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REITs could offer investors a piece of the real estate boom

A view of Phnom Penh’s skyline in 2015.
A view of Phnom Penh’s skyline in 2015. Vireak Mai

REITs could offer investors a piece of the real estate boom

The Kingdom’s property sector is booming, but investment in commercial real estate and high-grade rental assets is capital-intensive, providing few opportunities for smaller investors. However, a new investment tool may be on the horizon that will allow a pool of individual investors to earn income from commercial real estate without having to actually buy the assets.

Lamun Soleil, director of market operations at the Cambodia Securities Exchange (CSX), said the bourse operator is looking into the possibility of creating a mechanism for real estate investment trusts (REITs) to list on the exchange.

“We have already started to do some feasibility research on REITs, but it is in a very early stage,” he said.

A REIT is an investment vehicle that operates similar to a mutual fund by pooling the capital of individual investors to purchase – and often to manage as well – income-generating real estate properties such as apartment complexes, hospitals, warehouses, hotels and shopping malls.

Investors receive a share of the income generated by the REIT’s portfolio of properties as a dividend, allowing them to enjoy the benefits of real estate ownership without the capital costs and headaches of being a landlord.

Like other securities, REITs are often listed and traded on an exchange. Their initial public offerings (IPOs) have come to dominate the global real estate IPO market, as many investors perceive them to offer relatively stable yet attractive yields.

Soleil said the addition of REITs could improve the market visibility of Cambodia’s stock market, which has just five listed companies. He added that listing REITs on the exchange could interest investors seeking high yields, as REITs typically distribute all of their taxable income as dividends to shareholders.

“For the financial market, it will help promote the market’s visibility and liquidity since the real estate industry is booming,” he said. “Also, the REIT’s dividend yield is usually higher than other exchange-traded products.”

Reid Kirchenbauer, manager of Khmer Ventures, a Cambodia-based closed-end property fund, said REITs could make the Kingdom’s booming real estate market more accessible to investors.

“REITs will allow investors to buy property in Cambodia in a hassle-free manner, with a much lower minimum investment,” he said. “Companies will gain from being able to find a greater variety of investors in a more passive way.”

However, while REITs operate similar to property funds and can be listed like equities, Cambodia would need to develop a proper regulatory framework before introducing them in the local market.

“There aren’t currently any laws in Cambodia to govern a REIT as opposed to a standard publicly listed company,” he said. “The proper framework would need to be in place before the country is ready for REITs.”

According to Soleil, one of the requisites for launching the first REIT in Cambodia is that the market regulator must first establish regulations for operating a collective investment scheme (CIS).

“[REITs] can be launched once CIS regulations are ready by Securities and Exchange Commission of Cambodia,” he said.

While it could still be many years before the first REIT lists on Cambodia’s exchange, several international REITs are already considering Cambodian properties for their portfolio.

Thai REIT manager Strategic Property Investors Co has announced plans to set up a closed-end REIT, Strategic Hospitality Freehold and Leasehold Real Estate Investment Trust, and is aiming to raise up to $160 million in an IPO on the Stock Exchange of Thailand later this year. It will use the proceeds and borrowing to invest in five foreign luxury hotels, including two Cambodian properties – Raffles Le Royal Phnom Penh Hotel and Raffles Grand Hotel Siem Reap.

Eakapong Tungsrisanguan, chief financial officer of JWD Group, a Thai logistics and supply chain management company that is planning its first REIT, said that financial regulators in most countries permit REITs to include foreign assets in their portfolio, making Cambodian properties a potential asset for investment.

“Cambodia assets are interesting options for REITs since the regulation and investment policy of most REITs, such as in Thailand, allow for investment in overseas assets,” he said.

However, he said even in the case of a REIT that includes Cambodian properties in its portfolio, it would make more sense to list the REIT on a foreign exchange.

“If the REIT is to be listed in the CSX, it is likely to have a liquidity problem, which will significantly affect investors’ interest,” he said. “In my opinion, it will be preferable to establish and list the REIT in another country and purchase Cambodian assets as part of that REIT.”

Eakapong said JWD Group currently has no plans to add its properties in Cambodia, including a 4,400 square-metre refrigerated warehouse, into its REIT’s portfolio. However, that could change.

“No Cambodian properties will be included in JWD REIT in the early phases,” he said. “But we may consider including overseas assets [to build a REIT portfolio] in the future.”

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