Thai Airways suspend maiden flights to Samui

Comments on a report in The Samui Express 23 Feb 2007
Originally planned to commence operation on 1st March with two flights a day, Thai Airways have, according to Koh Samui Tourist Promotion Association, decided that the landing costs imposed by Bangkok Airways are too high and have scrapped those plans.

(We have to wonder why at this late stage they have changed their opinion as we are not aware that the landing charges have changed since they first announced the intention of flying here. The usual criticism is that Bangkok Airways airfares are excessive. Koh Samui is not shown as an available destination on the Thai Airways website so it is not possible to compare what they would have charged. We did check a return flight from Surat Thani to Bangkok and the total price was Baht 7,390. An equivalent fare with Bangkok Airways was Baht 8,030 so the additional Baht 640 saves a bus, ferry and bus trip to Surat. The Bangkok Airways promotional fare is only Baht 5,265. A flight from Bangkok to Phuket return was Baht 8,160 and to Krabi was Baht 7,830 so it seems that Bangkok Airways are once again being made the whipping boy for Koh Samui’s problems in not attracting tourists over the recent high season when the bad publicity last year and hotel prices probably had as much to do with that as did the much cheaper general packages to the Andaman Resort areas working hard to regain custom after the tsunami. So once again we are seeing calls for a second airport but there seems to be no evidence that this would produce cheaper fares and unless the hotels are prepared to compete on price with the Andaman coast then the tourists will still not come. There are an ever increasing number of high quality hotels coming to Koh Samui. Four Seasons has just opened, Evason has been here for a while and both Conrad and W have announced plans to be here soon. Others we hear are also planning new five star operations on the island. It is unlikely that guests to these hotels are going to worry too much about a difference of Baht 1,000 on an airfare. So what does Samui want? High end tourists only in which case the existing airport can probably cope or a second airport to attract mass tourism with no guarantee that on its own it will succeed? Can two airports operate at the same time on the island? The original plan for the second airport was parallel to the road from Hua Thanon to Nathon but there now appear to be issues with flight paths and wind shears off the surrounding hills. Also with the present interim government, do they have the will at this time to approve such a project? The land acquisition process itself could take years as compulsory purchase orders will need to go through the Courts and then the funds will have to be available to buy the land and build the airport by which time we will no doubt have a different government to that now in power or in power after the next election – so who knows where it could go and if Suvarnabhuni Airport in Bangkok can be used as an example we probably have another 45 years to wait anyway! )

To lease or not to Lease on Koh Samui!

The fall out from the bitter dispute between the military backed interim government and the ousted ex-Prime Minister Taksin Shinawat has been the attack on the nominee structure of foreign controlled Thai companies which for years have been the accepted way for foreigners doing business in Thailand to control their investment. The statement that they are merely clarifying the law rather than amending it is a purely face saving one to avoid admitting that they are changing the law retrospectively. They are doing this by amending the Foreign Business Act but as yet no one knows just what the final version will be and if there will be changes to the Class 1, 2 & 3 lists of prohibited and permitted businesses in which foreigners can have an interest. Consequently there is a great deal of uncertainty in business and in the property sector in particular as the nominee structured Thai company was the usual and accepted way for foreigners to acquire an interest in land in Thailand.

What is certain however is that a foreigner can lease land and this lease can be registered at the Land Office for a period not exceeding 30 years. There is a provision within the Land Code for a further extension of 30 years after the initial lease has expired. Section 540 of the Civil & Commercial Code states:
“The duration of a hire of immovable property cannot exceed thirty years. If it is made for a longer period, such period shall be reduced to thirty years. The aforesaid period may be renewed, but it must not exceed thirty years from the time of renewal.”

So let us look at the pros and cons of leasing land in Thailand as the law stands today.

Firstly and most importantly the interest in the land under a lease is completely legal and enforceable in the Courts.
Secondly, it is possible and again perfectly legal for the lease to be renewed for a further thirty years – and by implication that could go on indefinitely, but subject to the comments below.

The downside to leases are the following.
1) A lease is a depreciating asset. Whereas a freehold will increase in value in line with property values generally, a lease will decrease in value with the reducing remaining term.
2) The renewal of the lease after 30 years is based on a contractual option with the original Lessor. It may not be enforceable against his heirs and successors if he has disposed of his interest or died, although a recent Supreme Court ruling seemed to indicate that it might be provided the option has actually been exercised prior to the Lessor’s death.
3) The lease must be carefully drafted and so registered at the Land Office stating that the lease holds good not only to the Lessee but to his heirs and successors, preferably named, because if he dies the lease, if not, dies with him and is terminated.

These reservations apply principally to leases with individuals. Many developers now are offering 30 year registered leases with both options to buy should the law change to allow that and to extend the lease at the end of the term. These are relatively safe in that the Lessor being a company cannot “die” and the Articles of Association require the company to renew leases when the fall due.

So for the time being the only totally legal way for a foreigner to acquire and interest in land in Thailand is by way of a lease. Will that change? The most likely change being muted currently is to extend the period for which a lease can be registered and both 60 and 90 years have been bandied about. We must wait and see.

Koh Samui and Thailand - What now?

From a Real Estate point of view we have seen increasing interest since Christmas with more enquiries of a serious nature and sales being agreed. I am a little surprised that many lawyers seem to be still promoting the acquisition of real estate through the Thai company route and it does appear to be correct that the Land Office are continuing to register land of less than 1 Rai to companies with foreign shareholders. I can only assume that they are looking at the new FBA which it is stated will give companies two years to rectify any irregularities in the belief that a newly elected government will correct the present unsatisfactory situation. The nominee structure with its combination or Ordinary and Preference Shares was for many years the accepted way for foreigners to own land and it was a typical Thai pragmatic compromise which allowed this despite the strict conflict with Thai Law. The present government, interim as it may be, have made it very clear that businesses in Thailand must be majority Thai owned and the Thai shareholders must have majority voting rights. Foreigners may not own or control businesses in Thailand. I think it is widely accepted that this whole situation was brought about as a consequence of the deal between the ousted Prime Minister Taksin Shinawatra and the Singapore government for the sale of his family business Shin Corp. Apart from the tax free nature of the sale which created a lot of bad feeling the issue it brought to the fore was the control of a major Thai company (and a sensitive one being in telecommunications) by a foreign entity. Further investigations into his business affairs and those of his family really opened a huge bag of worms which extended to land deals and which the opposition seized upon with glee and culminated in the Coup last September.

Where does this leave us with regard to real estate? The first thing is not to panic. Nothing stays the same for long here and much fear of what might happen is built on ill founded rumour. We have had meetings with certain people recently and even within the present system there are fairly highly connected people who recognise the dilemma and who are trying to come up with a solution. For the time being my own recommendation is that land should be acquired on a Registered Lease for 30 years with two well drafted options, firstly to acquire the land should the law change and secondly to extend the lease for a further 30 years. The house on the land can be owned separately in your own name. There is also talk about extending the period for which a lease can be registered and some rumours state 90 years and some 60 years. As usual we must wait for the facts and assume nothing. I consider it highly unlikely that Thailand will relax its policy on foreign ownership of land but I do think they will come up with a solution that makes investment here acceptable again.

Quad Bikes on Koh Samui

Last November Top Gear’s Jeremy Clarkson ventured to Botswana and experienced Quad Bikes.
Here is a quote:

“Now, the quad bike has had a fair degree of bad press in recent years. First of all, we had Rik Mayall damn nearly killing himself when his turned over and then, more recently, poor old Ozzy Osbourne breaking what's left of his body in two when his pulled a wheelie, throwing him off the back.

If you want to kill your children, there's no quicker way that I can see than buying them one of those 50cc jobbies you sometimes see at garden centres. My son went on one the other day and in less than two minutes, he and it were in the swimming pool.”

The full article can be found here
http://www.topgear.com/content/features/stories/2006/11/stories/02/1.html
What on earth are they doing now on the roads of Koh Samui? Over recent weeks more and more of these machines have been seen zooming round the island with the riders for some reason believing that they are safer than the two wheeled death traps popular with locals and tourists alike. Koh Samui has a high enough accident rate without adding the false sense of security that these vehicles appear to give people. Not only that, but I have yet to see one with a licence plate, nor have I seen a tax disc and I suspect therefore no insurance.

During the Second World War, that work horse of the US Army the Jeep had a great reputation for its ability off-road, but the opposite on-road where it killed many GI’s due to its inability to turn corners at speed. These Quad Bikes seem to have similar characteristics and I wonder how long it will be before we see them adding to the island’s statistics.

Buying a business in Thailand

I am still amazed at the number of people who think that running a business in Thailand is going to be easy – in particular in the entertainment and hospitality industry. We get enquiries from people looking for a beer bar at the one end of the scale to a full scale resort at the other. The former we do not deal with nevertheless we still get young men in particular who walk through our door looking for a bar to buy with their latest girlfriend. She will run it and he will sit back and take the profits, drink and have a good time with his mates. I send them on their way with the names of a couple of bar owners I know who may be able to advise them of the pitfalls they will encounter. A few heed the warnings, but many do not and end up losing a significant amount of their savings. Those that get through the first couple of years discover that sitting at a bar seven days a week with no time off is not the same as sitting at the bar for your two week annual holiday. And if you are not there all the time you will get ripped off big time.

Moving up market to Pubs and Restaurants, there are many people who want a change of lifestyle, about to retire but want something to do. A Pub or Restaurant seems a good idea. Without experience they are going to have a problem and many have no idea of how the economics of these businesses work or how they can assess the potential revenue they can achieve and consequently the price they should pay. Few businesses will open their books to you and you have to be wary of how accurate the figures produced actually are. I treat revenue figures with a great deal of caution. I am much more interested in the running costs and in particular the cost of supplies. If the owner buys ten cases of beer a week on a regular basis then it is likely that he sells ten cases on a regular basis.

The next major hurdle we face is the changes that will be made to the Foreign Business Act which should be announced soon. The old multi class shareholdings may be on the way out and control will based on voting rights, not shareholdings. As a foreigner you can only own 49% of the shares in your business and so can be out voted by the majority Thai shareholders. This surely will have a negative effect on anyone considering investing in a business here for the first time. It will be interesting to see what new angles the Thai Lawyers come up with to deal with this one.

Buying a house on Koh Samui

I would estimate that the majority of sales we achieve are for properties different to that which the purchaser first told us they were looking for. It is a recurring theme that when you show them what they first described as being their ideal they say that is not what they are looking for. I believe this is for two main reasons.

Firstly, they do not really know what the want but have to say something to start the ball rolling and it is only when you sit in the car driving round and actually inspecting houses that their true hot and cold spots become apparent and eventually you can start to show them properties suitable for them.

Secondly, they know exactly what it is they want, but it is simply not available. Then they have a choice – compromise or build to suit. So in this instance they will buy a property which is not in their original brief or they will acquire land which also was not what they originally intended.

Either way I constantly tell my staff to look for the signs that indicate which type of client they are dealing with so that we do not waste their time and we identify quickly what they really will buy.

Koh Samui - Supreme Court ruling on renewal of lease

I came across an interesting Supreme Court Opinion during the month which, whilst in itself is not directly relevant to our concerns over Lease Options, did give an insight into the way the Supreme Court might go. The basic case involved a contract of hire for fifteen years of a building and the owner had agreed with the tenant in the contract that at the end of the fifteen years he would renew the contract of hire every 3 years. Unfortunately a year before the end of the fifteen years the owner died. His successors did not want to renew the contract and consequently the matter ended in the courts. The Supreme Court held that the right to a new Contract of Hire was a promise only and did not in itself make a new Contract of Hire come into place. The reasoning behind this decision appears to be that the promise was an offer made by the owner, but which at the time of his death had not been accepted by the tenant, therefore in basic contract law of offer and acceptance, no contract existed and the tenants had to leave.

The implication as I read it is that if there had been offer and acceptance, a contract would have existed and the Supreme Court would have enforced it. Therefore if I look at this from the point of view of an option after a 30 year lease it seems likely that if a proper contract for renewal exists including all the terms for renewal including consideration, then the Supreme Court would probably enforce it. The argument in Thailand is always about registration and that a lease can only be registered for 30 years and that therefore is the maximum enforceable term. If my interpretation of the above case is correct it seems to me that there is a good chance that correctly formed options would be enforceable in the courts. Of course very few leases have reached anything like 30 years and therefore the test in the Courts is a long way away.

This is of course just my opinion extrapolated from a decision which in this case went against the tenant, but I do see some logic in the argument and how it might be applied in other cases.

Meanwhile we await the Interim Governments pronouncement on how they intend approaching the problem of Foreign Ownership in Thailand, although I doubt we will hear much on this before the New Year.