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The likelihood of leasehold extension options in Thailand Print E-mail
Saturday, 29 May 2010 01:58

We all need space. Space offers us a canvas on which we can express our freedom in many ways. It can also somehow define our prosperity. In one's mind, space could represent a vast area of land situated in a quiet suburbia, or it may be the tiny parquet floor of a downtown condominium in a city that never sleeps. In a commercial sense, space denotes a key prerequisite for starting up a business.

To acquire space to start a business, an operator may either buy or lease. Buying may be tough because the price for the land may use up most of the funds set aside to run the business. For this reason, leasing a business location speaks more to our commercial subconscious, as it requires a lower initial investment cost. However, the decision also depends on the business operator's intended use for the land.

What is crucial for a business operator to determine is how long and secure the land lease agreement will be. The longer and more secure it is, the more returns the business will make. Under every civilised legal system, including the Civil and Commercial Code of Thailand (CCC), a mechanism for alternative possession of immovable property, such as leasing, is provided. The CCC provides that the lease term on immovable property, such as land, can be up to 30 years.

Seemingly, this permitted lease term extends for quite a length of time. However, let us compare this to our regional rivals.

In Vietnam, land is the property of the people and is exclusively managed by the state. Although the concept of private ownership of land is not recognised, one can lease land in Vietnam through the issuance of relevant certificates, which are valid for between 50 to 70 years, subject to certain conditions. The rights granted over the land are dependent upon payment of a land use fee together with upfront payment of rental fees for the entire lease term. In return for these payments, the lessee is entitled to many privileges, e.g. the transfer of land use rights and assets attached to the land, or mortgage or guarantee land use rights and assets to credit institutions in Vietnam, during the term of the lease.

Vietnam has in recent times become more open to investment, which is essential in order to foster development and boost its economy. The country is considered a very attractive emerging market for investment in several sectors, in spite of the recent global economic crisis. One of the most attractive sectors is real estate, illustrated by the prevalence of real estate funds, which are forecast to have huge returns in real estate businesses such as hotels and resorts. Considering the length of the lease term permitted, it is viable to state that Vietnam lives up to the accolades it receives.

Moving closer to the equator, Indonesian law recognises Hak Guna Bangunan, or the right to build, as a leasehold interest for a period of up to 30 years. This grants authorisation for the holder to build and possess a building that on the land. This leasehold can be extended for an additional 20 years, which puts it on level terms with Vietnam.

Malaysia allows foreigners to own land, unique in the region. A governmental programme called "Malaysia - My Second Home" (MM2H), which encourages foreign consumers to own second homes in Malaysia, has had considerable success with more than 11,000 foreign applicants approved to date. Foreign nationals may acquire property that is valued at not less than 1 million ringgit (approximately 10 million baht), with the government's approval.

The applicants are of various nationalities, with the majority coming from China, Bangladesh, the UK, and Japan. MM2H has brought millions of US dollars into Malaysia, which in turn brings additional income to the country's services sector.

To further promote investment in real estate, the Malaysian government set a maximum lease period of 99 years, although the final allotted lease period is subject to government approval.

So is Thailand trailing its neighbours in real estate terms?

Ranked 12th in terms of ease of doing business according to the World Bank's "Doing Business 2010" report released in September 2009, Thailand's warm climate, hospitality and low cost of living and labour attracts both investors in the real estate business and foreigners seeking retirement homes.

However, the CCC's 30-year leasehold limit does partially diminish some of the appeal, even though it does allow for renewal for another 30 years, because there remains a great deal of legal precedents suggesting the option is not always wise for business operators.

Many business operators have begun to think hard about whether they want to invest in the Thai real estate market given that its leasing laws have not been changed or discussed despite changing economic developments in recent years. Some have concluded that as an investment platform for accommodating their long-term needs, Thai leases are sadly lacking. While some investors choose to invest elsewhere in the region, others have attempted to circumvent the law by owning land through a Thai nominee, an issue that has recently been the subject of much public interest in the southern part of Thailand.

Space is essential to everyone, not least business operators. Perhaps it is time we redefined space to include the duration in which one can hold on to it along with width, height and depth? Thailand needs to consider longer lease terms to compete with its neighbours.

Amending the law will not be easy, so we will discuss options in the next article.

Source: http://www.bangkokpost.com/business/economics/37929/the-likelihood-of-leasehold-extension-options-in-thailand



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