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The architect of proposed changes to Thailand’s Foreign Business Act has resigned, signalling happier days could lie ahead for foreigners involved in the country’s real estate industry if his successor takes steps to undo some of the damage done to foreign investor sentiment.
Deputy Prime Minister and Finance Minister Pridiyathorn Devakula made the announcement of his resignation during a news conference on Wednesday. He cited several reasons for his abrupt departure, one being the military-led government´s recent appointment of Somkid Chatusripitak - a former deputy premier in Thaksin government - to chief of the economic panel responsible for explaining the country’s sufficiency economy to foreign investors. (Somkid resigned less than a week later following a barrage of criticism.) Pridiyathorn also claimed to distrust certain Cabinet ministers with ties to the ousted premier.
"People with links to the previous government still hold political office," he told media. "I don´t want to work under circumstances in which there are hidden agendas and influences."
Pridiyathorn has faced wide-spread criticism since the interim government took power for making several drastic economic decisions. First was the Finance Ministry’s tough capital inflow control measures implemented in a bid to stem the appreciation of the baht, which led to a 15 per cent crash in the stock market crash in December.
Next came the government’s proposed changes to the Foreign Business Act, a move many said spelt doom for the country’s property industry.
"It´s not even the exactitude of the law, but it´s the feeling that Thailand doesn´t want farangs [foreigners] here," Larry Cunningham, managing director of Phuket One Real Estate, told Property Report in January following the announcement. "It´s the negativity, this lack of clarity. They make one rule one day and then change it the next."
On January 9, the cabinet agreed "in principle" to approve changes to the Foreign Business Act that aimed to halt the longstanding practice of foreign companies using nominally Thai-owned firms to comply with the law. If the proposed amendments become law, a company would now be considered foreign if offshore investors hold more than 50% of either shares or voting rights.
But a closer look reveals some hope that the market will pick up again once adjustments are made. Law firms are also finding ways to make investors feel more comfortable putting money into Thailand.
“It is not all doom and gloom,” said John Howard, managing director of law firm Tilleke & Gibbins. “There are legal ways to make it work. Everything is still a work in progress.”
For sure, the military-installed government has been less than welcoming to foreign property developers. Before a packed house at the Foreign Correspondents Club of Thailand in late January, Commerce Minister Krirk-krai Jirapaet said explicitly that foreigners using shell companies to buy housing in Thailand are violating both the Land Act and the Foreign Business Act.
“Look around you,” he told them. “All the land in Samui, Phuket and Koh Chang is in the hands of foreigners. They cannot take the land away, but there´s a sense of nationalism and therefore they should restructure.”
It remains unclear when the government will draw the line for leasing companies that are exempt from the changes to the Foreign Business Act. Presumably, a foreign firm offering leasing services could still set up shop in Thailand with 100% control until the draft bill becomes a law.
Although freehold sales are obviously lagging until the law becomes clear, leasehold demand remains strong in resort areas. CB Richard Ellis (Thailand) chairman David Simister told reporters he´s seen “continuous demand” for Phuket property, and others agree.
“The only way to go now is leasehold,” said Norbert Witthinrich, managing director of SEA Property International in Phuket. “There are a few options to offer more investment security, and each law firm has its own way to do that.”
As of now, clients can only get 30-year leases with two extensions through negotiations with the freehold owner. If the owner dies or sells the land, however, the contract is no longer binding.
It may be possible to include a clause in the lease agreement that addresses this possibility, lawyers said. But such a provision has yet to be tested in the courts.
To make leases more appealing, some law firms are advising lessors to offer a pro-rata refund if for some reason the 30-year extension is not approved. This means buyers would get back about two-thirds of the investment cost on what would normally be a 90-year lease if an extension is not granted after 30 years.
Some sort of money-back guarantee “is an initiative land owners may need to take to make leases more attractive,” said Howard from Tilleke and Gibbins. “It gives the buyer a certain degree of confidence.”
Companies that purchased land through a nominally Thai-owned company and need to restructure their holdings can resort to creative methods to keep their investments, he added. One way to do this would be to create a clause saying that all decisions made by the company require a 75% majority. Other ways to ensure investments are protected include clauses on dividend policies and veto rights that can give power to the foreign shareholders, Howard said.
Since buyers will now be much more diligent in making sure their investments are legally secure, many in the industry think it will be very hard for foreigners who own land through a nominee structure to sell it or lease it. To this end, it may also prove difficult for foreign developers to find a Thai shareholder that can purchase half the company and take an active role in decision-making.
Good news may be on the way for leasehold sales, however. The government is considering proposals to allow 90-year leases, which is more in line with what the global market expects.
“Nothing has changed for leasehold purposes,” Howard said. “Leasehold is moving slowly, but it is caught up with the adverse perceptions and the hype about transferring from freehold to leasehold. The market should stabilize in the short term.”
The cabinet has also approved plans to remove the 49% foreign ownership limit on space in condominium buildings. Officials are now determining how much foreigners can own. Since many buyers and sellers are already preparing for a worst-case scenario, any new announcements are only likely to be positive. Unfortunately for clients, definitive answers may still be a few months away.
“As frustrating and annoying as it may be, it´s just too early to say if clients should restructure,” said Gary Biesty, managing partner of law firm Johnson Stokes & Master. “We just try to reassure clients, but we don´t have the answer yet.”
After the government´s legal body reviews the draft changes to the Foreign Business Act, the bill must still be passed by the National Legislative Assembly, the military-appointed legislature. Though some perceive this to be a rubber stamp, the body has already blocked some bills pertaining to lottery sales, and could force certain provisions to be altered. And then there’s the resignation of Pridiyathorn, which could alter the picture complete.
“If clients want to restructure companies based on a draft bill, then we´ll carry it out,” Biesty added. “But what if the law isn´t passed? It´s premature and unwise to restructure now. Sure, there are a number of things you can do to make it work, but how can you score a goal if you can´t see the goalposts?”
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