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26 Jun 2009

Financial Markets

Property Funds: Interesting Investment Alterative (Current Issue No.2165)

Property Funds (Type 1) are mutual funds set up by asset management companies to mobilize funds via public offerings for investment in immovable properties that earn regular lease income, such as department stores, airports, office buildings, factories, serviced apartments, etc. Returns from property funds come in two forms including the dividend, which may vary with rental income, location, type of property and economic conditions at that time, and capital gains on the investment units traded in the stock market that usually mirror the SET index. The total net asset value (NAV) of property funds during the first half of 2009 (1H09) was THB69,856.28 million (as of June 19, 2009), growing 5.19 percent over the end of 2008, which was less than the 7.78 percent growth seen in 1H08. The decline was due mainly to price competition following the widespread reductions in rents to attract tenants. Moreover, property funds related to tourism business venues have been affected by unfavorable economic conditions, domestic political problems and the outbreak of the H1N1 flu.
The trend for property funds in many countries are now improving with economic recoveries, as in Thailand where it is said that the downturn may have bottomed out. Therefore, asset management companies now see an opportunity to launch new investment products. One up-and-coming example is property funds investing in department stores and factories. Though no new funds are expected to be launched in the near future, these investments may continue through capital increase for investment in other types of asset. The funds that invest in offices and residential buildings are unlikely to expand their investments because of excess supply of such properties and limited demand.
KASIKORN RESEARCH CENTER (KResearch) projects that Type 1 property funds will continue to draw interest from investors because their yields are rather high and can increase if the economy recovers. Despite some brighter trends in domestic economic indicators, economic recovery (% Y-o-Y) will not prevail until 4Q09. In 2010, the Thai economy may improve, but with a low rate of growth. Therefore, the rate of real estate occupancy should improve accordingly, but at a gradual rate, and after that rents will rise more visibly.
Although property funds can provide higher yields and steady income for investors, there might be some other risks that influence investment in property funds, especially liquidity shortage. Relatively speaking, investments in immovable properties have lower liquidity than investments in equities or bonds. Most investors in property funds have emphasized long-term investments, whereas some assets with high growth potential and the number of investors preferring to invest in property funds would be rather limited. As a result, they must be prudent for defaults in rent payment or the drop in occupancy rate, due to economic recession, political instability, natural disasters and epidemic outbreaks. All these factors would reduce NAV of the funds. Not only should the investors study the types of funds and immovable properties, but they should also realize any risks involved, including expertise of asset management companies and timing for investment.
Property Funds (Type 1) are mutual funds set up by asset management companies to mobilize funds via public offerings for investment in immovable properties that earn regular lease income, such as department stores, airports, office buildings, factories, serviced apartments, etc. Returns from property funds come in two forms including the dividend, which may vary with rental income, location, type of property and economic conditions at that time, and capital gains on the investment units traded in the stock market that usually mirror the SET index. The total net asset value (NAV) of property funds during the first half of 2009 (1H09) was THB69,856.28 million (as of June 19, 2009), growing 5.19 percent over the end of 2008, which was less than the 7.78 percent growth seen in 1H08. The decline was due mainly to price competition following the widespread reductions in rents to attract tenants. Moreover, property funds related to tourism business venues have been affected by unfavorable economic conditions, domestic political problems and the outbreak of the H1N1 flu.
The trend for property funds in many countries are now improving with economic recoveries, as in Thailand where it is said that the downturn may have bottomed out. Therefore, assetmanagement companies now see an opportunity to launch new investment products. One up-and-coming example is property funds investing in department stores and factories. Though no new funds are expected to be launched in the near future, these investments may continue through capital increase for investment in other types of asset. The funds that invest in offices and residential buildings are unlikely to expand their investments because of excess supply of such properties and limited demand.
KASIKORN RESEARCH CENTER (KResearch) projects that Type 1 property funds will continue to draw interest from investors because their yields are rather high and can increase if the economy recovers. Despite some brighter trends in domestic economic indicators, economic recovery (% Y-o-Y) will not prevail until 4Q09. In 2010, the Thai economy may improve, but with a low rate of growth. Therefore, the rate of real estate occupancy should improve accordingly, but at a gradual rate, and after that rents will rise more visibly.
Although property funds can provide higher yields and steady income for investors, there might be some other risks that influence investment in property funds, especially liquidity shortage. Relatively speaking, investments in immovable properties have lower liquidity than investments in equities or bonds. Most investors in property funds have emphasized long-term investments, whereas some assets with high growth potential and the number of investors preferring to invest in property funds would be rather limited. As a result, they must be prudent for defaults in rent payment or the drop in occupancy rate, due to economic recession, political instability, natural disasters and epidemic outbreaks. All these factors would reduce NAV of the funds. Not only should the investors study the types of funds and immovable properties, but they should also realize any risks involved, including expertise of asset management companies and timing for investment.

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