REIT Investment Guide: Understanding the Operating Mechanism of Real Estate Investment Trusts from Scratch

Why Do Investors Need to Understand REITs?

If you lack sufficient funds to directly purchase commercial real estate or office buildings but want to profit from rental income, REITs (Real Estate Investment Trusts) become a practical option. Since launching on the Thai stock market in 2018, REITs have become an important tool in many investors’ portfolios for generating stable cash flow.

However, REIT performance is not always stable—some periods yield good returns, while others underperform. What secrets are behind this? To truly master this type of investment tool, you need to understand its essence first.

The True Face of REITs: More Than Just Real Estate Investment

REIT stands for Real Estate Investment Trust, also called ทรัสต์เพื่อการลงทุนในอสังหาริมทรัพย์. In simple terms, it is a “basket of assets” managed by professional fund managers. This basket contains income-generating real estate assets.

Fund managers raise funds by selling trust units, then use these funds to purchase and manage real estate, ultimately distributing the generated income to unit holders. These properties may include residential, commercial office buildings, warehouses, hotels, or even communication network infrastructure.

The most attractive feature of REITs for investors is: their dividends are often quite stable. This is because the rental income from underlying assets tends to be regular, making the income distributed to investors relatively predictable.

REITs vs. Property Funds: Looks Similar, But Different

Many people confuse REITs with Property Funds, which is understandable because REITs evolved from Property Funds and are a more flexible, internationalized version. However, they differ fundamentally in three key aspects:

1. Legal Structure and Regulation

Property Funds are collective investment funds that do not require issuing deposit certificates and are subject to relatively loose regulation. REITs are trust-based systems that must undergo strict regulation by the Securities and Exchange Commission (SEC) of Thailand and require approval from the Stock Exchange of Thailand (SET). This means REIT investors enjoy higher regulatory protection.

2. Investment Scope and Flexibility

Property Funds are limited to investments within the SEC’s “positive list” and cannot invest in overseas real estate. In contrast, REITs have greater flexibility, allowing investments in foreign assets and even permitting up to 10% of total assets to be used for real estate development projects.

3. Unit Issuance and Governance

Units of Property Funds are issued similarly to ordinary funds, without the need to maintain a “free float” of shareholders, nor are they required to hold annual unitholder meetings. REITs operate more like listed companies, requiring at least 15% of units to be held by retail investors and mandating annual unitholder meetings for voting.

In Thailand, new real estate investment products are now launched in the form of REITs, while Property Funds are gradually phased out.

The Five Classifications of REITs: Know What You Are Investing In

Based on the type of real estate rights, REITs can be divided into:

Perpetual Ownership Type (Freehold REIT)

This type of REIT owns full ownership of the real estate and earns rental income from it. When the property appreciates (e.g., through added construction on the land), the unit value also increases. This means investors can profit both from dividends and from unit appreciation.

Leasehold Ownership Type (Leasehold REIT)

This type of REIT does not own the property but holds leasing rights. It distributes income generated from lease rights. However, a key risk here is that when the lease expires, the income rights disappear, and the unit value gradually decreases to zero. Therefore, investing in this type of REIT requires close attention to the remaining lease term.

Classification by Investment Method

Direct Investment: REIT directly owns or holds real estate rights.

Indirect Investment: REIT holds shares in a company that is the actual operator of the real estate.

Classification by Real Estate Use

• Retail REIT: Manages rental income from shopping centers, malls, outlets, etc.
• Residential REIT: Manages income from hotels, apartments, dormitories, etc.
• Healthcare REIT: Manages hospitals, clinics, senior care centers.
• Office REIT: Manages rental income from commercial office buildings.
• Infrastructure REIT: Manages rental income from communication networks, energy pipelines, etc.

Each category of REIT has different income models and risk factors.

How Does REIT Value Change? Two Key Factors

Factor 1: Appreciation or depreciation of underlying real estate

Leasehold REITs will continue to depreciate due to the consumption of lease rights. Freehold REITs fluctuate based on the market value of the property itself. Drivers of property appreciation include economic growth, improved location, new infrastructure, renovations, and expansions.

Factor 2: Expected income stream

This directly affects dividend amounts. Economic prosperity increases tenant numbers and leasing demand (for example, office REITs benefit from corporate expansion), while economic downturns or unexpected events (such as travel disruptions) reduce income, leading to lower dividends.

Pros and Cons of REIT Investment

Advantages

• High Liquidity: Freely tradable on SET, unlike direct property ownership which can be difficult to sell
• Diversified Investment: Participate in real estate with a small amount of capital, without managing leases yourself
• High Transparency: All transactions, fundraising, and disclosures are supervised by regulatory authorities
• Stable Cash Flow: Regular rental income ensures relatively fixed dividend cycles

Disadvantages

• Tax Burden: Dividend income is taxed at 10% or must be included in annual personal income tax filings
• Interest Rate Sensitivity: When the central bank raises benchmark rates, REIT attractiveness declines (as fixed deposits or bonds become more competitive), potentially causing unit prices to fall

Mainstream REIT Cases in Thailand

CPNREIT (CPN Retail Growth Trust)

This is a Leasehold REIT, with assets including several stores of Central Department Store, office buildings, and the Hilton Hotel in Phuket. Currently, the annual dividend yield is about 8.35% (priced at 9.85 THB). As a Leasehold product, investors should pay attention to the remaining lease term.

IMPACT (Impact Real Estate Trust)

A Freehold REIT controlling Impact Exhibition Center and surrounding land and facilities with 4 buildings. The annual dividend yield is about 4.69% (priced at 12.80 THB). Its perpetual ownership nature provides stronger long-term value protection.

WHART (WHA High Growth Trust)

A hybrid REIT with both Freehold and Leasehold assets, mainly operating warehousing and logistics facilities. The annual dividend yield is about 7.63% (priced at 9.50 THB).

JASIF (Jasmine Internet Fiber Trust)

An Infrastructure REIT owning 1,680,500 km of fiber optic cables, leasing to TTTBB Company for stable income. Due to the scarcity of infrastructure and long-term contracts, the annual dividend yield reaches 13.73% (priced at 6.70 THB).

Before Making the Right Decision, Ask Yourself These Questions

REITs are neither perfect investments nor suitable for everyone. Before buying, consider:

• What risks can you bear? Leasehold or Freehold?
• What is your investment horizon? If short-term, interest rate fluctuations will directly impact your returns
• How much cash flow do you need? Different types of REITs have varying dividend yields
• Do you fully understand the tax implications? Dividend taxes can erode part of your returns

Overall, REITs are tailored for investors who want stable income from real estate but do not want to manage properties directly. At the same time, understanding their advantages, disadvantages, and mechanisms is essential to find the most suitable product among many options.