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Last Updated: Jul 31st, 2008 - 08:35:33 |
The market suffered a serious blip last month as lawyers, developers and agents alike scrambled to interpret a new Directive from the Land Department. But had anything actually changed? Tony Adams investigates.
Issued on the 15 May by the Land Department of the Ministry of the Interior to all the provincial governors, the new Regulation established procedures for land officials to follow when dealing with an acquisition of land by a corporate entity with foreign shareholders or directors. Issued with the stated aim to to prevent any law avoidance or buying land for the benefit of foreigners, the Directive outlined how any company established to buy land in Thailand would be put under increasing scrutiny and the Thai shareholders involved would have to disclose their assets and prove that they were genuine investors.
‘If it appears that the company has foreign shareholder(s) or has foreign director(s) or has appropriate reasons to believe that there are Thai people holding shares as the foreigner’s nominees, then the officers must investigate the income of every Thai shareholder,’ the Directive said.
The Directive was clearly a reaction to the widespread use of Thai nominee shareholders, particularly in resort areas, by foreigners as a means of acquiring freehold title on land. It was not however, a change in the law, as announced by the Bangkok Post on 31 May under the headline ‘New Property Law Stuns Foreigners.’ The effect of the Post piece, which contained quotes such as ‘"The property boom ended on May 25," was immediate.
Popular expatriate forum ThaiVisa.com immediately picked up the story and was flooded with posts which ranged from anti-Thai rants, to questions about the future validity of condominium ownership and debates over when it is appropriate to put property in a Thai spouses name. Other websites followed suit and the by the next day hundreds of concerned emails were arriving in the inboxes of lawyers, developers and agents. Many were unhappy with the feature that sparked the panic.
The Bangkok Post report was unnecessarily sensational, Gary Biesty, senior partner in the law firm Johnson Stokes and Master said, citing the source that broke the news. It was inaccurate in the sense that it suggested that it was new law, because it’s not. It was even inaccurate when it suggested it was a new application of the law, because it’s not. The determination of whether a Thai person, be they a juristic or individual person, is a real investor or somebody that is simply assisting a foreigner to circumvent the law has always been the same. For as long as I’ve been here, which is now 16 years, the test for a nominee has been: ’are you somebody that habitually invests? Are you somebody that has financial worth? And did you actually invest the money?’ So the regulation is simply a restatement of those three tests to determine if the Thai person is a real investor or are they simply a nominee who is been used to circumvent the law.
By the time the Post piece was printed the Directive was already beginning to have an effect, mostly at the Chonburi Land Office, which deals with Pattaya and the Eastern Seaboard, where transfers stopped altogether for a few days. At the time of going to press, transfers to companies had resumed though mainly in cases where a foreigner’s Thai spouse was a majority shareholder. Similar delays where also reported in the Samui and Phuket Land Offices.
I think it will all blow over, a well-known Pattaya agent, who wished to speak off the record, said. Ninety-nine percent of developments here are Thai-owned and run, but they are selling to the foreign market and do not want to see this kind of thing happening. Similar things have happened in Chonburi before, with no foreign bank accounts being allowed and no work permits being issued for periods of time in the past, so I am not overly concerned about this. However it will understandably make new investors wary for a period of time.
Loss of investor confidence soon emerged as the main concern within the industry.
It [The Bangkok Post feature] had an impact on investors who are perhaps less sophisticated than others and who perhaps hadn’t discussed and understood the nature of their investment with their lawyers before the article appeared, Gary Biesty said. We had relatively few enquiries from any high net worth buyers, who tend to be more sophisticated and tend not to be concerned. Our developer clients who are sophisticated and do understand the market, were concerned because of how potential buyers would view this. The real impact was not the legal issue, but the pure negative impact it would have on potential buyers. So developers were irritated by the inaccuracy of the report rather more than concerned about the quality of the title that foreigners would enjoy if they came in as true investors.
Only time will tell how badly the market will be affected. Some companies though are already benefiting from the Directive. International tax and legal consulting firm, BDO Richfield Advisory Limited, launched a new investment service last year and now looks set to reap the rewards of a clampdown on nominee shareholders. By using a holding company structure, which allows foreigners to legally buy land and property without comprising their investment.
We don’t use people, Paul Ashburn senior partner in BDO, said. There are no Thai individuals in our structure, we use holding companies. I understand that we were the first transfer registered in Bangkok since this regulation came out, where we had a foreign shareholding owning 49% of the shares and there was no question about our shareholding structure, it was just routine.
A typical BDO structure would have a foreigner owning 49% shares and the remaining 51% owned by four BDO controlled holding companies. As holding companies, each one can have shareholdings in the other.
It’s very simple when we go to the land office and they ask for a list of shareholders, Ashburn said. They are all Thai. So, say we had four of our Thai companies in there, they then want to see the shareholding in those companies, we provide the shareholding list and they are all Thai. But they are all companies: there’s no people.
Within weeks of the Directive, at least two other Thai law firms had announced plans of their own to offer a holding company structure to property investors. This may well be indicative of a general ‘flight to quality’, as investors seek more sophisticated advice and more soundly structured investment vehicles. Leasehold could also become an increasingly popular option as investors move towards the absolute certainty of 30-years ownership. Some observers, such as Gary Biesty, also believe that future changes in the law could be possible.
It terms of changes to the law, we can’t predict whether they will be a positive or a negative, he said. I don’t foresee that there will a negative change in the law which would seek to further prohibit foreigners coming here to enjoy land rights. Although of course if there is continued abuse, like non-payment of legitimate tax, then there is always a danger that might happen. I think we should look much more positively. There is growing commercial lobby asking the Thai authorities to grant foreigners legitimate personal rights over land which exceed the current 30 years, but which fall short of complete freehold title. There is a very significant gap there, which if there is a commercial and political will, they could move beyond 30 years. This would be good for Thailand, good for foreign investment and add certainty and stability to what is otherwise a slightly uncertain environment.
http://www.property-report.com/archives.php?id=540&date=0607
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