Thailand gives neighbours a lift

By Daniel Ten Kate
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A few months ago, Larry Cunningham of Phuket One Realestate had a Hong Kong-based client looking to invest US$50 million in Thailand.

“We showed them several large sites, and they were making all the right moves,” he says. But then Thailand’s military-installed government shocked investors on December 18 by introducing a 30% reserve requirement on all foreign funds. For Cunningham’s client, $15 million would need to sit in an interest-free account for one year.

The proposition killed the deal with Phuket One. But the property fund still wanted to invest the money in the region, and chose Cambodia instead.

The experience typifies a trend property developers have seen of late: Thailand’s loss is very much the gain of other countries in the region.

Vietnam, Cambodia and Malaysia are all benefiting from the government’s poorly implemented capital controls and proposed changes to foreign ownership laws. Investors who would’ve never given those countries a look are now making inquiries, and, in some cases, closing deals.

“Absolutely Thailand’s problems have benefited neighboring countries,” says Robert Collins, managing director of Agency and Investment Services for Savills (Thailand) Limited. “Malaysia in particular has benefited, and to some extent the residential side in Vietnam.”

But though Thailand’s regional competitiveness is lagging for the moment, the news isn’t all bad by any means. Most property developers agree that once the government gets its act together and sets clear economic policies that restore certainty to the market, Thailand will again be the top choice for property funds and investors.

“Thailand doesn’t have a natural competitor in the region,” Collins says. “If ownership structures become clear or sentiment reverses, we’ll see a huge outpouring of pent-up demand. It might not happen until next week or for another year. But the exciting mix and interest in Thailand is not going away.”

Until the military ousted elected premier Thaksin Shinawatra in a coup last September, Thailand’s property market was looking up. High economic growth, well-developed infrastructure and plenty of exotic tourist destinations made Thailand an attractive play for major property funds.

“Institutional investors have always had a stronger interest in Asia’s bigger property markets like Japan, Korea, China, Hong Kong and Singapore,” says Aliwassa Pathnadabutr, managing director of CB Richard Ellis (Thailand) Co., Ltd. “Interest has been growing in Thailand in recent years as part of the globalization of the property industry and the availability of investment properties in Thailand.”

That upward climb was knocked off kilter by the interim government’s unclear policy measures at the end of last year. The nationalist rhetoric of several key ministers, including former finance minister Pridiyathorn Devakula and Commerce Minister Krik-Krai Jirapaet, troubled investors whose holdings were based on a nominee legal structure that was suddenly deemed illegal after decades of widespread acceptance.

Although Pridiyathorn has seen been removed and his replacement, Chalongphob Sussangkarn, has toned down the patriotic bluster, it remains unclear what the new policy will look like. The capital controls remain, albeit watered down, while several drafts of the Foreign Business Act are floating around (see story).

The confused regulatory climate has led property funds to take another glance at Vietnam, Cambodia and Malaysia. But though these countries are perceived to be more business-friendly at the moment, the lack of infrastructure in some areas is still limiting sales.

“Thailand’s problems have increased the level of interest in Vietnam, but we are very underdeveloped in terms of development in both the retail/residential condo and office markets as well as the tourist/resort and hospitality sectors,” says Marc Townsend, managing director of CB Richard Ellis (Vietnam) Co., Ltd.

Vietnam’s economy is humming along at seven to eight percent per year, however, and the country just entered the World Trade Organization. Although WTO entry provides mostly a symbolic boost, many investors see a good opportunity to jump in early in what looks to be a promising growth story.

“Vietnam is suddenly the flavour of the month,” said Alastair Orr Ewing, chairman of Chesterton Petty Vietnam Ltd, the longest running real estate agent in the country with a staff of 230. “WTO entry has focused attention and the vital statistics look excellent. It is a ground floor opportunity in a market with great potential.”

Andrew Brown, country head of Jones Lang LaSalle Vietnam Ltd, said “the attractiveness of the Vietnamese market is driven by the strong work ethics, social and political stability, lower labour costs, attractive tax incentives and overall government support in the country. Another key factor in Vietnam´s favour has been the MNC´s drive for the so-called China plus one scenario, wherein they seek to reduce their excessive dependence on China and to more evenly spread their business risk in Asia.”

The legal structure in Vietnam is different than Thailand primarily in that it offers leases up to 50 years that are often renewable. Thailand offers 30-year renewable leases, but it remains unclear if they are binding if the freehold owner dies. This has led some property developers here to offer money-back guarantees to lure investors, but nearly all agree the government should offer a 90-year lease.

“The biggest problem facing the property market in Thailand is not necessarily the actions, but the perceptions of what the government is doing,” says Phuket One’s Cunningham. “I have clients who bought condominiums or leasehold sending urgent emails asking if their purchase is safe and secure even though they are not affected by the foreign business law changes. What the government must do is create something positive, and the easiest way to do that is increasing the percentage of condos that foreigners can buy from 45 percent to 75 percent or 90 percent, and offer 90-year leases.”

In Cambodia, laws are very much still being developed, and property values are difficult to ascertain. Still, the government has taken early steps to make the property market more attractive, in part by cracking down on land grabbing by corrupt soldiers and bureaucrats.

After years of isolation, Cambodia is finally seeing some high economic growth rates and an emerging middle class in Phnom Penh. The prospect of an oil discovery in Khmer waters of the Gulf of Thailand has increased optimism about Cambodia’s economic prospects. Beachfront property in Cambodia from Sihanoukville to Kep is becoming very attractive to investors who want to purchase virgin territory.

Coincidentally, foreigners can own land in Cambodia through a nominee structure in the same way foreigners did so in Thailand for decades. But after Thailand’s recent crackdown on nominees, investors may want to think twice.

Foreigners can’t own land in Vietnam, but Malaysia offers freehold ownership on properties costing more than $70,000. In addition, foreigners can get 60-year leases, 10-year renewable visas and take out loans from local banks, benefits not awarded to foreign investors in Thailand.

“Malaysia offers extremely sensible limited freehold property rights,” said Collins from Savills. “Of 1,500 foreigners that bought freehold in Malaysia, I’d say about 1,000 of them would´ve bought in Thailand if a similar package was available here.”

Malaysia certainly has plenty of upsides. Laws are clear and buying property is much easier than in other countries in the region. Moreover, the government is openly welcoming foreigners to invest through campaigns like “Malaysia My Second Home.”

The Malaysian economy is growing steadily at about six percent per year, higher than Thailand, which will grow between four and five percent this year. The Malaysian government is also close to completing a trade deal with the US that will likely give a further boost to trade and investment.

For property developers, however, beachfront property in Malaysia is very difficult to own, as most is reserved for Malays only. In addition, the nightlife and entertainment generally pales in comparison to that of Thailand.

When it comes to luxury housing in resort areas, Thailand is in a league of its own. Destinations like Phuket, Koh Samui, Pattaya, Krabi and Hua Hin all have unique personalities and easy access. Resort areas in Vietnam or Cambodia are much more difficult to get to.

“Nice resort locations in Vietnam are not easy to access,” Collins said. “A buyer based in Hong Kong who has a resort for weekend use can fly direct to Phuket and take a 15-minute car drive or fly to Vietnam and take a taxi drive and then a one-hour boat ride. There’s quite a bit difference in terms of convenience.”

Thailand is also a much more mature market than others in the region. The value represented in Cambodia and Vietnam now could quickly evaporate if a flood of foreign money enters and creates a bubble.

In that regard, many developers were not opposed to restrictions on foreign ownership in the Thai market. But many said those restrictions should be carefully thought out so as not to dampen the overall investment climate and hinder economic growth.

“The leading economies such as Japan are much more open to foreign institutional property investors,” said CBRE Thailand’s Aliwassa. “As the other countries are liberalizing their country´s economies and property policies, Thailand has become more restrictive, which will weaken its position in the competition to attract property funds and investors.”

All in all, property developers here are eager to hear some good news and see the Thai market catch up with Singapore, Hong Kong, Japan, Korea and China. The new finance minister may have stopped the free fall into economic nationalism, but actions speak louder than words.

“I’m sick of turning on CNN and the BBC and seeing international news programs telling people not to purchase in Thailand,” says Cunningham from Phuket One. “The government must make changes now to send out a positive vibe that Thailand does welcome foreigners.”