value; however, this total reduction must not exceed BT100,000 ($3270). Furthermore, listed companies investing in PFPOs are exempt from associated dividend taxes.

As of early 2014 some 47 PFs were listed on the SET’s main board, although the pace of issuing accelerated during the bull market to June 2013: six new PFs were listed in 2011 and 2012 each and three in the second quarter of 2013 alone. The largest amount mobilised came in January 2012 when British hypermarket operator Tesco launched the Tesco Lotus Retail Growth Freehold and Leasehold PF, raising BT18.4bn ($601.7m), more than the combined value of the six PF launches in 2011, which raised BT14.4bn ($470.9m). The funds raised via the initial public offering (IPO) acquired 17 hypermarkets from Tesco and then leased them back, creating a revenue stream. PF launches in the first half of 2013 came from the Erawan Hotel Group, the KPN Group and SCB Asset Management, while Phuket-based Sri Panwa Hotel floated its BT2bn ($65.4m) PF in August 2013 and there were three more offerings in the last two months of the year. Despite an equity market downturn since June 2013, Maybank Kim Eng still reported nine funds offering good liquidity and three funds offering heavy trading liquidity in September 2013. All major asset management subsidiaries of banks have proven eager managers of the funds.

Reits

In early 2013 the SEC approved new rules for REITs, expanding the types of assets held to offshore properties and increasing the leverage ratio for such trusts to 65% of total assets, subject to certain conditions. The trusts’ higher gearing levels also offer property developers and others a channel for issuers to transfer debt off balance sheet. “While REITs are able to leverage to much higher levels than property funds, the tax advantages of a fund are better and explain the rush to issue in 2013,” Pimpaka Nichgaroon, head of research at Thanachart Securities, told OBG.

Investors will still enjoy tax relief, and issuers will pay transfer fees for assets into the trust, but can benefit from tax deductions on operational income, according to legal firm Baker & McKenzie. The key barrier to issuance was tax, as REITs were not originally considered pass-through vehicles for tax purposes; however, the Revenue Department had corrected this by the third quarter of 2013. Beginning in 2014 the SEC stopped licensing new PF issues, which prompted a rush of issuance before the conversion was enforced.

Large issues announced in 2013 included those from Charoen Pokphand Group and TCC Land, to raise a combined BT28bn ($915.6m).

Within a year from 2014 all PFs are expected to convert to REITs. The first sign of a REIT launch came in August 2013 when convention centre Impact Muang Thong Thani, of SET-listed Bangkok Land, announced a BT20bn ($654m) trust to finance its second-phase extension, although the issuer will keep a 50% stake for at least five years. The Central Group, Thailand’s largest listed mall operator, announced its own plans to launch a REIT in 2013, while home improvement store HomePro will launch its own for three of its shopping malls in 2014. Meanwhile TCC Group, following its $11.2bn acquisition of Singapore-listed Fraser & Neave in early 2013, is still in discussions to launch a REIT in Singapore. The Thai group will list only offshore properties in the trust, expected to be over $1bn, but will likely retain a stake of 25%.

Infrastructure Funds

While not directly related to state efforts to steer both public and private investment towards infrastructure development, the SEC’s rules on IFFs passed in February 2012 are proving a draw to many issuers. The new structures, which are closed-end funds of over BT2bn ($65.4m) per fund, and over BT1bn ($32.7m) per project and BT500m ($16.35m) for power projects, will house infrastructure assets in rail, tollways, power, alternative energies, water supply, telecoms, airports and seaports, and will have to invest over 75% of funds in infrastructure projects within six months of raising them. The rules also provide for a leverage (debt/equity) ratio of three times, allowing funds to invest in new developments. Investors are exempt from personal income tax on dividends for 10 years, while transfer, mortgage and rent registering fees are reduced to 0.01% of transaction value up to a BT100,000 ($3270) ceiling, provided the assets are returned to the fund originator or state upon maturity. Non-deficit-making IFFs must pay out 90% of net profit to shareholders.

The first launch came in April 2013 when the listed Bangkok Mass Transit System (BTS) Group, operator of Bangkok’s sky-train commuter system, launched its Rail Mass Transit Growth Infrastructure Fund (BTSGIF) with Morgan Stanley, Phatra Securities and UBS as co-bookrunners and Bangkok Bank Asset Management as fund manager. While technically an IFF, the BTSGIF issue holds future earnings and not the actual sky-train assets, as part of the concession agreement lasting 17 years beyond the float date. “IFFs in Thailand thus far have resembled debt securitisation instruments: they do not hold infrastructure assets but rather future earnings,” Dol Watanasri, Citibank’s securities country manager, told OBG. With annual returns of 7% on the fund, the gains are on a par with those by PFs.

The fund raised BT62.5bn ($2.04bn) on its debut, making it the biggest IPO in Thailand’s history, while shares jumped 17.6% on its first trading day at the height of Thailand’s bull market. While BTS Group maintained a 33.33% stake, two foreign institutional investors ( Morgan Stanley and UBS) accounted for a combined 42.66% in equal shares. Yet having debuted at BT10.80 ($0.35) a share on April 19, 2013, shares were trading at 10% below listing price within three months.

Telecoms

Other IFF plans followed the BTSGIF issue from sectors including telecoms and power. “We were seeing several IFFs launched in 2013,” Kasem Prunratanamala, head of research at CIMB Securities ( Thailand), told OBG. “While IFFs normally yield lower returns than PFs, tax incentives are more significant.”

TrueCorp, a 63.3%-owned subsidiary of Charoen Pokphand Group, announced plans for a BT70bn ($2.3bn) fund in July 2013. With Credit Suisse and UBS as advisors and SCB Asset Management as fund manager, it plans to sell assets including some 13,000 towers and 45,000 km of fibre-optic cables on a 15-year lease-back basis, generating revenue for the fund. Retaining a one-third stake in the fund, True would use the two-thirds proceeds to reduce debt levels, which reached BT94.8bn ($3.1bn) at end-2012.

Following a dispute arbitrated by the National Broadcasting and Telecommunications Commission over True’s ownership of 2G towers under a concession with CAT Telecom, in September 2013 the regulator issued new guidelines for telecoms infrastructure funds to ensure their compliance with the Telecoms Act. Meanwhile, True scaled down its target fund size by 17%, removing the contested 2G assets.

Jasmine Telecom, the operator of TT&T broadband, followed suit in August 2013 with plans to raise BT50bn70bn ($1.6bn-2.3bn) by selling 610,000 km of fibre and 16,000 access nodes, retaining a one-third-stake. State-owned TOT and Cat Telecom were instructed in August 2012 by the Ministry of Information and Communication Technology to begin feasibility studies on launching their own IFFs.

Energy

The Electricity Generating Authority of Thailand has plans to raise some BT2bn ($65.4m) by listing a second unit of its North Bangkok Power Plant, under construction in 2013, to reduce debt. Meanwhile, Amata B Grimm Power Group, a venture between industrial estate operator Amata (13.77%), German-Thai group B Grimm (56.23%) and Japan’s Sumitomo (30%), raised BT6.5bn ($212.5m) in September 2013, selling two of its power plants to the fund. The proceeds of the IFF will be used to fund two of the 11 new power plants (each costing BT2.5bn, $81.75m) to raise its generating capacity from 613 MW to 2000 MW by 2019. Solar power producer SCPG plans to raise BT5bn ($163.5m) through an IFF containing solar farm assets, half of its planned investments in 2013. Authorities expect several other issues to follow from infrastructure firms.