The Financial Supervisory Commission yesterday gave the green light for domestic real-estate investment trusts (REITs) to invest in their international peers and offshore properties, in an effort to revitalize the nation’s market for real-estate-backed securities.
TEPID RETURNS
The decision was made in light of the tepid returns generated by the nation’s cooling real-estate market, where property prices remain high relative to the amount of rent collected, the commission said.
The price-to-rent ratio in the housing market — calculated as the ratio of home prices to annual rental rates — is estimated at about 64, with rental returns averaging 1.57 percent, compared with a ratio of 20, or 5.02 percent in Japan; 35, or 2.82 percent, in Hong Kong; and 35, or 2.83 percent, in Singapore, commission data showed.
Under the new policy, which could come into effect before the end of the first quarter this year, investments in international peers by domestic REITs must be less than 25 percent of the fund’s total assets, with the sum of investments in foreign REITs and offshore real-estate limited to less than 50 percent of total assets, the commission said.
In addition, the commission said that domestic REITs may invest in offshore properties through a wholly owned special purpose vehicle (SPV) — where a legal entities, such as limited companies, are created to fulfill specific objectives without putting the parent company at risk.
NAVIGATION
The SPV method has proven to be ideal for navigating the different tax and investment regulations in many major markets, the commission said.
Since 2011, the number of domestic REITs has dwindled to 5 from 8, the commission said.
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