Snapshot: real estate financing in Myanmar

Financing

Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?

Security is generally created in Myanmar in practice in the form of a mortgage by deposit of title documents, in which the title documents and any other relevant documents for the collateral property are delivered to the mortgagee or its local agent.

However, the 1882 Transfer of Property Act (TPA) provides for charges and five other types of mortgages.

Among Myanmar banks, the Construction Housing & Infrastructure Development Bank, which is a partially government-owned bank, is particularly active in providing loans to the housing and infrastructure sectors. However, Myanmar’s banking sector is still developing, and loan financing is generally obtained offshore. 

In terms of loan financing, on 15 January 2019, the Central Bank of Myanmar (CBM) issued Directive No. 2/2019 permitting Myanmar banks to offer home loans for terms of more than three years, up to five per cent of their total loan portfolio. Previously, such loans could only be offered for terms of up to three years.

Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?

In practice, there is no leasehold financing in Myanmar.

What is the method of creating and perfecting a security interest in real estate?

In the case of any type of mortgage other than a mortgage by deposit of title documents, a written instrument signed by the mortgagor and attested by at least two witnesses must be executed under section 59 of the TPA.

Section 58(f) of the TPA provides that a mortgage may be created by deposit of the title documents, with the intent to create security over such documents. The TPA does not set out any formalities for the creation of mortgages by deposit of title deed; however, it would be advisable to document the intent to create security over such documents in writing and stamp it under item 6 of the schedule to the Stamp Act. 

Stamp duty is payable on mortgages, and a stamped instrument of mortgage is required to be registered under the Registration of Instruments Law and the Myanmar Companies Law (MCL).

Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?

Land appraisals are not required by law and generally are not used in Myanmar transactions. Valuations can be challenging in Myanmar given the lack of data on the value of properties and, outside major cities, the lack of comparable, proximate properties that can be used to estimate it. A number of internationally qualified land valuers do, however, operate in Myanmar.

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

Generally, offshore lenders can now obtain security for loans in the same way as onshore lenders. Previously, under the Myanmar Companies Act, the practice of the Directorate of Investment and Company Administration (DICA) was to refuse to register security in favour of offshore entities; however, section 228(a) of the MCL now expressly requires that the DICA register such security.

A number of local licensing and registration requirements may apply, however. Other than for intracompany loans, a licence is in principle required from the CBM under Chapter V of the Financial Institutions Law (Law No. 20/2016) to lend money in Myanmar in connection with taking security, as this will be considered a banking business. The CBM has advised us that this licensing requirement does not apply to entities located offshore; however, given the terms of the legislation, it would be advisable to confirm this position with the CBM for each transaction.

In addition, an offshore entity is not permitted to carry on business in Myanmar without registering as an overseas corporation under the MCL. While lending money or creating security over property may not in itself amount to ‘carrying on business’ for the purposes of the MCL under section 43(b)(vi), this will depend on the circumstances of the offshore entity’s business in Myanmar.

Offshore lenders should also be aware of the implications of the restriction under the Transfer of Immovable Property Restriction Law, which restricts the transfer of immovable property to, or its acquisition or lease for more than one year by, foreign citizens, or foreign-owned companies (including in creating or enforcing security). This can be navigated by using a local security agent or including a power to sell the secured property in the mortgage instrument. Section 69(1)(c) of the TPA permits the sale of secured properties without the intervention of the court in certain cities (including Yangon) where set out in the mortgage instrument. 

Note also that a withholding tax of 15 per cent applies on interest payments to non-residents under Notification No. 47/2018 of the Ministry of Planning and Finance, which took effect on 1 July 2018. This rate can be reduced if the tax residence of the lender is a party to a double taxation treaty with Myanmar. Under the double tax treaty with Singapore, the amount withheld on interest payments will be reduced to 8 per cent if the payment is to a bank or financial institution, or 10 per cent if it is to any other person.

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?

As in other jurisdictions, interest rates for loans will be based on a profit margin above a bank’s lending costs, provided that the CBM requires banks to cap the interest rates on Myanmar kyat-denominated loans. The CBM also imposes a minimum rate on the interest rate on savings deposits, which affects the costs of lending of Myanmar deposit-taking institutions. In March and April 2020, the CBM announced three rounds of interest rate reductions to support the Myanmar economy in response to covid-19. Following the latest reduction on 27 April 2020, under Directive No. 8/2020 of the CBM dated 27 April 2020, the minimum rate on savings deposits is 5 per cent, while the maximum rate on Myanmar kyat-denominated loans is 10 per cent where they are secured by certain prescribed forms of collateral (such as land and buildings), or otherwise 14.5 per cent.

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

In theory, lenders may enforce their remedies through foreclosure, sale of the secured property or the appointment of a receiver. However, we are not aware of any examples of enforcement of security over immovable property in Myanmar by foreign lenders.

Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?

Whether lenders can recover against a borrower or its guarantors for shortfalls in the amount recovered in a foreclosure will depend on the loan documentation.

The statutory limitation period for suits depends on the type of instrument. Under item 132 of the first schedule to the 1908 Limitation Act, suits to recover sums secured by a charge (defined to include a mortgage by deposit of title documents) over immovable property must be instituted within 12 years of the date the sums become due.

What actions can a lender take to protect its collateral until it has possession of the property?

Receiverships are recognised under Part IV of the Insolvency Law. Typically, security documents will include a right of receivership; however, in practice, such rights are not exercised in Myanmar.

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?

The security documents may provide recourse to all of the assets of the borrower. Recourse will typically not be limited to the collateral, and section 204(e) of the Insolvency Law permits a creditor to prove as an unsecured creditor in the winding up of a borrower for any balance due after deducting the net amount realised on its security. Any limitations on guarantees will depend on the terms of the guarantee and loan documentation. 

Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?

The use of cash management systems or reserves depends on the particular transaction and parties.

What other types of credit enhancements are common? What about forms of guarantee?

Bank guarantees are the most commonly used form of credit enhancement in Myanmar transactions.

What covenants are commonly required by the lender in loan documents?

International standard covenants will generally be required for loan documentation for transactions involving foreign lenders.

What are typical financial covenants required by lenders?

As with loan covenants, international standard financial covenants will generally be required for loan documentation for transactions involving foreign lenders.

What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?

Security interests may be created in movable property by way of charge, pledge, or deposit of title documents (other than for marketable securities). Mortgages and charges over a company’s movable property must be registered under the MCL. To create a pledge, the pledged chattels must be deposited with the pledgee.

With the assistance of the International Finance Corporation, the Ministry of Planning and Finance has been drafting a Secured Transactions Law, which is intended to apply to the creation of security interests over movable property. However, this reform is still in its early stages of development.

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?

Whether SPEs are used depends on the particular financing transaction, but such requirements are not common.

There is no requirement for an SPE to appoint an independent director, and the appointment of independent directors is not common. A requirement to appoint an independent director currently only applies to listed companies, under clause 6 of Notification No. 2/2020 of the Securities and Exchange Commission of Myanmar, dated 3 December 2020.