There has been increasing speculation that the Thai government may liberalize the restrictions on foreign ownership of land in Thailand. Pending such liberalization, this article considers the current restrictions and the scope for foreign participation in the Thai real estate market presently permitted by Thai law.
Under the Thai Land Code, "foreign" ownership is considered ownership by any foreign individual or company. The following Thai entities are also deemed to be "foreign":
(a) a Thai company (whether public or private) in which either (i) at least one half of the total registered capital of the entity is held by foreign individuals or companies or (ii) at least one half of the total number of shareholders are foreign individuals or companies.
(b) a Thai limited or registered partnership where a foreign individual or company is the managing partner or manager.Direct Ownership
In the past, foreign investors could own land in Thailand if their country had signed a bilateral treaty with Thailand permitting such real estate investment. Presently, all such bilateral treaties have expired and only foreign investors who had already acquired their land prior to the expiry of the relevant treaty may continue to own such land.
Accordingly, direct foreign ownership of real estate in Thailand is now generally not permitted. There are two principal exceptions to this rule, namely ownership of condominium units and industrial land.Condominium units
Certain foreign investors are allowed to own a unit in a condominium, provided that the total foreign ownership of the building in question does not exceed 40% of the total units in the condominium. The foreign investors which are entitled to condominium ownership under this rule are:
(1) foreign investors permitted to reside permanently in Thailand under the Immigration Act;
(2) foreign investors permitted to enter Thailand under the Investment Promotion Act;
(3) the Thai entities set out above (see introduction) which are deemed to be "foreign" investors;
(4) foreign entities that are granted a certificate of promotion under the Investment Promotion Act; and
(5) other foreign investors, both natural and juristic persons, who have brought foreign currency into Thailand to purchase condominium units.Industrial land
Foreign investors engaged in industrial projects in Thailand may be entitled to own real estate through two different programs.
The Thai Board of Investment (BOI) grants permission to foreign companies to own land for factory sites and, notably, for residential purposes outside of a factory site in order to carry on a promoted activity. Such ownership is permitted to the extent that the BOI deems appropriate (ownership is, as a rule, granted to a promoted project if so requested).
Apart from promoted industrial projects, foreign investors are also permitted to own certain land for industrial use in industrial areas provided by the Industrial Estate Authority of Thailand.Indirect Investment
There are three main forms of indirect investment in real estate. The newest form is the Thai mutual fund, a recent reaction to the renewed need for foreign investment to support the Thai real estate market. A more traditional form of indirect investment is through Thai joint ventures. Finally, it is also possible to "invest" in real estate through secured lending or acquisition of mortgage-backed securities.Property Funds
Recently, the Thai government has enacted provisions for the creation of mutual real estate funds owned by foreign institutional investors. Initially, such funds were restricted to 49% foreign ownership. However, recent regulations now permit 100% foreign ownership of the mutual fund, which is created for the purpose of acquiring Thai real estate.
The mutual fund must be a Thai juristic person registered with the Thai SEC by May 24, 1999. It must have fund capital of at least Baht 500 million. All investors must be institutional investors and number at least 10, unless the fund receives an exemption from the SEC, and each investor may not hold more than 10% of the total outstanding units.
The fund must have an investment manager that is a Thai company licensed to carry on a fund management business. At least 75% of a fund's net asset value must be invested in real property or property-related debts; the remaining 25% of a fund's net asset value may be invested only in debt instruments. There is also a general requirement to hold real estate investments for at least two years and not to increase the scope and size of such investments after five years.Joint ventures
Another indirect means of foreign ownership of property in Thailand is through a Thai joint venture with Thai companies. As noted above however, where at least one half of the share capital is held by the foreign investor, a Thai joint venture company will be deemed to be "foreign" for the purposes of foreign ownership restrictions.
However, unlike some other jurisdictions, the "practical" definition of "foreign" may not depend upon who controls the company. It is possible for a foreign investor to own less than 50% of the registered capital in a Thai company (which would therefore not be deemed to be "foreign"), but to maintain control of the company.
One means for accomplishing this is the use of different classes of shares. For example, the 51% of shares held by the Thai partner may be designated "preference shares", which are designated different powers (usually greater rights concerning payment of dividends but less voting power). Contrary voting rights and dividend distribution represent only a few of the many differences the partners may specify between classes of shares. It should be pointed out that this practice appears contrary to certain provision of the Alien Business Law, and legal advice should be obtained in each particular case. Nevertheless, the practice appears fairly widespread.Real estate securities
Foreign lenders are permitted to be mortgagees of Thai real estate. In the event a mortgagor is in default, the foreign mortgagee is even entitled to purchase a mortgaged building (but not the land itself) at auction. More commonly, a foreign mortgagee would seek to dispose of the mortgaged real estate (building and land) at auction to a Thai purchaser.
Foreign investors can take an indirect interest in real estate by participation in the securitization of Thai real estate mortgages. Thai law (but not necessarily practice; see below) permits foreigners to establish a special purpose vehicle ("SPV"), which may be a private or public company, mutual fund or other juristic person, to buy debt from Thai originators for the purpose of the securitization of such debt. Please note, however, that while this is legally possible, and it appears clear that foreigners can purchase mortgage-backed securities themselves, the current policy of the SEC appears to be not to approve applications brought by foreigners for the establishment of these SPV's.
The value of real estate securities depends largely upon the existence of coherent and practically effective rules for foreclosure under such securities. Currently, foreclosure is governed by the provisions of the Thai Civil and Commercial Code, which provides for a government department, the Thai Execution Department, to sell the property at auction on behalf of the mortgagee. A new foreclosure law, which is intended to clarify the rules and streamline the procedures for foreclosure, is currently being drafted by the Thai government.