Beneficiaries Approve Liquidation of Two Taiwan REITs

The beneficiaries of two domestic real estate investment trust (REIT) funds—San Tin and Star of Kee Tai—have decided to liquidate the funds because of the weak development of Taiwan’s REIT market in the five years since its debut in 2005.

The resolutions were passed at meetings of the two funds’ beneficiaries on Oct. 28, both with over 93% of the vote. After liquidation is approved by the Financial Supervisory Commission (FSC), it will be carried out by Nomura Securities, which proposed the move.

The liquidation, if it happens, will reduce the number of REIT funds on the domestic stock market by a quarter, to just six.

The FSC appears to be rather reserved about the move. In a press release issued on the eve of the beneficiaries’ meetings, the FSC stated that “the liquidation of REITS runs counter to the original purpose of the trust contracts” and stressed its belief that the move to liquidate seems to be motivated by the pursuit of short-term profits, which is at odds with the long-term stable, even sustainable, nature of the product. FSC stated that it will look into the clarity of the explanations of the proposals, the legality of the procedures, and the disclosure of related information before deciding whether to approve the liquidation.

The key factor behind the eagerness of beneficiaries to liquidate is the opportunity to pocket the increased market value of the realty holdings of the two REIT funds, which is not reflected in their market prices. The properties are undervalued by 16-20%.
REITs made their Taiwan debut in 2005, when Fubon Life Insurance launched a product called Fubon No. 1 REIT. Fubon likened its REIT to equity investment, where investors earned capital gains on top of dividends derived from rental income on the invested properties.
REITs failed to catch on with investors, however, and are held mostly by institutional investors such as insurance firms, construction firms, and enterprises. Trading in their stocks generally amounts to only tens of thousands of shares per day. Institutional investors hold 74.5% of the NT$3.85 billion (US$124 million at NT$31:US$1) San Ting Fund, for instance, and 59% of the NT$2.47 billion (US$79.7 million) Kee Tai Fund. No REIT fund has been issued in the past three years.
Market players attribute the underdevelopment of the domestic REIT market to the legal restrictions that are imposed on their operation. REIT funds, for instance, cannot invest in realty-development projects, except for urban renewal projects, major infrastructure projects, and BOT (build-operate-transfer) projects—projects which investors find uninteresting because of the lengthy period of investment return. (PL, Nov. 2010)

(by Philip Liu)

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