Unlike some other Asian markets, which may have peaked, Thailand still has growth potential as James Pitchon reports
Foreign investors continue to be attracted to the Thai real estate markets despite restrictions on ownership and the difficulty in acquiring properties due to the lack of vendors. Much of the foreigner interest is focused on the resort hotel and resort residential markets where Thailand has become a regional market leader, attracting 14.5m overseas tourists in 2007.
The domestic property investment market continues to mature with the growth of publicly listed property funds, which are similar to REITs, and the emergency of yield driven Thai investors.
Restrictions on foreign property ownership continue to be an obstacle to foreign investment in the Thai property market. Foreign are not allowed to own land with the exception of sites on industrial estates or where the user receives Board of Investment Privileges, usually for manufacturing purposes.
The longest length of lease in Thailand is only 30 years, options to renew can be granted but there is the possibility of difficulties on the enforcement of the option.
In the past some foreign investors had established Thai corporate structures to own and develop property. This practice is no longer possible unless bona fide Thai shareholders own 51% of the company.
This means that the only route for foreign investors today is through joint ventures.
Income producing properties are not actively traded in Thailand. Although many properties are single ownership rather than strata-title condominium, ownership is fragmented with no dominant institutional landlords. Most buildings have been developed and owned by companies whose core business is something other than property.
The Bangkok office market is actually larger than Singapore's with a total office stock of 414 non-state owned buildings with a total lettable area 7,550,769m2.
In the last 10 years only three completed grade A office buildings have been sold. In 2007 there were only three office building sales and two of these were the sale of multiple floors in strata title buildings.
The opportunity for foreigners to invest in ‘plain vanilla' commercial property in Thailand has been limited because of the shortage of available product.
For that reason foreign investors have taken the development route to participate in Thai property market.
In many cases this has been through the development of residential condominium property where units are sold off-plan before and during construction.
Singapore based developers including CDL, HPL and Capital Land have been active in the Bangkok condominium development market.
Lehman Brothers have been active in the Bangkok market for 10 years, initially buying residential mortgages from finance companies that were closed during the 1997 financial crisis, and moving on to providing loans to developers and acquiring properties. ING and LaSalle have also made property acquisitions.
Resort hotel and residential property has been one of the fastest growing property sectors in Thailand. Thailand has long been one of southeast Asia's most popular tourist destinations, attracting 14.5m international tourists in 2007.
The resort market has moved from the pure hotel model to a mixture of hotels and retirement/second homes. There has been a distinct trend towards hotel branded residential property where residential villas and condominiums are developed together with a hotel. Purchasers can ask the hotel to manage their property providing rental income when they are not using the property themselves.
The resort sector has attracted widespread investments from global players such as Lehman Brothers and LaSalle, as well as middle east investors such as Kingdom.
The shortage of existing properties for sale has meant that international investors have as in Bangkok had to focus on development opportunities.
Ownership of income producing property in Thailand has been extremely fragmented. Most of the publicly listed developers are house builders. The developers of commercial residential and hotel properties were often companies whose core business was not property.
This situation is slowly changing: first, the number of commercial property developers has shrunk to those who have access to project financing and can afford to acquire prime sites; and second, there are now several domestic institutions who want to buy income producing property.
These institutions include the Government Pension Fund which has bought the three grade A office buildings that have been sold over the last 10 years. There is now a much greater focus on professional management to maximise yield over the long term.
The second major development has been the growth of public listed property funds with REIT-like structures.
These funds must be listed on the stock exchange of Thailand. They are closed-end funds and the initial launch must be on a ‘small lots first' basis. It should be noted that 75% of the net asset value must be invested in real estate or leasehold rights for real estate. Properties acquired must be in Thailand and at least 80% completed.
The fund must be managed by SEC licensed mutual fund managers. At least 90% of the net income must be distributed in dividends.
The funds themselves are free from income and capital gains tax. The SEC prohibits any debt or mortgages on the funds' properties as well as on the fund itself.
As at the third quarter of 2007, 15 funds had been listed with a market capitalisation of 49.2bn baht (€1.1bn). The dividend yields ranged between 5.8% and 9.8%.
Only two funds traded at or above their net asset value. The other funds traded at discount to net asset value of between 0.4% and 41.3%.
No non-listed funds can be established and the listed fund is the only method of creating a REIT-like structure.
There are several challenges for these funds. The difficulty in buying property has meant that funds have followed an integrated model with the developer selling a building into a fund sponsored by the developer.
The taxes paid by a developer are less if a leasehold interest is sold rather than a freehold, consequently many funds have properties held on 30-year leases. As yet investors have not demanded a significant yield differential between freehold and leasehold properties.
Although Thai property funds are well behind Singapore in terms of structure, their very existence shows progress in Thai property investment environment.
The return of Thailand to an elected government in January 2008 has raised expectations of growth in domestic growth.
The prospect of economic growth is exciting both local and international property investors who feel that there is growth potential in the Thai market, whereas some other Asian markets may have peaked.
James Pitchon is executive director, CB Richard Ellis, Thailand