Property in Koh Samui after Songkran

Songkran came and went and, as usual, was over in one day so by Saturday morning it was safe to go out without fear of getting wet. On the other hand elsewhere in Thailand Songkran goes on for days. My wife comes from Kalasin and she was home for the holiday and they were still celebrating a week later!

There is still a general air of uncertainty re the political situation which is not helpful, but on the other hand what I am beginning to see is a more positive attitude among many business people for the future. Whilst we should not be complacent, there seems to be a feeling that the lengthy deliberation and discussions about the Foreign Business Act will go on and on, possibly until the elections in December, when a more pragmatic government will instill some sense into the situation. We must wait and see of course and this may be the optimistic view but we are still receiving enquiries from interested purchasers.

There are inevitably some people who are panicking which I believe is totally the wrong attitude although on the whole most people are sitting back to see what happens. Remember that the concept of foreigners acquiring an interest in land through a Thai registered company with local Thai shareholders (nominee or not) has been a standard practice recommended by lawyers throughout Thailand for years and accepted by government after government. I find it somewhat disingenuous of all the lawyers today making statements to the effect that “we told you so!” - well in my six years in Thailand I cannot point to one lawyer who, until last year when this all came to a head, said the Thai company was not the way to go. Be that as it may, where could it go from here and why should we not panic?

We can only look at the Law as it stands and even assuming they apply the existing Law I see major problems of enforcement. Let us assume that on Koh Samui alone there are 1,000 such land owning companies controlled by foreigners. First of all they have to investigate all those companies and having established that there is foreign control, they must then apply to the Court for an order under the Land Code requiring the company to divest themselves of that interest with a 180 day deadline after which the Court can order a forced sale of the land. Now I would imagine that any vaguely competent lawyer could manage to defer these hearings for weeks if not months. Multiply that by 1,000 and you can see how quickly the Court system would be brought to a halt.

Let us be clear though. There is still nothing wrong with a Thai company with foreign shareholders owning land. What is at question currently is control of that company whether by majority shareholding or voting rights. Obviously it is not possible for foreigners to own more than 49% of the shares but it was, in the past, possible to control the company by way of preference voting rights and it is this issue which is currently being debated more than any other. However, even with equal voting rights it should still be possible to retain significant if not quite total control of the actions of the company by carefully worded Articles of Association. For instance, all decisions have to have agreement of 70% of the shareholders and… well I am not going to give all the secrets away!

But of course you still have to have legitimate Thai shareholders. Let us say for example that you are buying a Baht 20 million house. Technically you are going to have to find Thai shareholders to contribute 51% or Baht 10,200,000. That is clearly unrealistic. But remember that it is perfectly legal for you to own the structure on the land in your own right. So, let us say that the value of the land is Baht 2,000,000 so now you only need to find Thai shareholders for Baht 1,020,000. Five of them at Baht 200,000 each. Where do they get the Baht 200,000 from – well they can borrow it – where from I will leave you to work out! So now you take a 30 year lease from the company of the land and you own the structure in your own name. Options are built in to renew the lease in 30 years, to extend the lease should longer leases be allowed and to purchase the land should the law change in the future. You have to be careful how these various factors are put together as there are some tax implication to be aware of, but which can be legitimately minimised.

So what happens after 30 years? You serve notice on the company (of which you are still a shareholder) to renew the lease of the land for a further 30 years. Such renewal I would surmise is unlikely to be refused. The renewal is duly registered at the Land Office and in fact as you actually control the situation this could repeat ad infinitum. Obviously this is a simplistic description of what I am describing and there are a number of consequential issues that need addressing and safe guards to be built in and I am not going to cover them all in this Newsletter. **

We have to deal with what is in front of us and, whilst we can speculate on how the Law will be changed (or not) and how it will then be applied, I believe it is still possible to safely buy property here in Thailand and that the future for Koh Samui is very bright. There are some bargains around at the moment for those with the foresight to take advantage of them.

**If you would like to subscribe to my monthly Newsletter, please send me and email to hbonning@kosamuiproperties.com

April and Songkran on Koh Samui

Songkran is upon us again and will be celebrated in Samui between 13th and 15th April. For a detailed guide to, and explanation about Songkran, the Tourist Authority of Thailand have a very good wed site at http://www.tatnews.org/events/events/2007/april/3169.asp
In other parts of Thailand Songkran seems to last for days. At least here in Koh Samui it starts on the afternoon of the 12th when the kids will stand at the side of the road and throw and squirt water at passing cars and bikes. There is then one full day of mahem with processions through Chaweng and it is pretty well all over by midday on the 14th. However, for those few days make sure your telephone, wallet and cigarettes are wrapped in a plastic bag because you can be a target at any time. Be very careful if you are riding a bike as you will be a prime target and safety and consideration tend to go out of the window at this time. Watch out also for the pick-up trucks full of people with a large container in the back. These will get you too. Great fun for the kids but I think having done this too often before, I will be relaxing at home!

Mind you, water pistols may not be needed as after a fairly dry few weeks we have started to get showery weather again at the tail end of the NE Monsoon season. Nothing too drastic but useful to keep the water levels up although we really need a lot more. If you want to check the weather at any time go to http://www2.tmd.go.th/radar/chumphon.php and you will get a radar picture showing rain clouds. The Chumphon radar currently gives the best picture as the Surat Thani radar site is not working. We are just approaching the usual hottest months of the year and would expect the NE Monsoon to gradually give way to the SW Monsoon over this period.

British Summer Time (Day Light Saving Time) started on the 25th March so here in Koh Samui we are now only 6 hours ahead of the UK. This continues until Sunday 28th October. Day Light Saving started in the USA on 11th March and will finish on 4th November. Why do the Americans get a longer summer than the Brits?

Koh Samui has long been a stop off point for Formula One teams and the latest British success story Lee Hamilton is no exception as he made his way from Melbourne to the Kuala Lumpa Grand Prix by way of Bangkok and Koh Samui.

There is still debate over the future of the Foreign Business Act and how it will be drafted and applied with one or two more sensible words of wisdom floating about. However it is still too early to make any definitive comment until we know what the final version is. Two dates in December, 16th or 23rd, have been suggested for the General Election – but will that actually solve anything? Who knows!

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.