In review: real estate investment in Thailand

All questions

Foreign investment

Certain business activities, including construction businesses, real estate development and trading and other relevant service businesses, are reserved for Thai nationals under the Foreign Business Operations Act (FBOA).⁹ Under the FBOA, foreigner participation is not generally allowed if the share capital held by the foreign investors exceeds 50 per cent or more. This foreign capital restriction can be waived if a Foreign Business Licence is granted or such foreigners qualify for an exemption under a treaty to which Thailand is a party or is obligated to abide by. Currently, the only applicable treaty is the Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America. In the same manner, land ownership by foreigners is not permitted as a general rule under the Land Code. A company in which foreigners hold more than 49 per cent of the shares, or where more than half of the shareholders are foreigners, is also not permitted to own land in Thailand.

Nevertheless, some special laws and regulations allow foreigners to hold more than 49 per cent of the shares in a company or own land for specific promoted businesses or in specific areas – for example, investment promotion laws and those related to the industrial estates and the eastern special development zone. In exchange for such privileges, the foreign investors must complete certain requisitions and comply with the post-acquisition requirements, for instance, the minimum capital requirements, technology transfer programme and reporting requirements.

While there is a restriction on foreigners owning land, there is no such restriction on buildings, and accordingly foreigners can acquire and hold ownership rights in respect to buildings located on land under leasehold or other rights (though such foreigners owning the building must hold for their own use and must not offer the building for lease). However, in respect to condominiums, under the Condominium Act, ownership by foreigners is permitted provided it does not exceed 49 per cent of the total saleable area of a particular condominium.

Structuring the investment

There are several choices of investment structure for investing in real estate projects in Thailand. Foreign investors may choose to have a local partner or invest independently in the real estate project, depending on several factors. The main investment options for real estate investment in Thailand are as follows.

As stated in Part III, a foreign entity is restricted from owning land in Thailand unless it qualifies for certain exemptions. In addition, a foreigner engaging in immovable property businesses would normally be required to obtain a foreign business licence under the FBOA. However, it is rare for a foreign business licence to be issued for foreigners wishing to engage in the immovable property business in Thailand.

An investor who does not qualify for an exemption and seeks an approach to overcome such restriction can make an investment by setting up a joint venture company with a local developer. This traditional investment structure is one of the most popular structures for real estate projects in Thailand for foreigners. The investment portion of the Thai local partner must not be less than 51 per cent of the total shares in the company for the company not to be subject to the foreign ownership limitation. Local developers have expertise and knowledge in the Thai real estate market, which could also support a foreign investor who has no experience in this type of investment in Thailand. Nevertheless, an investor should bear in mind that there is a limitation under this scheme in terms of decision making as this would normally be mutually agreed by both parties.

Alternative investment structures that are widely used for investment in Thailand include an investment promotion scheme from the Board of Investment of Thailand (BOI) and the Industrial Estate Authority of Thailand (IEAT). Incentives offered to promoted entities from both the BOI and IEAT can be categorised into tax incentives and non-tax incentives that include authorisation to own land required for business operations regardless of any other contrary laws. To obtain such investment promotions, the investor must meet certain criteria – for example, have invested in a type of business included in the BOI promoted business list or have invested in an IEAT industrial estate.

A specific condition of the BOI provides that within one year after the promoted business is terminated or ends (for any reason) such land must be disposed of, otherwise the Director-General of the Land Department shall be empowered to dispose of such land. However, if a non-Thai national business operator who is granted authorisation to own land under IEAT scheme dissolves its business or its business is transferred, the land must be disposed of to IEAT or the transferee within three years from the date of dissolution or transfer as the case may be.

In addition to the above scheme, investment promotions are also granted under the Eastern Special Development Zone Act (the EEC Act).¹⁰ The EEC Act also offers incentives to foreign investors to own land in the promoted zones in Chachoen Sao, Rayong and Chonburi provinces (and in other areas, as prescribed by Royal Decree as special development zones, in the eastern part of Thailand), as under the BOI such land must be disposed of within one year after the promoted business is terminated or ends for any other reason.

If an investor does not qualify for obtaining an investment promotion to own land under the BOI, IEAT or EEC schemes, they may consider an alternative investment option. An alternative option would be to lease the land and own the building as there are no specific restrictions on the lease of land and ownership of buildings by foreign entities. The maximum lease term must not exceed 30 years as prescribed under the CCC. It is important to be aware that although this scheme can avoid the restrictions under the Land Code, operation of certain businesses may subject to limitations under the FBOA.

After the collapse of the Thai property sector in 1996, a contributing factor to the Tom Yum Kung Crisis in 1997, Thailand's government attempted to stimulate the Thai economy through implementation of various strategies. In relation to the real estate sector, the Securities and Exchange Commission of Thailand (SEC) supported the sector by adapting existing mutual fund regulations to establish a vehicle for PFPOs. PFPOs attracted investors by enabling them to partially own large real estate projects through the issuance and offer of investment units. Funds raised from investors were used to refinance the existing project and enable the development of new projects, enhancing growth in a shorter time than through traditional property project development.

Nevertheless, PFPOs have some disadvantages. The laws and regulations that were applicable when PFPOs were established focused heavily on investor protection, such as limiting the types of assets in which a PFPO could invest and restricting the debt ratio. This made PFPOs a strictly regulated vehicle for real estate investment. Subsequently, under an SEC Notification in 2012, the REIT was established. REITs are a more commonly and widely used vehicle at an international level involving an immovable property investment system that is easier to use and more transparent. REIT regulations also provide more operational and investment flexibility and opportunity.

The main characteristics of the REIT scheme in Thailand are as follows:

1. REITs in Thailand are trust-type schemes based on the Trust of Transactions in Capital Market Act.¹¹ A REIT in Thailand is not a corporation. Accordingly, the trustee of a REIT is formally the asset holder;
2. the assets invested in consist of:
   • immovable property (freehold rights, leasehold rights or possession rights over the land and the ownership or leasehold rights over the building); or
   • the shares of companies that hold immovable property;
3. the total value of the immovable property invested in must be at least 500 million baht;
4. the trust beneficiary rights units issued for REITs in Thailand must be listed on the Stock Exchange of Thailand. Currently, private placements of REIT units for REIT establishment are not permitted. There are several ongoing discussions on an amendment to current regulations or an issuance of new regulations to support the establishment of private REITs; and
5. there is also a minimum offering amount of at least 500 million baht for trust beneficiary rights certificates.

Another advantage of a REIT is the ability to borrow money and use its assets as collateral. REITs can borrow up to 35 per cent of their total asset value from financial institutions, or 60 per cent if the REIT itself is investment grade. This makes REITs attractive from an investor perspective. REITs can also raise funds by issuing bonds, which are becoming more common in today's market.