Thailand: Thailand

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

Situated at the heart of Indo-China, Thailand has elements of all the characteristics commonly associated with Asia. Covering an area of over half a million square kilometres and with a north-south distance of 1,860km, the country is also one of the most diverse in the region in terms of geography and climate. From high mountains in the north to hundreds of islands in the Malay Archipelago to the south, with river deltas, plateaux and valley systems as well as innumerable stunning beaches and cities teeming with culture and colour, Thailand offers an enormous range of attractions which draw visitors back year after year. The local people are renowned for their friendly nature – Thailand is regularly listed as one of the safest countries in the world – and the Thai cuisine and local specialities make any visit full of flavour and charm. Today, Thailand is by far the most popular holiday destination for westerners in South East Asia, and is sometimes known as the ‘Spain of the East’.

Known as Siam until 1939 and as a growing economy in the latter years of the 20th Century, Thailand has attracted significant foreign investment and has become one of the Asian Economic Tigers. Thailand is a dynamic free market state which encourages foreign investment, and, to an extent, foreign residents, and has established itself as one of the fastest-growing economies in the region. The country’s cheap workforce and comparatively high level of education have made it an attractive destination for overseas investors who are further inspired by Thailand’s stability and increased internal consumption. Although some mainly agricultural areas of the country are still relatively impoverished, Thailand is far more prosperous than most of the countries in East Asia; of its neighbours, only Malaysia enjoys a greater GDP per capita, and Thailand equals most, and surpasses some, of the Eastern European markets in those terms.

For those investing in Thailand, there are two key drivers behind the property market: domestic economic growth, and tourism. As previously stated, Thailand’s economy is now one of the most stable in the area, and the expectation is that this economic development will contribute to a general upward trend in property prices. Increasing tourism is also contributing to the investment trend, with people buying property in Thailand specifically for investment, to exploit the busy holiday rentals market (with a long-term view of capital appreciation), or for personal use as a holiday or retirement home.

Is this a good place to buy?

Thailand is the most popular tourist destination in South East Asia, with some of the finest beaches in the world. It has a tropical climate, is rich in cultural heritage, and is widely known as the ‘land of smiles’, very friendly and extremely safe. The economy and the people are highly resilient, reflected in the extremely rapid recovery shown after the Tsunami (local councils are in fact taking the opportunity created by the disaster to rebuild in a more structured manner, with resorts planned rather than accreted). The country has strong business links with China, the fastest-growing economy in the world, and has an excellent infrastructure and world-class facilities in many resort towns.

The best aspect of property development here is that Thailand is still relatively undiscovered as far as westerners are concerned. Although the country probably won’t entirely catch up with the established European markets, it is growing very quickly and strongly. There is great rental potential, due to the ever-expanding tourist market, and demand is growing, supported by increased government spending on marketing, a burgeoning tourist industry, the attractions of the people and the geography of the country. On top of this, there is no capital gains tax for private investors and very low ongoing costs.

Price history

It would seem to be a given that the Tsunami would have had a serious effect on Thailand, and although recovery was quick, serious damage was done to the tourist industry. Much of this damage was due to the media coverage of the event and to tourists wanting to be sympathetic and allow time for recovery, and figures released by the Pacific Asia Tourism Association in August 2005 show that arrivals dropped by 40% in that year. With tourism representing 6% of the country’s income, the Tsunami could therefore cost Thailand over a billion dollars in lost tourist revenue. Surprisingly, these effects were not reflected in the property market, and local real estate agents were still making sales the day after the disaster. Developers had such confidence in the market at the time that those hoping to get discounts because of the Tsunami were disappointed. Property prices are currently rising at between ten and fifteen percent a year in Thailand – and although this is a slower rate than in some other emerging markets, it promises a steadier, more settled future.

Which type of property should you go for?

Property in Thailand is sold on both a freehold and a leasehold basis. It is easier and more straightforward for foreign investors to buy apartments or condominiums, which can be either on a freehold or leasehold basis, although foreign ownership is limited to less than 50% of the total area of any apartment complex. These apartments are often to be found with guaranteed rental schemes in place, and therefore make for a relatively secure investment. The fact that Thailand enjoys a tropical climate throughout the year also contributes to this. Currently the leasehold system allows for three consecutive 30-year leases; at present it is not certain what happens when the third leasehold period expires, but it is fairly certain that further renewal options will be offered. In condo buildings over 6 stories, foreigners can sometimes receive freehold ownership. It is important to discuss this issue thoroughly with a legal advisor before making any purchase.

There are restrictions on foreign ownership of landed property in Thailand. The Thai Land Code was recently changed to allow foreigners to own land on condition that it does not exceed one rai (a Thai unit of land equal to 1600sq m) and that it is to be used for residential purposes. In addition to this, more than 40 million baht (approx £571,000/$1,000,000) must be invested in Thailand when buying land, and permission must be sought from the Minister of the Interior. The new owners must also abide by ministerial regulations governing the nature of the land use during the period of ownership. A way of avoiding these issues if you wish to buy land is to set up a Thai limited company. These cost about £800 ($1,400) to set up; the details and the reasons for this are described below.

Types of buyers who might be interested

Initially, Thai property ownership was restricted to wealthy investors or those looking for a second home; however, with the introduction of financing of up to 70% loan-to-value from the Bangkok Bank and the resulting possibilities for spreading an investment, the market has opened up. Consequently, Thailand is attractive to a wide variety of buyer; those looking for a second home, a retirement plan or for pure investment.

Hotspots

Across Thailand there are six main areas where foreigners are investing in property. These are: Phuket, Bangkok, Koh Samui, Chiang Mai, Pattaya, Krabbi and Pang Nang.

Residential property sales are to a large extent focused on two areas: the beaches and islands in the south; and Bangkok. Bangkok is renowned throughout the world for some of its less savoury aspects and it is an important point that, as well as the professionals following the fortunes of the blossoming economy, many overseas buyers in the capital are single men who have come looking for Thai women, either as brides or as less permanent partners. As far as the beaches and islands in the south are concerned, Phuket is the best-known area, as it was the first to be developed in any meaningful way for tourism. The determination of the government to attract the ‘right sort’ of tourism has ensured the development of a very classy market, both with regard to tourism and to property buyers. Koh Samui is another island following in the footsteps of Phuket and becoming well-known as a favourite destination. The prices on these islands and in Bangkok reflect their popularity, and for the investor with tighter purse-strings it may be wiser to look to other less developed markets with better potential returns for a smaller initial outlay.

Chiang Mai, the ‘Gateway to China’, is Thailand’s second city, and is fast developing into a business centre. The government is in the process of building a highway from Bangkok to China which runs via Chiang Mai, so the city is well-connected, and is seen to have more energy than Bangkok. Purchases of rental apartments, especially in the central business district, are likely to become a popular investment choice in the near future. New height restrictions which state that developments cannot be built higher than five stories also mean that the skyline is unlikely to change much, and the city will retain its character and beauty.

For those more interested in the tourist market or in finding a home on the coast, Hua Hin currently shows good potential. It is less developed, newer and cheaper than Phuket, and, as the king possesses a large home here, the area has been cleaned up and is nicer than Pattaya. Hua Hin is a former royal beach resort, close to Bangkok, and has a reputation for being gentle and slightly old-fashioned, combining tourism with a thriving fishing industry. The almost undiscovered nature of the area means that it is still possible to find a bargain, and the area is likely to become a property hotspot in the near future.

Key risks and opportunities

Risks. Although Thai society is friendly and welcoming to foreigners, the Thai people are very savvy operators, and as is the case everywhere, it is wise to find someone (preferably a lawyer) who speaks the language and knows the intricacies of the buying process in Thailand to guide you through any purchase. This is also useful for avoiding confusion over property titles, as Thailand’s family and inheritance legislation often leaves property in the hands of several family members at once. All these members must agree before a sale can be completed.

Opportunities. Thailand has a buoyant tourist trade and the strongest economy in the area. There is no capital gains tax (this is taxed as income on repatriation of funds), and any ongoing costs are likely to be very low. A rental yield expectation of 7% is not unrealistic.

The country has been through a number of crises, including the 1997 Asian Financial Crisis and the Tsunami, but it must be noted that Thailand recovered from both of these much faster than any of its neighbours. The people are optimistic and positive and deal with crises quickly, a fact which means that the economy is likely to remain stable for some time to come.

Purchase Process

The purchase process varies depending on the type of property, with apartments or condominiums in a complex being the most straightforward option as they do not require the extra work which goes into buying property with land. In any type of purchase, remember that the name used in the purchase process must be exactly that printed on the buyer’s passport. On finding a property it is wise to gain legal representation in order to file the proper paperwork (such as Land Department, Local Council and Revenue Department documents). This should be completed and checks should be made on the property title and condition BEFORE any agreement is signed or a deposit paid.

Once a buyer agrees to purchase a property, the vendor’s representative should prepare a purchase agreement, which should detail title details, the property address, the names of the buyer and seller, the selling price, costs and fees and how they are to be paid, the terms and conditions of sale, and the settlement date. The buyer will generally be required to pay a holding deposit on the date that the purchase agreement is executed. This deposit is usually 10% of the total purchase price and is refundable if the sale does not proceed through no fault of the buyer (for this purpose it is a good idea to pay this to the Real Estate Agent to hold in trust).

Once the purchase agreement has been prepared, all documents must be signed at a Thai embassy and certified and witnessed by a Thai official within 15 days of the signing of the reservation form. The balance should be paid on settlement, when the buyer officially takes possession of the property. At this point the documents, foreign exchange transaction forms, bank certificate of reservation fee and final payment should be sent to the vendor for the preparation of the registration application form, the official sale and purchase agreement and other necessary documents for transfer of title. The seller must arrange for the preparation of these documents and the title deeds with the Land Office – a process which normally takes one working day.

At the completion of the sale, the taxes are technically due, although some solicitors include payment for these in their fee. Make sure that their payment time and level is established before beginning the purchase process.

Properties with Land/Land only purchases. Properties with land are more complex to purchase, but the process is easy enough to mean that they still provide a viable investment. To buy land, it is necessary to set up a Thai limited company, which takes around three weeks and is fairly straightforward – the developer should be able to assist in this and it usually costs around £800. The company must have seven shareholders in total, with the foreigner holding 49% of the shares and the remaining 51% held by Thai nationals (locals can usually be found to take on the role of partner for a minimal fee). The Thai partners sign an undated sell-back document and grant the buyer an irrevocable and absolute power of attorney over the shares, and the buyer retains full control by being the sole director of the company with executive powers. For a stronger guarantee of control, the 49% of shares held by the purchaser should be designated Preference Shares, meaning that each of these shares allows for the voting power of five over the Thai shares, which only constitute one vote per share.

To set up a Thai limited company, a registered capital of two million baht is necessary (around £23,000/$40,000). Three alternative company names must be provided, along with three signed copies of the directors’ passports (maximum two directors), three signed copies of the visa entry stamp, and various Thai official forms which will be provided by your solicitor. The purchase then proceeds as above.

Mortgages. Mortgages have been difficult to come by for foreigners, although Bangkok Bank has recently announced that it will lend to foreigners at up to 70% loan to value.

Taxes and Fees. There are two kinds of property tax in Thailand: house and land tax, and local development tax. House and land tax is 12.5% of the rental value of the property, and is imposed on the owners of a house, building, structure or land put to commercial use. Residential property is not subject to this tax. Local development tax is imposed on any person who owns or is in possession of land, with rates varying according to the appraised value of the property as determined by the local authorities. There is an allowance granted for land utilised for personal dwellings, the raising of livestock and the cultivation of crops by the owner, with the extent of the allowance differing according to location.

Taxes involved in the purchase process include: Business Tax (3.3%); Stamp Duty (0.5%); and Title Transfer (2%). Most developers will pay half of these. On rental properties there is a personal income tax of 1-3% on repatriation of funds. Capital gains tax is taxed as income.

Opportunity Rating

With a resilient economy which is relatively diversified, good links with China and a well-deserved reputation as one of the premier tourist destinations in the world, Thailand represents a good investment in all respects.

Rating: $ $ $ $

Risk Rating

Investors in Thailand are subject to the obvious risk of further natural disasters, although these are unlikely and the country has proved extremely resilient. There is no political unrest to speak of, however as with any country, the tourist industry could be impacted by outbreaks of diseases such as Avian flu or SARS.

Rating: * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in:

“Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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