In conformity with the newly revised Real Estate Securitization Act, the Financial Supervisory Commission (FSC) is drafting guidelines for real estate securitization funds to invest in real estate development and expand their size via cash injection. This is expected to stimulate the development of the local real estate securitization market.

Lin Tung-liang, deputy director of the FSC`s Banking Bureau, reports that the draft guidelines allow publicly raised funds to invest up to 20% of their money in real estate development projects and private-placement funds to invest up to 30% in such projects. The FSC is consulting with related agencies, including the Ministry of the Interior and the Ministry of Transportation and Communications, for the finalization of the guidelines, according to Lin.

Existing real estate securitization funds will have to obtain the agreement of their beneficiaries and the approval of the regulator before putting their money into real estate development projects. Even then, the investment will be limited to such areas as urban renewal projects, major infrastructure projects, and BOT (build-operate-transfer) projects.

Two kinds of real estate securitization funds are currently operating in Taiwan: real estate investment trusts (REITs), and real estate asset trusts (REATs). REITs are likened to equity investment, whose investors stand to win capital gains on top of dividends on rental income from invested properties, while REATs are similar to bonds, generating fixed yields.

The total value of these funds is NT$77.8 billion (US$2.36 billion at NT$33:US$1), including NT$56.2 billion (US$1.7 billion) for REIT funds and NT$21.6 billion (US$655 for million) for REAT funds. Therefore, the maximum amount that they can be invested in real estate development projects is about NT$20 billion (US$606 million).
The draft guidelines also allow real estate securitization funds to expand their scale via cash injection, and to use the fresh money to invest in real estate development projects.

While investments in real estate development projects could generate windfall profits, they could also entail much higher risks (for instance, the actual income from rental or sale may not be up to the original projections) than the completed properties to which such investment was originally confined. Therefore, the FSC`s draft guidelines require the funds to fully disclose the possible risks along with projected returns in their investment prospectuses.

The new guidelines are expected to help energize Taiwan`s real estate securitization market, which, according to market players, has been developing at a slow pace since its birth in 2005 largely because of the restrictions on investment targets and the ban on cash injections. The situation was further aggravated by the outbreak of the U.S. subprime mortgage crisis. As a result, no new REIT or REAT fund has been set up on the island since May 2007.

In a report released on June 23, Taiwan Ratings predicts that local REITs will continue to enjoy good credit quality in the next couple of years, thanks to their conservative policy in taking out banking loans as well as a steady cash flow and rental income from investments that concentrate on commercial property, which can generate steady rental income even in a sluggish economy.

(by Philip Liu)