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Friday 29 December 2006

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.

Wednesday 13 December 2006

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.

Monday 4 December 2006

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.

Tuesday 28 November 2006

Movement in Koh Samui Real Estate Market

We have actually seen some movement in the real estate market over the last few days. We would normally expect to see enquiries start to build up at this time of the year prior to the Christmas season and the pleasant surprise, after the last two very quiet months, is that is what is happening. It is not just the level of enquiries that have picked up but the quality too. The people contacting us now have assessed the present situation and made a pragmatic decision that the fundamentals of the market are acceptable within their own strategy and now is the time to buy. Has any of this had an effect on prices? Not that I can see. Land owners generally do not have to sell and will sit on the land rather than sell at a price less than their expectations. The re-sale market in houses has not been affected for very much the same reason. New properties on developments have not as yet been much affected but I suspect that they could be the first as there are financial pressures on the developer to sell due to up front capital investment and I have recently seen a number begin to offer small reductions to keep the ball rolling.

Thursday 23 November 2006

Koh Samui in November

The real estate scene is very quiet at the moment but we would expect that at this time of the year which is our low season. Another three weeks and we should see more activity as people return to the island for the Christmas and New Year holidays. No news as yet from the government in respect of the Foreign Business Act but I doubt we will hear about that until the New Year now.

Tourists are very thin on the ground at the moment and many hotels are running at very low occupancy. The weather is not too bad as this is our rainy season but we are not getting the continual rain that we had last year which caused so many flooding problems. The Municipality have been working hard to improve the drainage and certainly so far there has been a distinct improvement when it has rained. We are getting mostly the afternoon heavy tropical showers which last for about an hour and then pass through. You can be in Chaweng and get wet and Maenam or Big Buddha and stay dry and vice versa. Very localised at times.

Wednesday 22 November 2006

Technical Post

Technorati Profile

Latest News from Koh Samui

So while we wait for the government to decide how they are going to move the issue of foreign ownership forward what else is happening on Koh Samui?

Well I suppose the big controversy over the last month has been the increase in airfares between Bangkok and Koh Samui imposed by Bangkok Airways. This amounted to a nearly 20% increase on what is already the most expensive internal flight in Thailand. The Thai locals in particular to exception to this, not entirely because of what they would have to pay, but because they saw that it would affect tourists making a choice of destination and who would choose to fly to cheaper destinations such as Phuket or Chang Mai. The protest was so vociferous that eventually Bangkok Airways had to back down and drop the increase.

One of the main problems on Koh Samui is that as many as 80,000 people live on the island unregistered. A large number of these people came to Samui as tourists and ended up working. The last census in 2000 put Samui’s population at only 39,369. But Samui’s actual population is much more than that. Each year hundreds of Thais and foreigners visit Samui and then find jobs without registering with the authorities. The result is a further strain on the island’s resources. The island’s annual allocation from the national government is based on a population reflected on the census. The problem is the unregistered population on the island is twice the census’s figures. In effect, the island isn’t getting the right budget for the actual number of people living on the island.
The true population is very important for local officials to correctly calculate the budget for the island. The true population helps them to plan appropriately for development of the basic infrastructures such as electricity and water supply. This also has had a negative effect on the island’s application for City status as the registered population is not high enough. City status would allow Koh Samui to retain a significant proportion of the tax revenues in generates but which at the present time end up in Surat Thani.

Some good news for Golfers now: A new course is being constructed in Bophut hills. Its designer is Piraporn Namatra, reputedly the best golf course designer in Thailand. It will be a championship nine-hole golf course and only the best equipment will be used. A limited number of memberships will be available and members can play without a limit. A club house is being built for the players to have relaxing place after a tough game. The restaurant will serve both Thai and international cuisines. Bophut Hills Golf Club (as it will be called) is expected to open in December, before Christmas.

The other good news is that Koh Samui will receive double the supply of electricity from 72 megawatts (MW) to 147 MW in December according to the Provincial Electric Authority (PEA). This comes after the completion of the third power cable to supply electricity to the island. Due to Samui’s rapid growth in tourism and the property sector, the demand for electricity also increased tremendously. At the end of this year, demand is pegged at 72 MW and will increase by 10% each year. The expansion will aid the deficiency of supply of the combined capacity of power lines from the mainland. The new power cable is hoped to meet electricity demand on Samui for the next seven years. An Italian-Thai Development company and Nexans Norway AS consortium won the contract in 2005 to lead the project and install the third power line from the Khanom power station in Nakhon Si Thammarat to Samui. The project costs Bt899 million.
The new 27-kilometer undersea transmission line is three months ahead of schedule and will be complete by early December. The cable has already been installed underground and the marine segment is 80 percent done. Also designed to strengthen Samui’s communication system, the new power cable is expected to break even within 15 years. PEA also considers a fourth power line or building a gas-fired power plant on the island

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.

Tuesday 14 November 2006

Foreign Ownership in Thailand

There has been a great deal of controversy in recent months about foreign ownership of companies, and particularly those owning land.

Firstly Thai Law prohibits foreigners from owning more than 49% of the shares of a Thai Company. This in itself is a bar to any foreign investment in Thailand as no one is going to put their money into an investment that they do not control. Thailand being Thailand found a pragmatic solution to this in that for the last 30 years or so, the 51% Thai shareholding has been by nominees – names on paper but with no financial interest in the company. Their voting rights were restricted and they were excluded from being Directors of the company. Essentially control remained with the investor. Major international companies applied this formula to their corporate structure and, whilst not adhering to the strict interpretation of the Law, it became common and accepted practice.

Shin Corp is a huge telecommunications company essentially owned and controlled by the family of the now ex-Prime Minister Taksin Shinawat. It was the sale of this company to the Singapore Government, and especially the fact that the deal was declared as tax-free, that opened up the debate on foreign ownership and was the beginning of the end for Mr Taksin.

The Business Development Department has reportedly concluded that the Singapore government's investment arm, Temasek Holdings, had violated the Foreign Business Act and telecom laws by controlling more than 49% in Shin Corp. But the report has remained sealed pending a broader inquiry into the use of nominee companies by foreign investors.

A survey of a dozen of the country's most prominent foreign investors, including Tesco, Holcim, Carrefour and others, showed a widespread use of multiple share classes, different voting rights, nominee structures and other techniques to bypass the 49% restriction. Thai law defines the nationality of a firm based on the nationality of its shareholders - if a majority of capital is controlled by Thais, then the company itself is considered Thai.

Secondly Thai Law prohibits foreigners from owning land.

There is an exception for someone who is prepared to invest one million Baht in specified investments for a period of at least five years who may then acquire and own in their own name up to one Rai (1,600 sq metres) of land subject to the approval of the Minister.

Apart from that foreigners may lease land. A lease can be registered at the Land Office for a period not exceeding 30 years. There are no provisions for options or renewals. However, it is contractually possible to agree an option but it cannot be registered. Therefore if there is any dispute about the renewal the matter will have to be settled in the Courts. I believe a recent Supreme Court judgement upheld a contractual option but I have yet to see the actual wording of the decision.

Again, for many years foreigners acquired the ownership of land through the Thai company structure as outlined above. This was the norm and accepted practice by lawyers and the officers at the Land Office. Was it strictly legal? No it was not, but no one objected and the procedure was well known at all levels of government.

The high profile nature of the Shin Corp case opened up the whole nature of foreign investment in Thailand to scrutiny. Those attacking Taksin Shinawat of course saw this as major ammunition for their case, but of course they had to apply the same principals to all companies from top to bottom.

Directives were sent out to the Land Offices around the country stating that where a Thai Company which had foreign shareholders was acquiring land, there should be an investigation in to the source of funds of the Thai shareholders to establish if they were legitimate investors or nominees. There was a great deal of confusion at the time about just what was required of the Thai shareholders, who was responsible for the investigation – the Land Office or the Commerce Department – and what action they should take. Consequently everything ground to a halt and virtually no registrations were taking place. By the time they had sorted out the detail the lawyers were coming up with ways to get round the new regulations. They simply had Thai companies with 100% Thai shareholders register the land and afterwards transferred 49% of the shares to the foreign owner. It probably would not stand up to scrutiny in the courts but it is again becoming “accepted practice”!

The interim government has recognised that the present situation is unsatisfactory and a review is being undertaken as to how to resolve the issue. On the one hand they understand the need of foreign companies to want to control their investment, but on the other hand do not want to make any changes that would let Shin Corp and Mr Taksin of the hook. It would be difficult to prosecute the parties involved one day and then change the law the next day to allow what they have just been found guilty of.

It has been my opinion since this whole debate started that the cost of ownership in Thailand has just gone up. It will, and is, still possible to acquire land through the Thai company structure, BUT the Thai shareholders must be legitimate. They must show that they had the funds to invest in their share either as capital or with sufficient income to support the investment. They will almost certainly need to be paid a dividend. I will deal with how this might be achieved in the next post.

Monday 13 November 2006

Thailand, and Koh Samui in particular, has been rocked by controversial events over the last few months. It started with the political feud between the Prime Minister at the time Taksin Shinawat and the Democrat Party and claims of corruption and nepotism. This led to claims of land encroachment by certain Thai Rak Thai politicians or their supporters on land in Koh Samui and that led to allegations of money laundering, extortion, illegal assembly and other crimes against certain individuals - the vast majority of whom were later totally exonerated - and a group known as the Bandidos - a motor cycle gang of international repute similar to, but rivalling the Hell's Angels.

The troubles for PM Taksin were exacerbated by the sale by his family of the Telecommunication giant ShinCorp to Singapore investor for several billion Baht and the sale was declared to be free of tax. This angered many people who started to look at the structure by which the Singaporeans had acquired Shin Corp as foreign control of companies in Thailand is not allowed and in particular with regard to a telecommunication company and the potential threat to national security. It was found that the shareholding through Nominee companies was 96% when at most it should have been 49%.

This then brought into the open the whole structure of foreign ownership in Thailand as the concept of using Nominees has been well established for over thirty years and whilst perhaps against the letter of the law, was the accepted practice for pretty well all international companies investing in Thailand. Why invest billions of Baht without having control of your investment? This applied to huge companies such as Lotus-Tesco and many more.

This had its inevitable knock on effect to the real estate market in that foreigners have been buying real estate in Thailand through companies with Nominees for years. Strictly under Thai Law, foreigners cannot own land (as opposed to buildings which they can own)in Thailand in their own name. So, a Thai company was formed with the standard structure and a 51% majority Thai Shareholding, although the 51% was designated as Class B shares with reduced voting rights. Suddenly the implication was that everyone who has used this route to ownership was in danger of losing their property. Of course the panic merchants had a field day. The reality is that even if the company is shown to be owning land illegally due to the share structure, Thai Law has a specific remedy for this and gave 180 days to regularise the situation. I have heard of no one anywhere in Thailand who has been required to do this.

Then of course we had the Coup. Welcomed by many, peacefully carried out and they have kept their promise to install an interim government with new elections in twelve months.

The interim government has been announced although it is clear that the Military are still holding the reigns. Edicts seem to come out everyday some of which make you wonder what is happening. We will soon be seeing a complete ban on advertising alcohol in all media – supposedly to protect the younger Thai population. The fact that most of the drink problems emanate from the illegally distilled local liquor Lao Khao which is never advertised seems to been ignored. Then there was the proposal to ban anyone under 25 from drinking – that received very short shrift when it reached the Cabinet and was immediately sent back to be redrafted but it has re-appeared with a new age limit of 20.

Discussions continue re foreign investment in Thailand and the government seems to have last taken on board that the present laws if enforced rigidly will not work and will only deter any foreign investment here. We have to wait and see what solutions they come up with.

Our current advice to anyone wishing to purchase property here is that you can still go down the Thai Company route, but the Thai shareholders must be real, or take a 30 year lease with options to convert to Freehold should that possibility occur in the future and with options to renew. 30 years is the maximum term for which a lease can be registered in Thailand and options are purely contractual. I will go into that in a later post.