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Wednesday, 15 November 2006

Buying Real Estate in Thailand.

As I have stated in previous post there are restrictions on foreigners owning land in Thailand.
A foreigner can acquire land only by virtue of a treaty providing an ownership in an immovable property and subject to the provisions in the Land Code. Now Thailand has no treaty with any countries entitling foreigners to own land under Section 86. The Thai-US Treaty of Amity & Economic Relations grants no privilege to US nationals to own land in Thailand. Therefore it is clear that, with one exception, there is no way for a foreigner to own land in his own name.

The exception is provided for in Section 96 of the Land Code Enacted in 2002 which permits a foreigner to acquire and own land in Thailand, with the following conditions:
(a) the aggregate area of land purchased cannot be more than 1 Rai (equivalent to approximately 1,600 sq. meters)
(b) the foreigner must import into Thailand a sum of not less than Baht 40 million
(c) the Baht 40 million imported into Thailand must be invested in any one or more of the following investments for a period of not less than 5 years:
(i) government bonds, bonds issued by the Ministry of Finance which secure capital or interest, Bank of Thailand bonds, and/or bonds issued by Thai State Enterprises (as defined under the State Enterprises Act)
(ii) a property mutual fund or mutual fund for resolving the financial problems of financial institutions under the laws and regulations set out by the Stock Exchange of Thailand
(iii) the share capital of either a private or public company that has been afford investment promotion privileges
(iv) any investment declared an eligible investment by the Board of Investment
(d) permission must be sought, and be given, by the Minster of Interior.Moreover, in addition to the above, it is important to note the following:
(i) the investment of Baht 40 million does not include the amount you will pay as the purchase price of the property, nor any repairs/upgrades you make to the property;
(ii) the property purchased must be used for your own, or your family’s, residential purposes(iii) the property cannot be used in a manner deemed contrary to the good morals and local custom of the people of Thailand, e.g. you cannot use the property as a casino
(iv) if the Minister of Interior gives you his consent to purchase the property, you (or your family) must take up residence in the property within a period of 2 years from the date on which you register ownership of the land.
If you fail to abide by any of these requirements, you will be required to sell the land within a period of not less than 180 days nor more than 1 year;
failing which, the Director-General of the Department of Land has the power to sell the property on your behalf.

So unless you have a spare 40 million Baht lying around what are your options?

The Thai Limited Company is, in my opinion, probably still an option provided that the Thai shareholders are legitimate and can prove the source of funds to invest. There must be at least seven shareholders, four of whom must be Thai. How might this be accomplished and allow the foreigner to retain control of the company?

The first thing of course is the Articles of Association of the company. These could provide for two or even three classes of shares with restrictions as to their sale, who can record share transfers etc. There would be stipulation as to the number of Directors, from which class of shareholder they must be elected and the formalities for appointing and removing the Directors. Obviously there is a lot more to it than I can explain here but essentially control is retained. The Thai shareholders hold a class of share which could be designated a Preference Share in that they will be paid a guaranteed dividend against their investment of say 2% above the deposit rate at a Thai Bank. For this guarantee they accept reduced rights. Secondly they must be shown as having the ability to make the initial investment – so it is no use just getting anyone off the street as used to be the case! However, look at this in reality.

Remember we are only talking about ownership of land – not house and land. Therefore if we take an example of a half Rai plot of land valued at Baht 2,000,000/rai. Land value is therefore Baht 1,000,000. Thai shareholding needs to be Baht 510,000. Minimum four Thai shareholders each has to show they had the means to invest Baht 127,500. If there were six Thai shareholders they would have to prove Baht 85,000 each.

We have to assume that the Thai shareholder has a desire to invest and make more money than they could elsewhere. A short term deposit in a Thai Bank will pay on deposits less than Baht 1,000,000 interest of 0.75% pa. A 36 month fixed deposit would pay 4.5%. This is why I suggest they are paid a dividend 2% higher that the bank interest rate. They are therefore legitimately investing to obtain a better return than they would on a bank deposit. In this case 4.5% plus 2% equals 6.5% or Baht 33,150 per year which is about £40 a month.

The question most people will ask is where will I find four, five or six Thais with the funds to do this? Initially I think it could be hard although I do know of some doing this already. What I suspect could happen is that certain astute Thais may form alliances with this in mind.

Now we must not forget Section 113 of the Land Code which states that “Anyone acquiring the land as an agent of any foreigner or juristic person under Section 97 or 98 shall be liable for fine not more than 20,000.- baht or imprisonment of not more than two years, or both.” This is where the interpretation of the Law by the Courts could become interesting – if it ever gets that far! I would argue that the purpose of the investment by the Thais was to obtain a higher return on their money than they could at a bank. The primary purpose was not to acquire land, although that was the vehicle through which the higher return was achieved. The Thai is not acquiring land, merely investing in a company which has.

So, from the above we can see that the situation is not straight forward and there are still some uncertainties about the Thai Company route even possibly with legitimate Thai Shareholders.

So what is the alternative?

It is absolutely legal for a foreigner to lease land, but the maximum term that this can be registered for is 30 years. Any promise or agreement for renewal for further periods is purely contractual and based on Contract Law not Land Law. 30 years is generally considered too short a period for a major investment on a personal basis. So how do we provide the extra term and security to achieve what the buyer wants?

I would suggest the following as a possible solution.

Let us say that my Thai staff formed a company for the purpose of investing in land with a view to leasing this land to foreigners in strict accordance with the Law. The company would be incorporated strictly for this purpose and the articles of association would allow the company to enter into loan agreements to provide the funds to do so. They would state that the company had the authority to enter into long term lease agreements and having done so, provided all terms of the lease agreement has been complied with, had an obligation to renew the lease for a further 30 years ad infinitum. Failure to renew would result in compensation being paid to the leaseholder based on the minimum original investment plus the cost of any improvements to the land (eg a house) multiplied by a reasonable factor to allow for inflation or the market value as determined by a qualified appraiser, whichever is the greater and should the property be sold within 12 months at a higher price, the difference to be paid to the leaseholder. There would be an obligation to transfer the lease to a third party at the request (and cost) of the leaseholder at any time. Nor am I aware of any restriction in canceling an existing lease and registering a new lease for a further period of 30 years at any time. There will be some registration cost implications but extending the lease on these terms should in my opinion be possible.

Where does the money come from? The Leaseholder loans to the Land owning company the full amount of the purchase price of the land. Say Baht 1,000,000. He charges the Land owning company 5% interest. The Land owning company buys the land in its name and leases the land to the Leaseholder, registered at the Land Office, and charges him 10% as rent. The company then has received Baht 100,000 and pays Baht 50,000 in interest, a gross profit of Baht 50,000.

It might be argued that on these figures it is not economical, but double of treble the figures and apply it to more than one acquisition and it starts to make sense. Also, the leaseholder no longer has to worry about maintaining a company and the associated costs and taxation etc. The leaseholder now has the right to build his own house which he can own and register in his own name.

This is only my opinion and a concept at the present time. I know there is a great deal of detail to flesh out and further pronouncements by the government may have an effect on this. Any comments, for or against my reasoning, would be welcome.

There has recently been an announcement about the Vacation Investment Programme (VIP) which offers a similar type of set up to that described above. I have many questions about the formation and promotion of that scheme which I am currently researching and will return to that topic in a later post.


Karina said...

If you are looking for a property in Thailand to invest in, you should consider these important factors:

Thailand property is very affordable. Compared to many other countries, Thailand is still unspoiled and yet poised for development. If you are a smart buyer, you should buy a Thailand property now while property prices are relatively low and there is substantial potential for capital appreciation.

Availability of Quality Developments
One of the reasons why investing in a property in Thailand is good idea is the availability of quality properties. There are grand villas, beachfront houses, and spacious apartments. Choosing one among the many beautiful Thailand properties will be the hardest thing for you.

Great Location
The country still exudes a special charm even as visitors numbers increase as Thailand's tourist industry thrives. Choosing to buy a property in Thailand is a smart investment decision. Places like Phuket and Koh Samui can offer buyers with the hottest property investments in Thailand.

Koh Samui Luxury Property for Sale said...

Well at present, investment in property is very safe haven for cash, which equity markets or banks are clearly not. A much more practical solution is property investment in Koh Samui Luxury Property for Sale for the principle reason that most purchases are not financed through any mortgages or loans.