The Financial Supervisory Commission (FSC) has proposed a revision of the law to reinvigorate Taiwan`s real estate investment trust (REIT) market by expanding the scope of REIT investment and fund raising.

During an REIT forum organized by the Land Bank of Taiwan on July 2, FSC Section Chief Ho Li-yang reported that the draft revision (which is awaiting passage by the Legislative Yuan) will allow the establishment of development-type REITs that can invest in real estate projects when they are in the stage of planning, construction, reconstruction, or restructuring. Existing REITs, by contrast, are limited to investment in completed property; development-type REITs have a higher profit potential, but also carry a greater risk.

There will be two kinds of development-type REITs, Ho said. The first will be open to subscription by the general public and will invest in areas with relatively low risk, such as urban renewal projects, build-operate-transfer (BOT) public construction projects, and other projects approved by the regulator. The second kind will be open only to institutional investors and will not be restricted as to investment targets.

The revised law will also permit the issuance of open-end REITs, which, unlike closed-end funds, will be able to openly carry out follow-up fund raising and whose investors will be able to redeem their investments.

Taiwan`s REIT market has failed to live up to expectations since it was inaugurated in 2005, and the relaxed measures in the draft revision are expected to give it a much-needed shot in the arm. So far eight REIT products have been floated in on the island, seven of them traded on the central stock exchange and one on the over-the-counter market; at the end of last year, their total asset value amounted to NT$55.6 billion (US$1.8 billion at NT$31:US$1).

Most of the existing REIT products offer investment opportunities in commercial property in prime locations, especially the greater Taipei area. Cathay No. 1, the largest such product, for example, owns the Sheraton Taipei Hotel, Hsimen Building, and Chunghua Building, all in downtown Taipei.

Issuers talk up the safety of investment in the local REITs, thanks partly to strict regulatory requirements. Buildings in which REITs invest, for example, must have achieved lease rates of 85% during the previous three years. No single tenant in an REIT-invested building can account for a tenancy share of more than 40%. REIT subscribers get dividends once or twice a year, typically earning 4% to 5% annually.

The stringent constraints on their operations have kept domestic REIT funds smaller than they would otherwise be. Cathay No. 1, the largest of the lot, has a value of only US$442 million, a figure that is dwarfed by the US$5-6 billion normally invested in leading foreign REITs.

Under the impact of the subprime mortgage crisis and stock market downturn in the U.S., three domestic REITs have seen their market value drop below par (NT$10) and the other five are barely above par value.
(by Philip Liu)