Starting a Business in Thailand (4): Land Development

February 1 2012 Categories: Doing Business In Thailand, Thailand Business No comments yet

Land Development is an activity that attracts many foreign investors in Thailand. I often wonder why because it is really a tricky activity to invest into if you are a foreign investor for several reasons as follows:

Legal Issues Pertaining to Foreign Investment in Land Development Business

Pursuant to the Land Code a foreign investor may not own land but for exceptions such as BOI
Pursuant to the Foreign Business Act List 1 Land Trading is a business not permitted to be operated by foreigner for special reasons
Pursuant to the Foreign Business Act List 3 (10) Construction is an activity which exercise is permitted to foreign investors only upon being granted a foreign business license (but for exception under 10.a and 10.b).

While foreign multinational construction companies or multinational land developments companies will have no problem to find a genuine Thai partner to do a Joint Venture and invest into the land development business in Thailand within the framework of the law (that is to say in joint Venture owning only 49% of the project (exception BOI), investor lambda (that is to say a private individual investor) will not have this facility.

Chances are that our investor lambda will only be able to start into land development business by doing allegiance to “You-Know-Who” “He/She-Who-Must-Not-Be-Named” that is to say the Thai Wife, Girl Friend, Boyfriend or the Thai shareholder that may be deemed a nominee.

Land Development is Business with a Strict and Developed Legal Framework

During the past 12 years I had the opportunity to meet and to work with many of this would be developers and I noticed certain characteristics which are always the same.

As many foreigner that are investing in Thailand they have this idea that in Thailand one can do everything any way one want too. Nothing is more wrong than this.

While big developers have a myriad of consultants, lawyers, accountants working for them and advising them on how to structure their project the right way the would be developer often work on their own requiring legal assistance on a case per case basis. Now the problem is that often those foreign investors don’t speak the language, don’t read it and don’t have any idea of the laws that are applicable in the real estate sector. And at one point or another into the development of their project they will pay for this absence of knowledge their project being stalled because they are not able to divide the land or because the local authorities stopped their projects for failing to have the proper permission.

Do Not Make the Mistakes of a First Time Developer

In my book “How to Safely Purchase Real Estate Offshore: The Case of Thailand” I call would be developer the First Time Developer and here is what I say on the subject

“First-Time Developers nearly always launch their projects in spite of the odds against them. Generally speaking, First-Time Developers have no previous record of success in real estate development; or if they have a record, they were employees of a company involved in real estate only in their home countries. First-Time Developers are often foreign investors newly arrived in the country where you are making your purchase. When they are foreigners (as many First-Time Developers unfortunately are), and even if they have experience in this kind of business, they will be unable to refer to their accomplishments when developing their project in their newly adopted country because their experience was gained in a completely different context. When they are foreigners, they are rarely able to speak, much less read, the local language and will have only a superficial understanding of the laws applicable to land development.

The average cycle of project developments by First-Time Developers will take place as follows: In most cases, the First-Time Developer has enough capital to purchase project land and to hire an architect to do some drawings and a master plan. In some cases, they will have enough capital to start the construction of a show house and laying the ground work for the utilities, but rarely more. Their First-Time Developer status will make it hard or impossible for them to access commercial loans for financing their projects. De facto, the First-Time Developer has no other options. Once the original capital has been spent, continued financing for the construction and development of the project will come out of their clients pockets. First-Time Developers will easily sell the first five to ten units of their projects (10% to 20% of the whole project) to family members and close friends as they commence the construction in earnest. However, the level of sales will soon drop and/or the developer will begin to encounter problems dividing the land, and/or will have used part of the payments made by the customers to build their houses and market the project…

Whatever the cause, the time will come when the First-Time Developer begins to encounter financial difficulties as cash flow is less than anticipated, or the project construction will begin to suffer more and more delays as a result of unwise spending. After a time, those few existing customers will stop making payments and this is when the project fails.

First-Time Developers are not generally dishonest and they seldom start their projects with the intent of cheating or harming their customers. They firmly believe in what they are doing and, while they do not have the capital to fully finance their projects, they generally invest all of their savings in the projects and will end up broke if they fail. First-Time Developers hold little prospect of success and their projects are likely to fail as the elements of insufficient experience, knowledge and capital combine for the only outcome possible in most purchases from First-Time Developers, and that is failure.”

How to Avoid the Fate of First Time Developer

The first thing to do would be to surround yourself of advisers that would assist you with the following matters. Yes it will cost you but the better your project is structured the best are your chance to sale. If you do not do the things right the chance is that any time a potential buyer hires a lawyer to review your set up and agreements you will miss a sale. So you should surround you with professional that may assist you with this kind of services (for more information on this line of services contact@renephilippe.com )

Legal Compliance Studies: Checking what regulation are applicable to construction and development whether national or local regulation.
Project Management: We advise developers on how to structure and manage their project.
Condominium or Land Allotment Licenses: Assisting developers with legal formalities.
Investment Structure: How to legally structure a land development project including tax planning.
Agreements: Negotiating, drafting, and finalizing Joint Venture, Construction, Management, Loan, Lease and any other properties related contracts.
Sale to End Users: We advice developer on how to organize the sales of a real estate project to end user whether Thai or Foreigners.
Property Conveyances and Title Registrations: Handling all transfer formalities of your property.

Then you should have a professional assist you with preparing a business plan and an estimation of the costs you will face before to start to implement your project. A lot of First Time Developer fails or lose money because they did not accurately calculate the cost of developing the land (utilities, facilities and so on).

If you don’t have at least half of the capital requested to complete the project don’t even start it because you will go into trouble.

In terms of sales I noticed that those who are successful were either small developer with a designated target market. For example a Swedish developer targeting only Swedish customers, a developer making a project specially design for old buyers of for buyers with a handicap. Then they are price ranges.

The projects that are easiest to sell are those which range of prices is below 5,000,000 THB per Unit or above 25,000,000 THB or more per Unit. People who can afford property at 25,000,000 THB or more have cash available to purchase, people who are purchasing property at price below 5,000,000 THB have the cash to purchase people interested by properties in the range between 6,000,000 to 20,000,000 THB often don’t have the financial capacity to do the transaction cash. As foreign buyers will have trouble to find financing to purchase property in Thailand (but if they can mortgage a property in their country of origin) the only way a developer may easily sell will be if the developer has sufficient financial surface to provide a personal financing to his customers.

If you want to Do Business in Thailand Safely Contact us: contact@renephilippe.com

About the Author:

The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.

http//:www.renephilippe.com

Originally posted 2009-11-10 06:17:05.

Doing Business in Thailand