Question & Answer
DONOVAN CHEAH is the founding partner of Donovan & Ho, a law firm in Kuala Lumpur (www.dnh. com.my).
MALAYSIA’S PROPOSED NEW BANKRUPTCY RULES ALLOW EASIER DISCHARGE
Q1 : I have 2 housing loans from Bank A, credit card and overdraft facilities from Bank B, and I am a guarantor for my company loan at Bank C. Total outstanding is RM400K from Bank A for both housing loans, RM45K and RM40K from Bank B, and RM500K from Bank C. Since a year ago, I have been having cash flow issues due to the slow economy in Malaysia. The banks are now chasing me for payment. My only income is from my business which is, plainly speaking, in the red. My other income is my rental income which is not sufficient to pay off the housing loan.
I understand the new rules allow only bankruptcy proceedings for outstanding principal of above RM50K. As such, can Bank B sue me for bankruptcy since each facility is less than RM50K? Or, can Bank B combine all the outstanding facilities (making the total above RM50K) and sue me bankrupt?
A1: Currently, in order to present a bankruptcy petition, the debt or aggregate amount of debts owing by the debtor to the petitioning creditor(s) must exceed RM30,000 Under the proposed amendments to the Bankruptcy Act, this threshold will be increased to RM50,000. It is therefore possible for a single creditor with multiple debts owing by the same person, to combine all outstanding debts in order to meet the threshold. It is also possible for multiple creditors to come together in order to meet the minimum threshold.
Q2: As guarantor to the loan to my business from Bank C, will the bank desist from suing me bankrupt? But if they exhaust all other avenues, they can still sue me bankrupt, right?
A2: First of all, it is important to distinguish between two types of guarantors. Social guarantors are people who provide, not for the purpose of making profit, guarantees for scholarship/education loans, or loans for hire-purchase of vehicles for personal or non-business use, or housing loans solely for personal dwelling. Under the proposed amendments to the Bankruptcy Act 1967, social guarantors will be immune from bankruptcy proceedings. Other guarantors can still be made bankrupt provided the petitioning creditor first obtains leave (or permission) from the Court.
Currently, social guarantors do not have immunity and can still be made bankrupt provided the petitioning creditor first proves to the satisfaction of the court that he has exhausted all avenues to recover the debts owed.
In the scenario above, a guarantor for business loans is not a “social guarantor” and as such has no immunity from bankruptcy whether under the existing law or the proposed amendments.
Q3: Can I preempt the banks and declare myself bankrupt? What would be the implications? Or should I try to sell off my 2 properties and my business and propose a scheme of arrangement with a 2-year moratorium on repayments?
A3: Individuals may declare themselves bankrupt by submitting a debtor’s petition. However, the effect of bankruptcy is the same whether it is initiated by the creditors or the debtor himself.
The proposed amendments to the Bankruptcy Act will allow a debtor to have the option to propose a voluntary payment arrangement at any time before he is adjudged a bankrupt. When proposing a voluntary payment arrangement, the debtor can apply to the Court for an order whereby no bankruptcy petition or legal proceedings can be commenced against the debtor for a period of 90 days without permission from the Court. The voluntary arrangement will be presented to the creditors at a creditors’ meeting and if approved by special resolution (i.e. by at least 50% in number and at least 75% in value of creditors present), the arrangement will bind all creditors.
Q4: When will the proposed new Bankruptcy rules be enforced? Will it have retrospective effect? What is the time period from service of bankruptcy notice to the bankruptcy order?
Q4: The proposed amendments were tabled through the Bankruptcy Amendment Bill 2016 for first reading in Parliament on 21 November 2016. The Bill must first be passed by Parliament and its effective date will be the date as notified in the government gazette.
The Bill provides that the amendments shall not apply to a person who was made a bankrupt before the coming into operation of the Bill. All bankruptcy proceedings which are still pending before the coming into operation of the proposed amendments will continue as if the Bankruptcy Act had not been amended. However, the Bill provides that a person who is made a bankrupt before the coming into operation of the amendments will be entitled to obtain a discharge from the DGI without objection if he is a social guarantor, a person with disability, deceased, or a person suffering from serious illness certified by a government medical officer (provided a minimum of 5 years has lapsed since the bankruptcy order).
There is no fixed time period from the service of bankruptcy notice until the bankruptcy order. The time taken will depend on each individual case and different variables such as whether the bankruptcy proceedings are being disputed and the court’s schedule.
Q5: If I can’t be a director of my company after being made a bankrupt, can I be re-designated as an employee and be allowed to travel overseas if the job requires it?
A5: A bankrupt can still be an employee. However, if he is to be employed by his spouse, sibling or family member, permission from the Director-General of Insolvency (DGI) is required. A bankrupt is also prohibited from leaving the country without permission of the DGI or the court. Permission to travel for work may be granted by the DGI at its discretion and/or subject to any conditions that the DGI deems necessary.
Q6: The proposed new rules provide for automatic discharge. What are the conditions that would allow this? What would constitute a medical condition that would let the bankrupt off the hook – life-threatening diseases such as cancer, physical disabilities, etc?
A6: The proposed amendments to the Bankruptcy Act provide for an automatic discharge after 3 years from the date of the submission of the statement of affairs (to be submitted after a bankruptcy order has been made). In order to qualify for an automatic discharge, the bankrupt must satisfy 2 conditions, namely: (a) the bankrupt has achieved the target contribution amount of his provable debt; and (b) the bankrupt has complied with the requirement to render an account of moneys and property to the DGI.
For bankrupts that don’t meet the conditions above, they can still apply for discharge from the DGI after a minimum of 5 years from the bankruptcy order. The discharge will be at the discretion of the DGI. However, the proposed amendments state that in such a situation, no objection shall be made if the bankrupt is a social guarantor, a person with a disability, deceased or suffering from a serious illness certified by a government medical officer. There is no definition of what amounts to “a serious illness”, but the assumption is that it would most likely include critical and life-threatening illnesses.
ALVIN TEO is a lawyer in Malaysia specializing in distressed properties.
NON-PAYMENT OF RENTAL – TO SEIZE ASSETS OR EVICT TENANT?
Q :The foreign tenant of my 4-storey shophouse in Kuala Lumpur has not paid 6 months of accumulated rental. I have met up with him several times for the last 6 months. Each time, he would give me partial rental. I have recently issued him a letter to terminate the tenancy and gave him 3 months’ notice as per the contract terms. I have also used his 3 months’ rental deposit towards payment of the unpaid rental. The tenancy has a fixed term of 3 years, renewable for another 2 terms for a total of 9 years. He has rented for the last 2 years at a monthly rental of RM7K per month. If he doesn’t move out at the end of the 3-month notice period, what can I do? Change the locks, report to the police or go to court to get a court order to evict him? He runs a budget hotel at the premises.
ALVIN : Even though the tenancy agreement may have allowed the landlord to terminate the tenancy and re-enter the premises after the stipulated notice period, to be on the cautious side, (and due to the prohibition under Section 7(2) of the Specific Relief Act 1950), it is advisable for the landlord to obtain a court order to evict the Tenant if the Tenant refuses to move out.
The Landlord may through his lawyer apply for an Eviction Order to evict the Tenant and recover vacant possession of the premises and claim against the Tenant all outstanding rentals, mesne profit (double rental) and other damages.
Alternatively, the Landlord may consider a distress action under the Distress Act 1951. A “Distress Order” could be faster and more economical in recovering outstanding rental due and owing by the Tenant. Distress Order is a Court Order that enables the Landlord to seize the Tenant’s assets and properties (in accordance with Distress Act 1951) in the premises and thereafter auction them off. The proceeds of the auction will be paid to the Tenant after deducting all court expenses and guard fees.
The Distress Order may “force” the Tenant to pay the Landlord all outstanding rental due and owing and the ancillary expenses, or risk all his assets and properties in the premises being seized and auctioned off. The Landlord needs to be aware that the Distress Order however does not terminate the tenancy (as Distress Order is technically an avenue for the recovery of outstanding rental and not to evict the Tenant) or allow the Landlord to claim back vacant possession as of right but in some cases “out of embarrassment” (e.g. due to the presence of the Court Bailiff and/or seizure of the Tenant’s assets/properties in the premises), the Tenant may leave the premises.
Dato’ Pretam Singh Darshan Singh practises at Pretam Singh, Nor & Co in Kuala Lumpur.
Purchasing land for durian plantation in Malaysia
Q: I am a permanent resident of Malaysia and am keen to buy agricultural land in Malaysia for a proposed durian plantation. If the proposed durian plantation is only expected to number about 50 trees, must I plant them on land zoned only for agricultural purpose?
A : According to the Economic Planning Guidelines, property acquisitions by foreign interests that do not require the approval of the Economic Planning Unit, Prime Minister’s Department are as follows:
(a) acquisition of agricultural land valued at RM1,000,000 and above or at least five (5) acres in area for the following purposes:
(i) to undertake agricultural activities on a commercial scale using modern or high technology; or
(ii) to undertake agro-tourism projects; or
(iii) to undertake agricultural or agro-based industrial activities for the production of goods for export.
It is therefore apparent that only certain types of Agricultural land can be acquired by foreigners which can extend to permanent residents. The durian plantation which you intend to purchase must fulfil the above requirements in order to be exempt from EPU approval.
Durian trees can be planted at any site including commercial zones although it may seem uneconomical because commercial land is certainly more expensive and there may not be economies of scale.
Can you KEEP BIG DOGS IN A CONDO IN KL?
Q : My uncle who is sight-challenged has owned a ‘seeing eye’ service dog for the last 4 years. He has previously stayed in a house so there was no issue with the dog’s presence. However, since 2 months ago, he needed to move to a condominium in Kuala Lumpur. The agent informally told him that it is okay for him to keep his dog; but nothing about the dog was ever mentioned in the tenancy agreement. My uncle has not met the landlord as the latter is based overseas. Two weeks ago, the condo management sent him a letter informing my uncle that he cannot keep his dog as there were complaints from the neighbours. What should my uncle do?
A : It was common practice previously that all strata parcels in the country are governed by Deed of Mutual Covenants (DMCs) which spell out the do’s and don’ts in a strata community, both high rise and landed.
Before 1st June 2015, each condo had its own DMC drafted by lawyers, some spanning up to 80 pages long. This is despite case law stating that the terms of the Sale and Purchase Agreement prevail over the DMC in cases where the terms clash.
However, from 1st June 2015, all DMCs including those signed before June 2015 henceforth were deemed invalid and the only governing rules for condos are those contained within the new Acts namely the Strata Titles (Amendment) Act 2013, Strata Management Act 2013 (enforced from 1st Jun 2015), Strata Management (Maintenance & Management) Regulations 2015 (enforced from 2nd June) and Strata Management (Strata Management Tribunal) Regulations 2015 (enforced from I July).
The new law also strictly prohibits contracting out of the Strata Management Act, namely one cannot sign contracts and deeds contrary to any provision of the Act. Also, the new law effectively provides that the Third Schedule of the Strata Management (Maintenance & Management) Regulations 2015 will be the only applicable regulations for condos. Therefore, from 2nd June 2015, the only surviving “DMC” is the Third Schedule of the Regulation thus making the Third Schedule the standard bylaw for all strata parcel owners in the country.
‘No annoyance or nuisance’
In relation to keeping of pets, Bylaw 14 of the Third Schedule provides that parcel owners may keep animals in his own unit or on the common property provided that they do not cause any annoyance or nuisance to other owners/ residents or pose a danger to the safety or health of other residents in the condo.
It also provides that if the owner receives a written notice from the management to remove the animal, he must do so within 3 days.
What constitutes “nuisance” and “annoyance”? The words are often used together, but they have different meanings. The classic definition of nuisance was given in a 19th century case as “an inconvenience materially interfering with the ordinary physical comfort of human existence”. So, for example, an activity which causes excessive noise or dust or smoke might constitute a nuisance.
“Annoyance” has no technical legal meaning but it is clear that it is wider than “nuisance”. The leading case on the point, Tod-Heatley v Benham (1888) 40 CH D 80 concerned the use of a building as a hospital for patients with contagious diseases. Medical evidence was given that there was no significant risk of infection from the hospital and the court held that the use was an annoyance although not a nuisance.
Annoyance was defined as anything which “really does bring an objection to the mind of a reasonable being” or “reasonably troubles the mind and pleasure, not of a fanciful person, or of a skilled person who knows the truth, but of the ordinary sensible English inhabitant of a house”. There need not be any “physical detriment to comfort”.
Regardless, since annoyance has been included as a valid cause for removal of an animal from the stratified property, this means a broad range of reasons can be given including if it “reasonably troubles the mind and pleasure” of a neighbour.
Issue: Can the Management Corporation (MC) prohibit the keeping of dogs in the stratified parcels?
Section 70 (2) of the Strata Management Act 2013 allows an MC to make any additional bylaws or amendments thereof as long as these are not inconsistent with the Third Schedule of the Regulations. Hence, the MC can’t absolutely prohibit the keeping of dogs since the Third Schedule clearly allows it.
However, it is a requirement that dogs have to be licensed by the local authority. In Kuala Lumpur district, the Licensing of Dogs and Kennel Establishment (FT of Kuala Lumpur) By Laws 2011 allows one ‘small dog’ to be kept, harboured or maintained in a flat (By Law 8A).
SCHEDULE II (By-law 2) defines small dogs to mean: Miniature Pinscher, Bichon Frise, Pekingese, Papillon, Poodle (Toy), Japanese Chin, Maltese, Pomeranian, Chihuahua, etc.
Since the definition does not cover many other types of dogs including those of unknown breed or other breeds, nor mentions the maximum weight of a “small dog”, it is my view that the provisions of the Strata Management Act 2013 which allows the keeping of any animal provided it is not an annoyance or nuisance will override the licensing requirements set by DBKL (Kuala Lumpur City Council) in its bylaws.
Any proprietor (including resident) aggrieved by the decision of the MC that prohibits the keeping of dogs may well be advised to challenge it in the Strata Management Tribunal set up under the Ministry of Urban Wellbeing, Housing and Local Government.
Hence, in this case, the tenant can challenge the MC in the tribunal despite the Tenancy Agreement not mentioning anything about the keeping of dogs and despite the fact that the guide dog is not a “small dog” as required under the council’s licensing requirement.
Top 5 issues faced by condo owners in Malaysia
Q: I am planning to buy a condo in Kuala Lumpur. What are the 5 most common legal issues faced by condominium owners in Malaysia? How do we resolve them?
PS : From my experience, these are the 5 I have come across most often:
1. Condo owners not paying Service Charges
This ‘freedom’ of not paying service charges however will come to an end with the establishment of the Strata Management Tribunal (SM Tribunal). Any parcel owner or tenant who fails to pay service charges can be produced before the SM Tribunal thanks to the Strata Management Act 2013, Strata Management (Maintenance & Management) Regulations 2015 and Strata Management (Strata Management Tribunal) Regulations 2015. It is interesting to note that the maximum that can be claimed through the tribunal is RM250K per claim. Any non-compliance of an award (decision) of the SM Tribunal is now a criminal offence. Further, the unit affected is also subject to attachment and sale for non-payment of service charges.
2. Quorum at General Meetings of JMB/MC
This has always been a problem, now the Strata Management (Maintenance & Management) Regulations 2015 states that one half of the proprietors present shall constitute the quorum and if this is not enough, then whoever is present within the next half hour shall constitute the quorum. This clearly takes away any impediment towards formation of the Joint Management Board/Management Corporation.
3. Repair of Common Property
It has always been a contentious area when it comes to repair of the common property. Now the Strata Management (Maintenance & Management) Regulations 2015 states that the developer has to put a deposit equivalent to 0.05% of the construction costs with the Commissioner of Building for repair of defects in the common property.
4. Issues relating to inter-floor leakages
It is now a criminal offence for a parcel owner not to give access to persons carrying out inspection to determine leakages, provided adequate notices are given.
5. Damage to party walls
It is now a criminal offence for a parcel owner not to give access to persons carrying out inspection to determine the damage to party walls, which are walls that form part of the interior of a parcel provided adequate notices are given. Party walls are common property for which it is the duty of all parcel owners to keep in good shape.
SELLER NOT LIABLE IF SOLD ON ‘AS IS WHERE IS BASIS’
Q : I am a Singaporean and I have purchased a condominium in Kuala Lumpur in 2005. I sold the condo two years ago but recently, the management of the condo has contacted me to say I need to be responsible for the water leaking to the unit directly below me because it first occurred when I was still the owner.
PS : In Malaysia generally, a seller has the duty to disclose known latent defects. These are defects that the seller is aware of and are not easily discoverable upon a reasonable inspection of the property. However, if the property is sold on “As is where is basis”, it eliminates a seller’s duty to disclose material latent defects. This clause would protect the seller in a lawsuit by the buyer for damages incurred by the seller’s failure to disclose a defect.
An “as is where is” clause, however, will not prevent the seller from being liable if the seller is found to have engaged in “active fraud”. “Active fraud” requires an act by the seller such as concealment of a defect or misrepresentation of a condition of the property. An example would be if the seller is aware of a leakage problem and when questioned by the buyer states that there is no leakage problem or conceals the leakage problem with fillers so that the defect cannot be discovered by a reasonable inspection.
It is imperative that buyers and sellers review the terms of the purchase contract. When a buyer contractually agrees to accept a property “as is where is”, the seller is relieved of the duty to disclose and will not be liable to the buyer for non-disclosure of a defect unless it can be shown the seller engaged in fraudulent concealment, fraudulent inducement or fraudulent misrepresentation.
In this case, if the property is sold on “as is where is” basis, the owner can ignore the notice from the management.
Michael Yeoh is CEO & Founder of GM Training Academy PLT and has 20 years of experience in the mortgage industry in Malaysia. He can be contacted at www. miichaelyeoh.com where you could also buy his book.
TIPS ON GETTING YOUR LOAN APPROVED
Q :I heard bank loan rejections have reached 70% for properties in some areas in Malaysia, and some in respect of first home buyers. How do I ensure that my loan is not rejected and how do I secure a higher loan margin? This will be my second home purchase and I am thinking of borrowing in my wife’s and my name.
MY : The first thing you must do is get your objective right. It can determine your buying and bank borrowing. Are you buying for your own dwelling or for investment? In Malaysia, you need to be aware that we have 70% borrowing ruling by Bank Negara (Central Bank) after the second house. If your income permits, use single purchaser and borrower so that your husband or wife can still borrow 90% on the next purchase. When this objective is settled, then you move on to the bank borrowing process.
Bank rejections are getting more and more frequent each day. Statistics have shown that for every 10 loan applications submitted to the bank, more than 5 were rejected. In some banks, the rate of rejection can be as high as 80%.
Borrowing today is not like 10 or 20 years ago. Submission to banks are more complex if you were to compare with previously when it was easy to get approval. Do you know that submitting too many or too few documents can cause your loan application to be rejected? That’s why I always stress that the borrowers must do Mortgage Planning before submission.
In any country including Malaysia, it is paramount that you do your own credit checking before applying. There are 2 checks you must do before you submit your documents. The banks will do similar checks before processing your loan.
1. Credit Tip Of System (CTOS)
2. Central Credit Reference Information System (CCRIS)
CTOS will let you know whether you are being sued by an individual or company. When I was in Standard Chartered Bank 20 years ago, the only way to check is to apply for the loan first with the bank. Today, you can check your status on their website. CTOS is a private company.
If the person is CTOS-positive, his/ her loan will most likely be rejected. Once the person’s name is in CTOS, the record will be there forever.
In a lot of the cases, I have seen that borrowers’ applications rejected because they stood as guarantor to someone else’s loan and the loan turned bad. Do not stand as a guarantor if possible.
CCRIS on the other hand is managed by Bank Negara. It will show the facilities, banks, outstanding loans, repayment loan application as well as bank rejections. Banks use this as a tool to check on prospective borrowers. If the person is a bad paymaster, it will reflect in CCRIS.
I had a borrower a few weeks ago whose loan was rejected by the banks. I told her that if she go to other banks, it would also be rejected. She thought that her RM30-RM50 consistent non-payment on her credit card will not affect her loan application.
Debt Service Ratio (DSR)
You must also calculate your Debt Service Ratio (DSR). Different banks have different DSR from 40% to as high as 85% or more. It also depends on the amount applied and also your income.
Debt/Net Income X 100 = DSR
For the banks, the higher DSR will be better for them whereas the lower the better for borrowers.
It is also equally important to choose the bankers who process your case. I did a case last month where the purchaser had bought a unit for RM400K and was referred to 2 bankers by the developer. Both banks rejected her application.
She came to me for help. I told her that the bankers should know that this type of documents will definitely get her loan rejected. So, I restructured her documents and sent them back to the same banks which had rejected her earlier but at a different branch. She has since signed her letter of offer and Sale and Purchase Agreement. What does this tell you? Does the experience of the bankers count in this case? You are not buying a RM1 property but one that’s worth hundreds of thousands and even millions of ringgit.
Dr. Lee Ville is the Director Of New Bob Group and licensed auctioneer. He can be contacted via. ask@ newbob.com.my.
RETIRING IN PENANG
Q : I am interested to retire in Malaysia especially Penang. Are there any retirement villages there? I heard there is one in Balik Pulau. Where in Penang would you recommend for retirees to live in if there are no retirement villages? What are the advantages and disadvantages of applying for the MM2H visa?
LV : There’s no retirement village in Penang, however we do have nice developments on the island. Thus, it mainly depends on the budget of the retirees / and where they want to stay. There are many liveable areas in Penang depending on what they are looking for and their personal preference. If they are looking for beachfront, it has to be Batu Feringghi area; and, if they are looking to invest in the local heritage culture, they have to stay in the UNESCO Heritage City of Georgetown.
I believe Balik Pulau is ideal due to its close proximity to the kampong (village), seaside, seafood and schools. For those with schooling kids, there are various private schools nearby in Balik Pulau namely Prince of Wales Island International School. Besides that, there are many developments in Balik Pulau, and they also have a botanica. I guess what’s most important for retirees is to find a place close to the healthcare centre. However, there’s no private hospital there yet at the moment. The nearest to Balik Pulau would be Pantai Hospital.
There’s no disadvantage for holding a MM2H visa. One of the main advantages is that they get to buy properties priced only RM500,000 and above instead of RM1 million and above (condo) and RM2 million and above (landed property) if they do not have the MM2H visa. The minimum price applies only to Penang state as other states may have a different threshold.
Apart from that, they also get to purchase cars with certain tax exemptions and a visa for easy in-out entry at the immigration.
Laksamon Dhamminch is Managing Partner of Fusion Break Ltd., a law firm based in Bangkok. She specializes in Property Law, and advises clients on property acquisitions, development planning and construction regulations. She can be contacted via laksamon@ fusionstatute.com
NEW OPTION FOR LONG-STAY RETIREMENT IN THAILAND
Q : I understand the Thai government has recently replaced the current retiree visa for foreigners with another one which requires a minimum of Baht 3 mil to be deposited in a bank account in Thailand. I currently hold a retiree visa based on the old scheme where only Baht 800K is required to be deposited at the time of application and yearly renewal. Does the new system mean I will now have to come up with Baht 3 mil? When does this take effect?
LD :This new scheme is not a replacement for the current scheme. Under Government Cabinet Resolution No. 44238/2559, this scheme is a special option for citizens of following countries: 1) England, 2) USA, 3) Germany, 4) Switzerland, 5) Japan, 6) France, 7) Australia, 8) Norway, 9) China, 10) Sweden, 11) Netherlands, 12) India, 13) Italy, 14) Canada, and 15) Taiwan The cabinet has just approved this long-term stay visa scheme but it is not implemented yet until the relevant Ministry has announced its internal regulations to support the scheme. There is no specific time frame to get it implemented but it is considered a priority. The government cabinet resolution is just a policy directive so there might be some minor changes when the Ministerial regulations come out. The principle will be the same; just that the regulations will provide more specific details on the procedure. Under the new scheme, the applicant has to meet the following conditions: 1. Aged 50 years old and above; 2. Has funds in Thai bank account of not less than 3 mil THB or has monthly income of more than 100K THB; 3. Validity of Visa is 5 years and extendable once. Required to report every 90 days; 4. Obtain health insurance for at least one year; and 5. In the first year, visa holder has to freeze money in bank account of not less than 3 mil THB. After one year, the visa holder can withdraw not more than half of the money for spending in Thailand. Upon application to extend the visa, the applicant must have at least 3 mil THB in his bank account if he chooses the bank account option. The Visa fee is 10,000 THB per application. Visa holders can apply for dependant visa for their spouse and child. If the spouse is 50 years old or older, she/he must have a separate source of income or separate bank account having a minimum of 3 mil THB as well. Visa holders of this long stay Visa are allowed to work as a volunteer only for non-profit organizations or entities. They can buy cars or condominiums subject to specific regulations for registration of condominium and car ownership. Citizens of other countries who are not qualified or who cannot meet the above requirements can still apply for the existing retirement visa as usual.
BUYING THAI PROPERTY WITH LOAN FROM SELLER
Q :I understand Thai banks are reluctant to lend to foreign property purchasers. Is there any alternative source of financing originating in Thailand for foreign purchasers who can’t come up with the full purchase price in cash? If so, what are the usual terms and conditions?
LD :Rather than getting a home loan from banks, buyers also have the option of asking the seller to provide a payment plan for the purchase of property.
Effectively, this method is similar to a mortgage but is usually provided without interest or the interest has already been added into the full purchase price. Payment is flexible depending on mutual agreement between buyer and seller. For example, the buyer may be required to pay a downpayment of 20% of the purchase price and pay the remaining balance by installment or even balloon payment if the seller agrees.
If both parties agree to a payment plan for the purchase, it must be registered at the Land Department. This registration is known as “Registration of Preferential Right” (in favour of the seller). Upon making a down payment, the seller agrees to transfer ownership of the property to the buyer while registering his own name on the back of the title deed as holder of the preferential right (somewhat like a caveat).
On the registration date, the Land Officer shall make one agreement to detail the conditions of purchase, payment terms and method, etc. If the parties have an agreement drafted by themselves, they could inform the officer to attach their agreement with the registration forms.
In case the buyer fails to comply with the payment terms, the seller can file a lawsuit against the buyer requesting for full payment plus interest (if any) or other remedial actions that both parties have agreed to under the agreement. The buyer will be able to sell the property to a new buyer but payment of the purchase price will be deducted to settle the outstanding balance to the seller first prior to successful registration of the sale to the subsequent buyer.
The tenure of the payment plan normally does not exceed two years because the seller is not a financial institution and the purpose of sale is to obtain proceeds of sale rather than to gain from the interest on the payment plan.
Although this payment plan seems to help the buyer’s cash flow, the purchase price is usually higher than the usual purchase price to take into account the interest which is typically set at 8% of the purchase price.
It’s becoming tougher for non-Thai buyers to get home loans from banks in Thailand therefore, some development projects, especially in popular resorts like Phuket, are now offering this type of payment plan as an alternative for foreign investors.
Buying property to do business in Thailand
Q :I have just returned from Pai last month and am interested to stay long-term there. I understand there is a retirement visa valid for one year which I can easily apply myself provided I keep THB800,000 in a Thai bank account. In that one year, prior to application to renew within 3 months of the expiry date, apparently I could withdraw the money as per your answer in Asian Property Review. I am thinking of withdrawing the money (together with my other savings) to use it either to:
1. Buy a guesthouse (double up as my own accommodation) or,
2. Rent a guesthouse
I am thinking of somewhere near the Walking Street or not more than 3kms away. What possible problems do you think I would face as a foreigner? E.g. harassment from local Thai businessmen, gangsters – protection money, harassment from government officials.
How legal would Option 1 and 2 above be if it was solely in my own personal name?
Alternatively, what suggestion can you give to optimise the THB800,000 in order to pay for my expenses as a retiree in Pai?
Since Pai does not have any condominium (not that I have seen so far), what options does the foreigner have if they want to purchase a home in Pai e.g. long-term leases??
LD :Pai is such a beautiful and romantic place, I have no doubt why people fall in love with this place. As you know, foreigners are not entitled to own land in Thailand. If you still wish to acquire land and/or houses, there are some legal vehicles that you may use. It depends on the level of risk you could take because every option has its own risks.
- The first option would be taking a long-term lease of land and buying the house.
The most difficult part of this option is how to convince the land owner to agree with you. Most land owners want to sell freehold property. If the land owner agrees to sell leasehold property, then it’s how your lawyer drafts the contract for a long-term lease (30 years) and sale of house built on the leased plot.
Please note that renewal of lease clause is still controversial. Many lawyers believe that under Thai law, the renewal clause of the 30-year lease is unenforceable. I do not have clear answers for this argument since the Thai court has been empowered to decide such an issue at its absolute discretion on a case to case basis with justice and fairness as the main considerations.
I recommend you to calculate the value of your investment based on a 30-year period only. A lease which has a term of more than 3 years must be registered at the Land Office. The sale of the house must also be registered at the Land Office. However, before registering the sale of the house, the Land Officer will announce the sale at a public place in that area at least 30 days before accepting the registration. If nobody objects to the sale of that house, the Land officer will register the sale of the house in your name.
The lease registration fee is 1.1% of the total rental value (rent required to pay for 30 years). The registration fee for sale of house is 2% of appraisal value of the house.
What will happen to your house at the expiry of the lease (if it is still in good condition)? There are two ways to deal with this depending on the mutual agreement between the land owner and lessee. The land owner could buy the house at market value or the lessee demolishes the house at his own expense.
You may also choose to lease both land and house for 30 years but if you want to do business in that house, I recommend you to buy the house rather than lease it because then you won’t need the land owner to issue a consent letter for your business licenses.
- The second option is setting up a Thai company that has a Thai citizen holding a majority of the shares.This option is accepted by land offices in most areas of Thailand. Therefore, to exercise this option, I suggest your checking the possibility with the local land office first.Some land offices accept the registration of land ownership through a Thai company with some conditions, for example, the Thai company must have been formed for more than 2 years and must have generated profit with proof of Corporate Income Tax payment. Some land offices accept the registration of land ownership through a Thai company only if all shareholders are Thai citizens. However, upon completion of the registration, you can then transfer 49% of the shares back to a foreigner.In regards to investigation and harassment, there will be less in the case of the first option because the land is still owned by a Thai citizen while the foreigner is just a lessee. The house will depreciate one day so there is no hidden attempt to acquire land ownership.However, if you choose to set up a Thai company and use nominee Thai shareholders, you cannot avoid the risk of being investigated and in a worst case scenario, being blackmailed by your own Thai partner unless your Thai partner genuinely owns 51% share in your company.
RETIRING IN THAILAND
Q :I found out about a ‘property-for-visa’ scheme by a developer in Pattaya and also a website that claims to be able to get a Thai retirement visa in one day! How genuine are these retirement visas? And are you aware of other property developments in Thailand that offer a similar ‘property-for-visa’ scheme? How reputable are these developments?
LD :Thailand has launched a country membership programme known as “Thailand Elite Project”. The latest scheme is legitimized by an Announcement of the Ministry of Interior governing permission to stay in the Kingdom for an alien in a special case, issued on the Government Gazette on February 22, 2013.
Thailand Privilege Card Company Limited (TPC) is a wholly-owned subsidiary of Tourism Authority of Thailand (TAT). The company is responsible for the Thailand Elite membership management and recruitment as well as distributing the revenue to the tourism-related operators who are selected as service providers.
Membership confers the right to stay in the Kingdom virtually indefinitely, with five-year renewable multiple entry visas issued to all members – as well as renewable 1 year or 365 days extendable stays without the usual need to leave the country. Members will receive a “Thailand Privilege Card” and extension of Visa could be up to 20 years depending on the validity of the membership.
The company also provides a property-linked Visa scheme. The buyer of an eligible property development project will receive a 5-year visa to stay in Thailand, which can be extended 4 times. The validity of Visa is linked to the ownership of such property. If the owner (Visa bearer) has sold the property, the Visa will be void. In case of resale, the buyer will be eligible to resume this Visa benefit for the remaining period. However, the Visa benefit is cut on the first resale. Further reselling will not grant the third buyer a Visa under this scheme.
At present, there is only one eligible property development project that could offer the Thailand Elite Visa upon purchasing the property – “South Point Project” in Pattaya. Visa benefit is an option. That means you can either just buy the property by itself or buy the property and apply for Thailand Privilege Card. The price of a property that includes the Visa benefit will of course be higher than buying without membership.
This Thailand Elite Property Co-Project Membership is suitable for a person who is mainly interested to invest in Thai property. The membership benefits are optional. Members will not obtain the full benefits of Thailand Privilege Card if their membership is obtained through the Co-Project.
If your main purpose is to have a long-term Visa to stay in Thailand, I suggest you apply for Thailand Privilege Card membership directly. The Company offers various packages such as Easy Access (5-year Visa), Individual Membership (5-year Visa, 4 times extendable), Family Package; etc. The fees and expenses depend on your selected package. There are more privileges offered rather than just a Visa. Please drop me an email enquiry, I am pleased to provide more details about the scheme and assistance.
To obtain a retirement visa, if you meet the criteria set by Thailand’s immigration law, the process is straightforward and you could get a one-year retirement Visa in one day. Using the services of Visa service providers/agents will definitely be more convenient as they would take care of documentation and bureaucratic procedures. However, a foreigner can also handle the application by himself.
THE CRITERIA ARE:
(1) Applicant must be aged 50 years or older; and
(2) (a) receives pension of not less than 65,000THB per month, or
(b) maintains money in a Thai bank account of not less than 800,000THB (if this is your first time to apply, you may choose to show proof of fund transfer from overseas to your personal bank account in Thailand for not less than 800,000THB), or
(c) receives pension plus money in Thailand’s bank account in one year of not less than 800,000THB. Once you have such qualifications, you should prepare your photo, fill in the forms and you are ready to apply.
1. Legally, you are required to maintain 800K THB all the time during the validity of the Visa. However, in practice, an applicant can withdraw such amount and top it up 3 months before the renewal date because the officer will only ask you to show proof of the funds in a bank account only in the last 3 months from the visa submission date.
2. The validity of retirement Visa is 1 year. This type of Visa does not allow you to work in Thailand.
3. The 800K THB deposited in a personal bank account in Thailand can be transferred from overseas or it could be an income generated in Thailand. The source of fund does not matter.
4. At present, a spouse can get a dependant Visa. But there is a proposal to change the criteria so that both husband and wife must each have 800K THB in their own bank account. This proposed change is still under consideration.
5. There is no special privilege granted to a retiree Visa holder.
6. If a retiree visa holder wants to work, he must cancel his retirement visa and apply for a business visa in order to apply for a work permit.
7. There are no other benefits given to a retirement visa holder. It’s just permission to stay in the Kingdom for retirement.
8. There is no prohibition to change retirement visa to Permanent Residence. However, there is no category [under the law] to support the retiree visa holder to apply for PR. The grounds to apply for PR are mainly for doing business, taking care of Thai family, investment, etc.
9. After having obtained a one-year retirement visa, the visa holder can stay anywhere whether inside or outside of Thailand.
FEES & EXPENSES
Government fees and expenses are as follows:
1. Visa Fee: 1,900 THB/one applicant.
2. Multiple Re-entry permit: 3,800THB / Single re-entry permit: 1,000 THB.
3. Bank fee (certificate to confirm funds in account): 100-200 THB depending on banks.
4. Translation of documents (if your documents are not in Thai / English language, they must be translated into Thai language and certified as correct translation by a translator and Thailand Consular Affair Office. The translation fee is about 400-600 THB/page and government fee for certification is 400 THB per page.
5. The service fee for assistance to apply for retirement Visa ranges from 5,000 THB to 15,000 THB. My firm’s service fee for this type of Visa is 10,000 THB for retirement Visa and 5,000 THB for dependent Visa.
Buying and operating a hotel in Thailand
Q :I am thinking of buying and operating a hotel in Phuket. I am the only person funding the purchase. How do I go about it to ensure that I still continue to have 100% ownership of both the hotel (3-storey) and the business?
LD :The hotel business is a reserved business for Thai Nationals. However, the Board Of Investment of Thailand (BOI) has offered the privilege to both Thai nationals and non-Thai nationals to operate the Hotel business if:
(1) The hotel is a newly constructed hotel;
(2) It has more than 100 rooms or has a minimum investment of THB 500 million. The benefits granted to an approved application will be both tax benefits and nontax benefits such as employment of expat and entire foreign ownership. The tax benefits will be granted only if the hotel is located in the eligible zone.
After receiving the BOI’s approval, the applicant will be able to request for the Foreign Business Certificate that allows foreigners to entirely own the hotel. However, prior to starting the operation, the hotel owner must apply for a Hotel license as well. The hotel license holder could either be a Thai person or non-Thai person who meets the requirements.
In response to your query, you are interested to buy a hotel that is now operating. Therefore, you will need a Thai partner to hold the majority shares in your company that will own the hotel and undertake the operation. The basic way to control the majority shares is to control its voting right. You also have to make sure that you have drafted the company’s Articles of Association in such a way that the majority shareholders will not be able to pass the meeting resolution without your consent/knowledge.
Although I said that it is a basic strategy, you are highly recommended to hire an experienced lawyer to help you sort it out. Some unqualified service providers may mess it up easily by using the Articles of Association copied from other companies. You have to explain your business concerns to your lawyer. The qualified lawyer will be able to draft the Articles of Association to match your needs and comply with the laws.
Since it is an existing company, you will have to ask the present owner to give you a certified copy of the Articles of Association, Financial Report in the last three years, certified shareholder list and company share registry book and of course the company affidavit and Hotel License. The Articles of Association will tell you how the shareholders agree to control the company and whether you will need to amend it to be more secure for you.
The Financial Report will tell you if there are any outstanding taxes and if they have paid the applicable taxes correctly. Shareholder list and share registry book will tell you a history of share transfers. The company affidavit will tell you the major company details such as director’s authorization, share capital, company address and authorized person’s name.
In addition to the control (managing power) structure of the company, I suggest you to check carefully on the business licenses and outstanding tax matters. Many hotels do not have the hotel license. Most of them do not pay correct taxes such as the corporate income tax and local taxes levied on the hotel business, land and house tax, etc. A legal Due Diligence may cost extra money for you to undertake this business deal but it is worth paying to ensure your investment is safe.
PT 2: TOP 10 MISTAKES FOREIGNERS MAKE WHEN THEY BUY THAI PROPERTY
Thailand is a popular destination for many foreigners who would like to invest or even stay for the rest of their lives here. But Thailand laws have a number of restrictions for foreign purchasers. In Part 2, I will point out the frequently asked questions that I have experienced in my position.
# 6 “Is EIA approved?”
Many developers of projects, either condominiums or completed houses, have launched pre-sale promotions to attract potential buyers. Is this the best buy period? I have to say this has pros and cons for you to consider.
Pre-sale promotions always attract you with very tempting starting prices and other privileges, but there may be hidden risks. Without checking thoroughly the project details, your dream condominium or housing project may never be built.
In Thailand, many property projects are legally required to undertake and submit an Environmental Impact Assessment (“EIA”) report in order to get the construction permit. It may be the case that the pre-sale promotion takes place before EIA approval. When the EIA is approved, the project’s floor plan, facilities, etc, as advertised could be subject to alteration e.g. swimming pool turning into a park, downsizing of fitness centre, etc. The worst case scenario is that the whole project is cancelled.
The buyers who had paid the booking price or made a downpayment would have to find a way out of this complex situation. Therefore, the best solution is to get to know the reputation of your project developer and check with them whether the EIA has been approved.
# 7 “Is foreign quota available?”
In Thailand, foreigners are allowed to be legal owners of a condominium unit, however, there is a foreign quota restriction. Under the Condominium Act, the proportion of foreign ownership of a condominium must not be over 49% of the total usage area in a registered condominium.
At the time of registration of ownership at the Land Office, the Condominium Juristic Person of such condominium must provide the certification letter to confirm that the foreign ownership quota of this Condominium is still available to support the registration of ownership transfer.
Therefore, you should check its availability prior to the title registration process.
# 8 “Is there any Specific Business Tax concerns?”
Investment in the property without knowing the tax liability may cause you more than you bargained for.
Some foreigners want to invest in a property in Thailand and sell at a good price in a short period of time. However, to sell the property after holding it for less than 5 years, the owner will be subject to a business tax at a rate of 3.3% of the appraised value or the selling price, whichever is higher.
This extra expense is easily overlooked. Therefore, you are advised to check the government fees and tax burden prior to agreeing on the price.
# 9 “Is there any requirement from your spouse?”
A foreigner who is married to a Thai must provide a letter of consent from his/her spouse for the purchase of a condominium. This is because Thai law deems a husband and wife as one person and both must consent to a contract.
In the case where the foreigner wants to buy land (as opposed to condo), he must use his Thai spouse’s name to buy it since foreigners are prohibited from buying land. But the Thai spouse must declare that the purchase price came from her personal funds in order to have it registered in her name. The foreign spouse must also sign a declaration letter that he acknowledges and gives her consent to undertake this transaction. It is then deemed her personal asset and if the couple were to divorce, the Thai spouse will retain the property.
Therefore, the documents and information of the buyer’s spouse are essential to a successful registration.
# 10 “Can foreigners have their name in the House Registration Book?”
There are two types of House Registration Books, otherwise known as a census record in Thailand.
The first type is the House Registration Book that always comes with the title deed, House Registration Book (Tor Ror. 14), also known as “Blue Book”. This Blue Book allows only a Thai national or a foreigner who has permanent residency to have their names registered therein.
The second type is a House Registration Book (Tor Ror. 13), so called “Yellow Book” issued specifically upon request by a foreigner who has a non-immigrant visa and specific foreign immigrants under the Immigrant Act. In this Yellow Book, a qualified person as defined here, can be named as the house master of your property. This book is not proof of property ownership but shows that you live in this property as your primary address in Thailand.
Top 10 mistakes foreigners make when buying property in Thailand
Q : I am interested to buy a property in Thailand but heard the process is complicated and many got burnt and lost money. So I would like to know what are the things to look out for before signing on the dotted lines of the Sale & Purchase Agreement?
LD : I have found many repeated mistakes that the newcomers make, mostly because they don’t get proper legal advice before buying the property. The Sale & Purchase Agreement and related legal documents are more complicated than people think. It is not just the wordings used in the contract but the legal implications arising from the terms & conditions, authority to contract of the parties, enforceability of the contract and specific concerns in relation to the property such as road access, provision of water supply, etc.
I will summarize the Top 10 most popular mistakes here for your benefit:
#1. No tap water, no road access contrary to drawings
Thailand still has a lot of land-locked plots and many places still do not have tap water.
We normally advise clients to conduct due diligence on the land before committing themselves in any investment particularly if the investment in the land is either a leasehold for the individual’s residence or a freehold by the company for commercial purpose.
Although there is a road in front of the land when you visit the land site, it may be the private land of somebody else and you may end up buying an expensive land-locked plot. Many land owners tried to price up the land by cutting a small part of their own land to be constructed into a public road. This public road in fact is a two-sided dead-end. It is just dressed up in the drawings to fool the negligent buyers that this land has road access. Sad but true.
You may think the land price that you paid includes the basic infrastructure like tap water. No, many beautiful villas in Thailand needs a water truck to fill in their water tank every fortnight. You cannot change the fact that the development of Thailand’s infrastructure occurs slower than the demand. But if you know about it before buying the property, you will at least be able to pay the correct value.
#2. The Seller may not be the owner
The Seller may show you around to inspect the property and sign the contract but do they have the right or authority to sell? The Court has ruled that the ‘seller does not need to have the ownership of the property when signing the contract’. However, he must be able to sell it on the agreed ownership transfer date. Thus, if the seller does not have the ownership when he signs the contract, this is not considered as “Fraud”. But would you like to sign the contract with a person who does not have the ownership or the authorization from the real owner to sell?
The best way to check the ownership is to check the authenticity of the land title deed. The land title deed is a public registered document, therefore, anyone who has the interest can request to check the information at the relevant Land Office. The document is available only in Thai language so it is recommended to employ a lawyer to do it for you.
#3. Leasehold title is not the real property (“Jus In Rem”) under Thai law
Unlike in Western countries, the leasing right under Thai law is a personal right “Jus In Personam”. This means the right cannot be transferred to your heirs in case of death. On the other hand, if the lessor (land owner) is dead, the heir of the lessor is not obligated to renew your lease even if you have a lease agreement that has the clause to renew. So the 30+30+30 years lease will work well only if both the lessor and the lessee are alive. Don’t worry, there is a way to ensure that your lease can be renewed. However, after 90 years, you have to return this property to the owner unless the law has been changed to attract more investments in property.
#4. Purchase price of the condo unit must be brought from overseas
Although the foreigner is allowed to purchase a freehold unit, there is a Ministerial Regulation stipulating that the foreign buyer must provide the Foreign Exchange Transaction Form issued by the Thai Bank to support the application for the ownership transfer registration.
Therefore, you cannot use the money that you earn in Thailand to buy the condominium unit that is subject to foreign ownership quota.
There is a solution if you work here in Thailand. You may open the non-resident bank account to pool your money for this purpose. However, this will cause a difficulty upon registration of ownership transfer. We thus recommend you to transfer funds from overseas in order to purchase the condominium unit in Thailand. Please make sure that you specify the purpose of fund transfer as “Condominium Unit Purchase”.
#5. Under-declaring the price is a criminal offence
The Seller and/or your Thai friends may tell you that it is a very common practice to state a lower price than the actual purchase price on the registration of ownership in order to pay lower government fees and taxes due for registration of the land. It is true that many people do it but it does not mean this is alright.
Giving false statements to the Land Registrar is a criminal offence. If convicted, the perpetrator is liable for imprisonment up to 3 years or a maximum fine of 6,000 Thai Baht; or both imprisonment and fine.
Furthermore, when you sell the property and your buyer does not agree to declare a lower price as you did when you bought it, you will have a bigger real capital gain. This will lead to more taxes payable arising from the sale of property. Basically, this is the profit tax carried forward from the previous seller. Think again, why do you need to take this risk in order to save taxes for your seller?
We will continue the rest in the next issue. Look out for it!
LAND OWNERSHIP IN YOUR THAI GIRLFRIEND’S NAME
Q : I have bought a landed house in Phuket and put it under my Thai girlfriend’s name. However, I want to ensure that in the event we separate, I still get back my house fully. Also, I want to make a will bequeathing half of the house to her and half to my 2 children from my previous marriage. How do I go about doing this?
LD : As foreign ownership is allowed only for acquisition of a condo unit, the most common advice to secure your investment on your landed property is as follows:
1. Register a long-term lease on the property; or
2. Register the mortgage (assuming this property is mortgaged).
(1) While registering the lease will ensure that you will be able to use the property during the lease period, it will not stop the land owner from selling the leased premises. However, she will have to sell the land together with your registered lease attached.
(2) The mortgage will protect your investment at least for the principal but it will not allow you to live on the mortgaged property. So the land owner may request you to leave the property anytime whether or not your relationship has ended. You can register your interest on the loan if you decide to register the mortgage. However, you are not allowed to insert the condition that you are to share the profit in the event that the land owner sells the property. This will be considered as an attempt to have own land by using a Thai nationals as a nominee which is illegal in Thailand.
As you wish to bequeath this property to your non-Thai children, the mortgage may be the better option because the assignment of the lease requires the consent of the lessor (land owner).
The fund provider could either be a foreign individual or foreign company. If you have no problem maintaining a company in good status just for the purpose of protecting this investment, then the registration of the mortgage to the company will be more secure.
You can bequeath this property to your heirs by making a will to split the shares in your company to your children and to your girlfriend. In a worst case scenario, your girlfriend will be able to sell the land only if she could pay off the loan. Thus, if the price of the land has dramatically increased and your girlfriend can find the financial resources to pay off the loan, then your children will receive half of the loan repayment plus interest. But your girlfriend will receive half of loan repayment plus interest as well as the profit from the sale of land.
Please note that no other rights are better than ownership. Since Thailand does not allow foreigners to have land ownership, foreign investment on land in Thailand will inevitably come with a risk. The legal solutions will certainly help to reduce the risk but cannot entirely eliminate it.
Q : Will the S & P be both in English and Vietnamese? And which one takes precedence? What is the track record of Vietnamese developers in terms of construction time? If beyond the time stipulated in the S & P, would there be problems getting compensation from the developer?
AW : Prior to the implementation of the existing Law on Housing, foreign developers in Vietnam have all these while practised issuing the S & P in both English and Vietnamese language. Both versions are of equal standing and are governed by the laws of Vietnam. With the existing Law on Housing, an increasing number of domestic developers are following suit with this practice; currently most developers that are targeting foreign buyers have both language versions of the S & P.
Most of the established (financially stable) Vietnamese developers keep to their construction schedule as stated in the S & P very well; from experience, most projects are completed and handed over well within the stipulated construction time frame. The same cannot be said for lesser known developers.
If the construction drags beyond the time frame as stipulated in the S&P, or if the developer goes bust, or for whatever other reasons, a guaranteeing bank will compensate the buyers. This is in accordance with the existing Law of Real Estate Business whereby all developers are legally required to take up a banker’s guarantee on their real estate project. Moreover, the issuing bank must be approved by the State Bank of Vietnam. Photography by Jan Yong
SELLING YOUR PROPERTY IN THAILAND
Q :I am planning to sell my condominium in Bangkok worth about THB10 million. I bought it since 2012 for THB8 million. The condo is jointly owned under my name (I am Malaysian) and my Thai wife’s name. At the moment, there is a tenant staying there and the expiry date of the tenancy is next January. Are there any restrictions I should be aware of e.g. Can I sell to anyone including both locals and foreigners, is there Real Property Gains Tax, and how much commission do I need to pay to the agent to sell for me? Can I let potential buyers view the condo while the tenant is still staying there? Any other information on selling property in Thailand would be very much appreciated.
LD : Your case is very common and clients coming to our law firm often wonder about the tax and legal implications of a sale. There are several parts to your question and therefore I will endeavour to answer them in chronological and practical order.
Firstly, the Thai Revenue Department does not enforce a Property Capital Gains Tax; however before you start “popping the champagne”, it is important to note the profits from the proceeds of a property sale are instead subject to Income Tax. The calculation for this can be complex and depends on the individual’s situation and circumstances; however the Tax is charged at a progressive rate starting from 5% to 37%.
From the brief review of your situation, I understand you have owned the Unit since 2012 so that would mean that the term of ownership is less than 5 years. You would also therefore be subject to the Special Business Tax (SBT) which is 3.3% of the sale price or appraised value. Except if the seller has registered the name in the House Registration Book more than one year, the SBT will be exempted and there will be the duty stamp at 0.5% of the sale value applied instead.
The final Fee on the Sales of your Property would be, the Registration Transfer to the new owner. This is usually at 2% of Appraised Value; however due to recent changes in legislation, if you were to sell before April 28, 2016 you would only be subject to a 0.01% Transfer Fee.
In terms of restrictions on the Sale, provided the unit is registered in the Foreign Quota of the Condominium, there will be no restrictions on the sale to Thais and Non-Thais.
Therefore to recap:
The final part of your question pertains more to the “marketing” of the property. Upon consultation with a property agent, I understand that this Fee is a standard 3% of the Sales Price throughout Bangkok.
Conducting successful viewings while the Property is tenanted will depend on your Rental Agreement and the relationship you have with your Tenant. Rental Agreements tend to have clauses allowing access to the property “provided adequate notice” is provided. However, since the key to a successful sale at a good price is to “maximize viewings”, this may disturb your tenant’s peaceful occupation of the property. Therefore, the best course of action is to discuss with your tenant and have an arrangement in place (i.e. Viewings can be conducted only on certain days).
Property Law and Tax can be quite complex in Thailand; on top of this, the government departments involved in property transactions, notably the Revenue Department and Land Department operate in Thai which is an added obstacle. Therefore, I would advise anyone looking to buy or sell to engage the services of a good and reputable law firm.
Pierre Leung is the Sales Manager of Fresh Property, a boutique property agency that specializes in Sales and Rental of Residential Property in the Sukhumvit Area of Bangkok. He can be contacted via www.freshbangkok.com or Pierre@freshbangkok.com
PROS AND CONS OF STAYING IN BANGKOK CBD
Q : I am a Singaporean and I am thinking of buying a condo around Wireless Road or somewhere in the CBD as my second home. What are the pros and cons? Facilities that I must have include a swimming pool, gym, proximity to the BTS skytrain and MRT, as well as the right to rear a small dog. Also, first rate security system and at least one car park. A duplex would be preferable too. Could you recommend me some condos – both new and sub-sale? Would appreciate the price range, area, and why you think the particular unit is suitable for me and my wife. My budget is Baht 30 mil.
INVESTING IN MULTIPURPOSE APARTMENTS IN JAPAN
Q: Are there SOHO (Small Office Home Office) or its variants, SOFO and SOVO available in Japan? If I want to rent out my apartment investment, would it better to buy a serviced apartment or even better, one that is managed by a reputable hotel management company? Are these properties subject to commercial rates in terms of utilities, taxes, etc?
A: As shown in our recently published deal analysis, there are plenty of apartments in Japan that are designated multipurpose – meaning, they can be leased as a residential property, business, or any variation of the two. However, the distinction lies in local municipality area ordinances and building management restrictions. From the landlord’s perspective, there is no difference in taxation or rates (although certain building management companies may charge slightly higher monthly fees for management for units functioning as businesses). Corporate tax rates are applicable only in cases of corporate ownership of the property, regardless of whether it is used as a private residence, a business, or both. As far as serviced apartments go, these are normally only used for short term leases in Japan, and are known here as a “weekly mansion” or “monthly mansion”. These can be attractive investments if they are located in well-maintained buildings, close to city centres or other convenient locations, and are well equipped with functioning kitchens, internet access and electrical appliances. In these cases, the management companies would normally charge approximately 30% of the gross rental income, and would in turn take care of all advertising, placements (check-in/ check-out), cleaning and monthly reporting on behalf of the owner. However, the unit profiles required to make these apartments popular with short-term tenants, which tend to be travelling business-folks or visiting tourists, would make the initial capital outlay a lot higher than most profitable “standard” apartments (more central, newer buildings, larger units, etc). Generally speaking, the best way to approach these potential investments is to first contact a local serviced apartment management company and ask them for the designated profile fitting their current stock – then look for appropriate units available on the market and see if the price and projected returns make sense.
SELL BEFORE THE OLYMPICS?
Q : Some Japanese experts are advising that you should sell your Tokyo properties just before the Olympics if you had bought them within the last few years. What is your take on this?
ZNM : The short term view:
Capital gains tax in Japan is doubled if properties are sold within five years after purchase, so from a pure financial perspective, and taking into account projected sales costs (normally 3-6%, unless you’re lucky enough to have a direct buyer lined up), you need to make sure it’s worth your while. Of course, this would entirely depend on the price at the point of purchase and sale.
The medium term view:
Once the above has been factored in, it has generally been noticed that property prices in Olympic cities tend to build up in the few years leading to the event, and slump away slightly afterwards. So if the numbers are in your favour, and you’re in it for the long haul, then yes, the assumption that selling just before the Olympics would be a prudent course of action and is most likely correct statistically.
The long term view:
The multi-trillion dollar question, as always, (not just for our own personal holdings, but for the entire region and its’ local economies) is what the future will bring. Not holding a crystal ball, but noticing the volatility in the area and the (as of yet) reluctance of the current government to address some of the deep-seated social and demographic issues underlying Japan’s economics – I would advise a less speculative and more monthly yield-oriented approach. Buy and hold basics – if it’s not generating enough to justify holding it, compared to what your money could be doing for you elsewhere – simply don’t.
NEGLIGIBLE IMPACT FROM EARTHQUAKE
Q: How would the recent deadly earthquake in Southern Japan affect the property market in Japan?
ZNM : Japan’s property market is, sadly, well versed in natural disaster, as are its’ insurers and property holders. From that particular aspect, and for individual property owners, it’s business as usual, and no effect overall.
From a more local perspective, a singular earthquake or even a series of closely occurring earthquakes and aftershocks would not cause any serious dent in market fundamentals. Kumamoto was, and will most likely remain, a very attractive market with a growing population. It also boasts socially aware local governance which supports its ageing population in a much better fashion than many of Japan’s municipalities, and some interesting industries to watch out for – not the least of which is one of the world’s largest mega-solar farms, built in rural Kumamoto prefecture and drawing many employees and businesses to the area.
However, if this were to become a repeated occurrence of some concern, with the area officially declared more earthquake-prone than others, it would most likely have a deeper localised effect on its property market as well.
On this note, we would like to take the opportunity to announce that NTI has been assisting our clients in donating directly to the Kumamoto earthquake relief efforts, by donating directly to local municipalities, with little to no overhead involved. Please feel free to contact us if you wish to participate – all donations are welcome.
HOW TO RETIRE IN JAPAN
Q : I am thinking of retiring in Japan. How do I go about it? Is there a retirement visa for foreigners?
ZNM : Unfortunately, there is no specific visa for foreigners wishing to retire in Japan. The vast majority of foreigners who have retired here have done so via either a working/business visa, spouse visa (through marriage to a Japanese citizen or permanent resident), or long-term residency.
1. Work visa – generally speaking, the easiest visa to get, as all it requires is a job offer from a company willing to sponsor the applicant. The main drawback to this visa, however, is that it is only valid as long as the person is employed – not exactly conducive to retirement purposes.
2. Business visa – anyone who has approximately USD50,000 to invest in a Japanese business (the actual investment amount may be reduced based on the number of Japanese employees who will be hired by the business) can apply for and receive a business or investor’s visa – however, while certain areas may allow six temporary months for investors to set up their business operations first, before investing their funds and hiring staff – the general idea is that the money has to be invested, and the business operating, for this visa to remain valid.
3. Spouse visa – the requirements for this visa are the least stringent technically – however, the validity of this visa depends on the validity of the marriage (simple civil unions or de-facto relationships do not apply), and the termination of the marriage would usually lead to the termination of the visa as well.
All of the above visas, while essentially temporary in nature, can lead to a long-term visa which, over the course of the years, can lead to permanent residency and retirement. This is not a straightforward process, however – generally the pre-requisite is a reasonable minimum annual Japanese income obtained for six years (two consecutive three-year “long-term” visas), coupled with proven proficiency in written and spoken Japanese – after which the applicant may apply for permanent residency, which will enable him/her to retire in Japan regardless of employment, income and/or any family associations.
It is worth noting that, due to Japan’s rapidly shrinking population, it is widely believed that immigration reforms allowing for easier migration may be one of the country’s most pressing and necessary issues to tackle – however, at this point in time, these reforms have yet to take place.
Negative rates impact on property market
Q : I read that Japan now has negative bank interest rates. How would this affect my property loan denominated in yen? And how would this impact the Japanese property market overall?
ZM : This move by the Bank of Japan (BOJ) is the latest in a series of attempts to re-ignite healthy inflation in the world’s third largest economy – and mainly because the previous attempts have been met with only limited success. BOJ governor Kuroda, who was appointed by and works closely with Prime Minister Shinzo Abe since 2012, is hoping that by taxing financial institutions’ funds kept in the country’s central bank, he would be able to force these institutions to invest in a more diverse, global and constructive manner – rather than “sit” on their deposits as they have been doing historically.
The reason for this lack of diversity, aside from the infamous Japanese mentality of avoiding risks at all costs, is mainly due to the fact that any interest, even a very modest one, becomes far more positive in a deflationary environment, where costs of domestic goods and services keep dropping – as do nominal wages. By taxing these deposits, Kuroda hopes to force these institutions to withdraw and invest their (and their clients’) capital, thereby turning a deflationary cycle into one of growth.
Regardless of the results of this exercise, one should not assume that banks will now start paying borrowers to borrow, or even reduce interest fees accordingly – in fact, some even speculate that they may increase rates, to cover their own increased borrowing costs. The reasons for this are various (aside from the obvious greed factor) – firstly, banks are not obliged to pass any such rate hikes or reductions on to their clients, and often quote a myriad of reasons stating why they cannot, or will not, do so. Secondly, the effects of this manoeuvre on the value of the Yen is yet to be determined – if the very mild effects this announcement has had on the stock market is anything to go by, it may be very lukewarm indeed – and a yen-denominated loan taken in another country, with associated international fees and interim middle-men and institutions, may be affected even less. Lastly, and perhaps most importantly, a drastic reduction in official bank interest rates, which would have to also be applied to client savings, may kick off a withdrawal frenzy, which the banks and government will want to avoid at all costs.
As for effects of this particular move on the property market – again, if its effect on the stock market is anything to go by, I wouldn’t keep my fingers crossed – it will take far more than a single headline grab and policy aspect implementation to move things one way or another. The property market is closely tied to the economy as a whole in a “chicken and egg” type of symbiotic relationship – and deep and meaningful structural, social and economic reforms will still be required for the market to respond positively in any meaningful, long term way.
If viewed on its own, this particular strategy may do nothing – but if joined with other policies designed to tackle Japan’s big issues, such as the declining birth rate, gross national debt and outdated approach to globalisation – it may just be a big step in the right direction.
SURGE IN SALES EXPECTED DUE TO TAX HIKE IN 2017
Q : I understand there is a proposed consumption tax hike in 2017. Usually, when such is the case, there will be a surge of property buying activities before the hike kicks in. Do you see the same happening in Japan in the run-up to 2017? If so, would you say now is the right time to buy especially when interest rates are so low? What are possibly the items (both goods and services) that are likely to be subject to the new tax?
ZM : Consumption tax is charged on all services and new goods – as far as property purchases go, this means a 2% increase in all purchase costs (which, at worst case, could mean an increase from around 20% purchase costs to 20.4%). Additionally, new properties bought directly from the developer would go up 2% in price – but only theoretically (see more below).
If we were to project based on the last tax hike, back in 2014, there would indeed be a surge in property transactions in the months leading to the hike, and a temporary slump in the quarter following.
However, there are some caveats in this case – firstly, for new developments, providers normally discount new property prices in the months following a tax hike, in order to soften the blow. Additionally, the 2014 tax hike was the first since 1997, which naturally was quite a shock following two decades of deflation.
The tax hike planned for 2017 is already the second in two years, and the national psyche is likely to be less gravely affected by it. Lastly, the proposed 2017 tax hike, (which has already been postponed once), is coming on the back of wage increases – and while these aren’t as robust or sweeping as previously hoped, their existence is likely to provide at least a small measure of resilience to the general population. This is especially so when they are faced with increased prices at the cash registers as well as for new property developments.
Tax matt ers & Japanese properties
Can you explain to me what are the taxes I need to pay as a foreigner when I invest in a property in Japan e.g. rental income, quit rent, assessment or municipal taxes, and real property gains tax when I sell?
ZM : The following is a brief and general outline of taxes applicable to foreign propertY investors in Japan:
◆ Income Tax
Income tax thresholds in Japan are the same for individual residents and non-residents alike. Non-residents, or residents who have lived in Japan under five years, are not required to report their income in other countries to Japanese tax authorities.
The Japanese financial year ends on 31 December, and tax statements and payments are to be concluded by 31 March the following year.
It’s important to note the following –
a) Most developed countries have a tax treaty in place with Japan, to prevent double taxation – you should confirm the existence of such a treaty between Japan and your country of residence prior to deciding whether a Japanese investment property portfolio would be profitable for you. Depending on your personal financial circumstances and whether any claims/deductions are applicable in your case, however, you may have to pay the difference in taxation levels. For example, if you are taxed at 5% in Japan, and 6.3% in your country of residence, your local tax department may require you to pay the remaining 1.3% even if there is a tax treaty in place. Consult with your local accountant to find out which taxation scenario applies for your particular circumstances.
b) Once you reach the minimum reporting threshold (below), Japanese accounting services would be required, in order to file tax return statements, claim expense deductions & depreciations, etc. Bear in mind, however, that in Japan, property purchase costs can generally be claimed in full, and also carried forward for several years, so a smallish 1-5 small, second-hand units portfolio would normally not be required to pay any income tax or use an accountant’s services for the first four or five years.
c) Whenever you reach a higher income tax threshold, the new level is only applicable to income exceeding that of the previous level – meaning, for example, that once your income exceeds 380,000 JPY, you will only be paying 5% on every JPY beyond that sum, and not on the entire amount (see thresholds below).
* Under 380,000 JPY per-annum – 0% (non-taxable income)
* 380,001 – 1.95 Million JPY – 5%
* 1,950,001 – 3.3 Million JPY – 10% + 97,500 JPY
* 3,300,001 – 6.95 Million JPY – 20% + 232,500 JPY
* 6,950,001 – 9 Million JPY – 23% + 962,500 JPY
* 9,000,001 – 18 Million JPY – 33% + 1,434,000 JPY
* Over 18,000,000 JPY – 40% + 4,404,000 JPY
◆ Property (Fixed Assets)
Tax Property tax in Japan is approximately 1.4% of the official taxable estimated value of the property per annum, with slight variations possible due to the age of the property, its designated purpose, location and size.
The highest yielding properties are normally under 200 sqm in size, and as such, enjoy a large discount in property tax– which brings the tax further down, to 0.75-1.25% of the purchase price per-annum, on average.
◆ Purchase Tax
Property purchase tax in Japan averages up to approximately 2.6% of the official taxable estimated value of the property per-annum, with slight variations possible due to the age of the property, its designated purpose, location and size.
◆ Capital Gains Tax
Gains realized from selling short-term real properties (i.e., properties held for less than five years) are taxed at 40% of the net gains. The taxable net gain is computed by deducting the acquisition costs and related expenses, improvement costs, and transfer costs from the gross sales price. Net gains from the sale of properties held for more than five years will be taxed at 20%.
◆ Consumption Tax
Consumption tax, or goods and services tax (GST), as it is known in other countries (sometimes also referred to as value added tax (VAT) – while not directly related to property investments, is included in all quotes and invoices received from Japanese shops, companies, or service providers (such as our own company, a real estate agency, or a property management firm or property lawyer). The tax has gone up from 5% to the current 8% on 1 April, 2014, and is anticipated to rise to 10% by the end of 2017. Any quote or invoice issued by a business (as opposed to a private individual) for goods or services rendered in Japan includes this tax, even if it is not mentioned specifically.
◆ Other Taxes
Other Japanese taxes, which are mostly corporate or prefectural/municipal in nature, do not apply to individuals who are not Japanese residents. For foreign or locally incorporated entities purchasing, holding, managing or selling real estate properties, other taxes may apply – please consult the relevant accountants or authorities in your country of residence as well as in Japan.
(N.B. Nippon Tradings International (NTI) is not a professional accountant and will not be held liable for any losses sustained by above information. It is highly advisable to hire the services of a Japanese accountant for accurate and up-to-date advice. Feel free to contact me for the contact details of our recommended accounting firms.)
JAPAN TICKS ALL THE RIGHT BOXES FOR INVESTMENT
Q : I have read that Japan is in recession now and no one knows when it would come out of it. Is now a good time to buy Japanese property for own stay and for rental?
ZNM : It could be claimed that Japan has been in consecutive recessions for the vast majority of the last 25 years – since its economic bubble burst in the early 1990’s. And, while it has enjoyed a period of GDP expansion in the last few years, its shrinking population all but dictates that technical recession will hit again and again, whenever anything even slightly negative occurs in the economy – simply because it doesn’t have the rising population numbers to provide for an expansion of GDP (or, as Mathew Yglesias correctly postulates in his excellent piece in “VOX: Business and Finance” – “In the context of a working-age population that’s shrinking 1 % a year, an economy that is ‘only’ shrinking at 0.8% per year is actually doing okay”).
And the interesting thing is that, as far as almost all other indicators go, Japan is actually doing more than just ”ok” – it’s doing spectacularly well – unemployment is at an historic low of just under 3.5% – workforce participation by working age adults (15-64) is at a record high of just under 76% – the price index is constantly climbing since the introductions of “Abenomics” (PM Shinzo Abe’s economic policies, introduced in late 2012), and is now back to its mid-2010 levels – and perhaps most importantly, a healthy level of inflation, introduced for the first time in over two decades, actually put nominal GDP on the rise as well – which is key to maintaining all those positive trends on the long-term.
This is not to say that Japan doesn’t have its share of problems, not by a long-shot – it will absolutely have to deal with its declining population, either by increasing birth-rates or by allowing intensive immigration (preferably both), as well as with its gargantuan public debt to GDP ratio – if it is to reverse this trend and stop slipping into technical recession on a regular basis – however, this single indicator means very little for its intensely consumer-oriented culture and society, and for the fact that it remains Asia- Pacific’s largest property investment market, and second largest property investment market globally, right behind the USA.
If anything, temporary slumps in the economy, like anywhere in the world, normally spell good news for property investors, as it means the country becomes a buyers’ market, and fantastic deals are more likely to be found on a regular basis – when things improve again, it becomes time to sell and realise capital growth. This is not to say that we, as investors, should jump head-first into any stumbling, emerging, third-world economy only because it is cheap to buy – market fundamentals have to be favourable, the environment well-regulated and supportive of our investment goals, and legal recourse has to be an option, particularly for foreign investors like ourselves. Japan, being the world’s 3rd largest economy, more than ticks all of those boxes, and so remains a great long-term investment for anyone seeking high rental yields in a stable, hassle-free business environment.
‘PERFECT’ TENANTS ARE FOR REAL
Q : I understand there is no credit check system in Japan, so how do I check out a potential tenant for my downtown Tokyo apartment? Are there credit guarantee companies and if so, how reliable are they?
ZNM : Credit guarantee companies or rent insurance companies, as they are known in Japan, are quite reliable, and are one of the three types of guarantees a tenant can potentially provide when leasing a property (the other two being a security deposit and personal guarantors – which can be of various degrees of reliability, from friends or colleagues, through family members, and all the way up to employers). These companies will interview a potential tenant, review their income status and require documentation to prove it, prior to approving them – and will often refuse to issue the insurance contract and advise against the tenancy, if they are unsatisfied with the results.
Generally speaking, Japanese tenants, while not as officially verifiable as tenants in most Western countries, also tend to be far more reliable, and would rarely have payment issues compared to other countries. In over 130 properties managed by our company, we have so far only had one tenant with chronic payment issues, and another one who absconded altogether (the rent insurance paid three months of missing rent on his behalf, as well as for the cleaning and removal of personal items following that).
Perhaps most importantly, tenants here would almost never intentionally damage a property, use it for illegal purposes, squat/allow unauthorised sub-tenants to move in with them, or any of the other ills often associated with bad tenants elsewhere – and, surprisingly enough, this is also true for the lowest end of the tenancy market.
The reason for this is that, culturally, “doing the right thing”, or behaving in the “correct” way is one of the main pivots of Japanese society – strictly governed by social expectations, concepts of respectable and honorific behaviour and appropriate citizenship – which, to the average Japanese, can be a far stronger deterrent than legislation and fear of repercussions. This is doubly true in the case of company employees, whose biggest fear is that their bosses and colleagues may somehow find out that they have behaved inappropriately. Strange but true
CITIES WITH HIGHEST YIELD IN JAPAN
Q: Should I base my purchases on highest yield when purchasing properties?
PD: Ask investors what appeals to them about Japan properties and they will say – affordable prices, high yield and steady cash flow from rental income. This is true in part. However, placing your bets on high yield alone can prove to be risky when trying to replace a tenant in an area with low population growth. Therefore, in addition to yield, taking into consideration population growth and even governance can minimize investment risks for a steady rental income stream.
HIGHEST YIELD VS POPULATION GROWTH
Due to Japan’s fastest declining and fastest aging population in the world, and because population is key to the occupancy of rental properties, it is important to understand the correlation between yield and population growth. Based on the chart here, Kobe, Hiroshima and Sapporo provide the highest yield and show stable populations. But replacing a tenant might not be as quick as you would find in Kawasaki, Tokyo or Saitama based on higher population growth.
This chart which shows a low-risk blend of both population growth and yield identifies Fukuoka, Saitama and Kawasaki with the most potential.
Across Japan, rental income yields approximately 7.5% net pre-tax on average with less risky, high occupancy, metropolitan cities at 6% yield, and smaller townships with the prospect of higher vacancy rates closer to 11%. The drivers of yield vary considerably in each city.
The 2011 tsunami affected property prices across Sapporo resulting in yields of approximately 8% net pre-tax. After the 2011 tsunami and up to 2013, the tens of millions of tourists visiting the main island of Hokkaido on a yearly basis came to a halt. Property prices became depressed but rental rates remained the same as local residents did not flee to other parts of Japan.
After 2013, population began to slowly grow boosting occupancy rates, and tourists gradually returned. Property sales picked up, but not enough to boost sale prices. As a result of depressed prices and stable rental rates, we see higher yields with older (1973-2000) single room properties generating the highest yield.
Fukuoka properties, although more expensive than other parts of Japan due to demand, are a popular choice for the conservative investor. The thriving city experienced a re-awakening since 2011 for several reasons.
First, politically, the city’s governor, a modern forward-thinker, strategically marketed Fukuoka to the world as, “Japan’s gateway to Southeast Asia.” Being closer to Korea, Shanghai and Taiwan than to Tokyo, this initiative proved to be successful for international conferences.
Second, after the “3-11 Tsunami” and subsequent nuclear spill in Fukushima, households and businesses in the area sought to distance themselves and moved away to the western end of the country, Fukuoka. Fukuoka city has experienced the largest organic growth of families and is seen as the best city to raise a family in the country. In this bustling city, high tenant demand and more expensive property prices bring down the yield.
SMALLER CITIES AND TOWNSHIPS
Investors also keep their eyes on higher yields in smaller cities and townships, particularly those growing faster than Tokyo. Kumamoto, for example, has a population of 734,917 as of 2015 and 670,348 in 2008. Not over a million like Sapporo, Kobe and Fukuoka, but much more growth at 9.63%, a significant difference to 3.91% in Fukuoka, 1.31% in Kobe, and 1.13% in Sapporo, and steadily growing. Kumamoto’s growth can be attributed to the development of one of the largest solar farms in the world, established since 2013.
While yield is undoubtedly a factor for higher monthly income, and population is key to tenant demand, growth and governance should not be overlooked. Where there are factories, you can expect a demand from employed tenants. Where there is strong governance supporting the unemployed, elderly and disabled, you may receive timely rental payments directly from townships through welfare programs.
Aidan Wee is the Managing Director of Somot Realty and is a Licensed Property Salesperson (Accredited by the Council of Estate Agencies in Singapore). Browse www.Somot-vn.com, call (+65) 9345 8633 or email aidan.property@ outlook.com
Dubai developer, Limitless has begun work on a long-delayed USD550 million housing (340 villas and apartments) and tourism project in Halong Bay in north-east Vietnam.
Q : I read that in March, Dubai developer, Limitless has begun work on a long-delayed USD550 million housing (340 villas and apartments) and tourism project in Halong Bay in north-east Vietnam. Are there other beach or island resorts that are being developed with the foreign investor in mind? In these areas, are there special rules to allow foreigners to own landed villas or shoplots?
AW :According to the geographic location of Vietnam, if you look at the shape of the country, it has a long coast line along the South China Sea. There are a whole plethora of beach and island resorts in Vietnam. In central Vietnam, Danang and Nha Trang are popular beach resorts with small offshore islands for tourism. In the South, we have the resort areas of Mui Ne and Vung Tau along the coast. At the southern-most tip of Vietnam is the rapidly developing tourist hotspot of Phu Quoc, an island located in the Gulf of Thailand.
With the boom in the second homes market and tourism in Vietnam, beach side and island locations have become very popular with real estate developers. The second homes market in Vietnam is usually targeted at the wealthy. Previously, such products were catered to the local market. However, with Vietnam’s acceptance into the World Trade Organisation, foreign developers have accessed the market and raised the bar on the quality of the products in line with international standards.
Most second homes developers have courted internationally renowned brands to manage their resort projects. Brands such as Hyatt and Intercontinental are brought on-board to provide their management expertise and high level of service.
Prior to the revision in the Law on Residential Housing that took effect on 1 July 2015, most second home developers have solicited foreign buyers through Long Term Lease Agreements. Now, foreign buyers can make investments directly via a Sale and Purchase Agreement. That said, in Vietnam there are no special rules to allow foreigners to own landed villas and shoplots in these areas; foreign ownership of all residential properties in Vietnam is subject to a single law.
Since the new law took effect, most developers have launched premium grade second homes products with foreign investors in mind. Since consumer consumption of second homes is limited to the wealthy locals, foreign investors present a new market that have the financial ability to invest in such product class. Foreign investors from a variety of countries have already shown great interest propelled by the growth in tourism. Sensing big opportunities in this segment, investments in the area are poised for a surge in 2016.
How to inherit Vietnamese property
Q: My husband owns a condominium in Vietnam which he just bought last November. He has just passed away recently leaving a will giving me and my children 100% share in the property. How do I get the property transferred into our names? My children are aged 8 and 9 respectively. We are residents in the United States.
AW : According to Article 767 in Vietnam’s Civil Code 2005, it can be inferred that the inheritance law must comply with the laws of the countries of which the estate leavers bear the nationalities before their death. It is not specified if your husband is of American nationality or just a resident. Assuming that your whole family are American nationals, you must ensure that the legal entitlement of you and your children to his will is legitimate in accordance with American laws.
Once this is in order, the inheritance rights to the condominium in Vietnam must comply with the laws in Vietnam where the property is located. Should you and your children be eligible to own property in Vietnam in accordance to the current Law on Residential Housing 2014, you will be allowed to inherit the property and be granted an ownership certificate for that property in Vietnam. There are no income taxes levied on the portion of the property inherited by your children since the relationship of the deceased to them is of parent and child, but you will have to pay a 10% tax on income for your portion of inheritance on the property (based on the value of your share on the property).
However, if you do not meet the requirement on foreign ownership of residential property in Vietnam, then the property must be sold and you and your children can only inherit an amount of money equivalent to the value of the property. In this case, there will be a tax on income of 10% applied.
Assuming that the heirs satisfy all the legal conditions for the inheritance of the condominium in Vietnam, they are able to take over the remaining leasehold over the property and enjoy the respective rights on the use of the property. You are required to assist your children as they are considered minors (below 15 years of age) in initiating the procedure to claim inheritance of the property. The procedures to be followed will be generally as follows:
Prepare a dossier of documents as required according to Vietnamese laws. This is to be done in Vietnam. Should the heirs not be able to travel to Vietnam personally, they can also appoint a third party to prepare the documents via a power of attorney.
Be present personally at the relevant government authority offices to complete and sign the necessary documents to finish the transaction (this step cannot be bypassed because the Vietnamese government will need the heirs’ passport with Vietnam’s immigration stamp on them as proof of valid entry in order to grant a property Ownership Certificate).
The dossier should include documents such as: A copy of the deceased death declaration from America, documents to prove the relationship between the deceased and heirs, passport of the heirs, all relevant documentary proof of the property and the will. Please note that all foreign documents must be notarised in their country of origin and translated into the Vietnamese language by a notary public in Vietnam.
This article only serves to inform and guide. It is by no means professional legal advice from a lawyer, as I am a professional in the field of real estate. My advice is to appoint a Vietnamese lawyer for a more accurate advisory. I am not responsible for any repercussions as a result of this article.
FAST-GROWING VIETNAM IN THE RADAR OF BIG FUNDS AND DEVELOPERS
Q : There has been a lot of hype about an influx of foreigners going to buy properties in Vietnam since the liberalisation of its market to foreigners in July last year.
1) Seven months on, how’s the situation? Have many of the implementation hiccups been resolved?
2) Can you also suggest some areas in HCMC that would be ideal for a 55-year-old retiree like me – somewhere quiet, not too far from the city centre yet with all modern amenities. I would also prefer a non-Vietnamese developer; joint ventures are okay. My budget is about USD1 million.
3) And finally, can I unofficially rent out a room in the 3-bedroom unit that I am thinking of?
AW : 1) A few months since the change in Vietnam’s Housing Law on 1st July 2015 allowing foreigners to purchase properties in Vietnam, foreign interest has noticeably gained momentum. According to Thanh Nien News (a prominent local newspaper): “Foreigners are welcoming the new law with more than 400 transactions from foreign buyers registered since July, while only 126 foreigners bought between 2009 and 2013.”
With the recent conclusion of the Trans Pacific Partnership (TPP), Vietnam’s economic connectivity to the rest of the major markets in the world should improve by leaps and bounds, with the lowering of import tariffs of “Made-in-Vietnam” products. This will accelerate Vietnam’s growth as a manufacturing powerhouse made possible by its relatively cheaper labour (when compared to its illustrious neighbour China) and ease of access to port facilities (made possible by its long eastern coast lines and broad river networks).
Moreover, the signed ASEAN Economic Community (AEC) when fully implemented will create a single market in Southeast Asia, allowing Vietnam to experience an increase in Gross Domestic Product, jobs and wages. All these factors will work in Vietnam’s favour to greatly improve its standard of living and increase the demand for quality housing, as well as creating a more vibrant and sustainable real estate industry.
Real estate funds and developers are placing Vietnam on their radar; some acquisitions had already concluded successfully with Singaporean and Japanese institutional investors leading the way. However, widespread investment adoption rate from individual buyers into Vietnam properties is still slow as compared to more established investment destinations such as Thailand, England and Australia.
Individual buyers are warming up to Vietnam as a choice destination for property investments (due to Vietnam’s strong economic scenario), but the lack of comprehensiveness and circulars guiding the implementation of the law had prevented foreigners from entering the market en masse. Apart from the 1st July 2015 revision in Housing Law, additional circulars providing explanation and guidance in implementing the law have not been forthcoming. As of now, a lot of policies adopted by the developers selling Vietnamese projects are still subject to the developers’ own interpretation of the law, which is not necessarily a bad thing as they are in a position to take responsibility for the buyers.
2) There are 2 main areas to the East and South of Ho Chi Minh City’s Central Business District that fit all your requirements. District 2 (Thao Dien, An Phu) in the East is known to be a landed housing cluster where the local rich and Western expatriates like to stay. Recently, more high-end apartments with good facilities are being developed there. A lot of foreign developers choose this area due to the general affordability of land prices and the desirability of the location.
Capitaland’s “The Vista”, Keppeland’s “The Estella” and “Estella Heights”, Hongkong Land’s “The Nassim”, Daewon’s “Cantavil”, Hamon’s “Gateway Thao Dien” and Prudential’s “Imperial An Phu” are some of the more notable foreign invested projects. Most are joint developments with a Vietnamese counterpart.
Typical amenities in close proximity to the residences are restaurants serving foreign cuisines, international brand shops, supermarkets stocked with imported products and international schools. Depending on the quality of the developments, a high-end 3-bedroom apartment will cost you about USD180,000 to USD250,000 upwards (you could even get 3 to 4 units should you want to maximize your budget).
Another area for your consideration will be District 7 (Phu My Hung) to the South, nationally recognised for being a “model township”. This part of District 7 used to be a swamp land and over the course of 20 years, a joint-venture between the Taiwanese and Vietnamese
known as Phu My Hung Corporation created a residential urban centre with modern amenities such as international hospitals, schools and commercial centres.
Riding on Phu My Hung’s coattails, some foreign developers also chose to locate their own projects in the surroundings of Phu My Hung Township. Notable projects in District 7 surrounding Phu My Hung are Keppeland’s “Riviera Point”, Pau Jar’s “Docklands Saigon”, Creed’s “An Gia Skyline” and Mapletree’s “SC Vivocity”. Similar to District 2, a 3-bedroom high-end apartment in District 7’s Phu My Hung and other surrounding projects will cost you upwards of USD180,000 to USD250,000.
In conclusion, by living in District 2 (Thao Dien, An Phu) and District 7 (Phu My Hung), you will have similar commute times to the Central Business District in HCMC; a commute by car will take approximately 30 to 40 minutes from both locations assuming decent traffic conditions (which is not too far from the city centre). Both locations also fit your requirements of having modern amenities and are relatively peaceful as compared to the hustle and bustle of city centre life.
3) Finally, you can unofficially rent out a single room within your 3-bedroom apartment or even your whole apartment, but by doing so, you will not be able to register your occupiers with the local police department and issue a tax invoice to the tenant to offset his tax liabilities, which is required under Vietnamese laws.
“More advantages dealing with estate agency” in Vietnam
Q : I am thinking of renting a property in Ho Chi Minh City for my business cum residential. What are the pros and cons of using an estate agency compared to dealing direct with the owner?
AW : When it comes to renting, my advice is to go through a credible real estate agency. Vietnamese property owners might not speak good English or any other third languages, and most of the time important information gets lost in communication. Moreover, any good real estate agency will have a proper tenancy agreement prepared in two languages (English and Vietnamese) of equal standing. The last thing any tenant wants, would be a simple tenancy agreement that has too many loop holes that allow for disagreements half way through the tenancy period; this will create a disruption for business.
There are many advantages of using a real estate agency that you are comfortable with, as your interest as tenants will be professionally looked after. A capable real estate agent is experienced to know very well the suitable rental price of a property, educated enough to communicate in two languages of both the owner and tenant, knowledgeable to prepare a good tenancy agreement and socially adept to negotiate.
The only disadvantage of appointing a real estate agency is their professional fees, which is minimal considering the savings you make in securing a lower rental price via negotiations and any loss of income through a tenancy agreement that does not protect the tenant’s interest.
On the other hand, I can see no significant advantages in renting direct from the owner. The owner will also rely on help to draft a tenancy agreement, and the last thing you want is a shabby contract not drafted by a professional. The misconception that owners charge a higher rental to cover the commission for the agents is simply misguided; owners will charge a rate according to how much effort they need to administer the tenancy, and without the use of an agent, you can be sure the owner will incur a lot more expenses just executing the transaction. Think of the work needed for income tax declaration, tenancy paperwork, informing the police on residency and so forth.
OWNING A SHOPHOUSE IN THE FRENCH QUARTER, HANOI
Q : I have just returned from Hanoi and am completely captivated by the French architecture especially at the French Quarter. How easy is it for a foreigner to buy a shoplot in the French Quarter and use it as retail space (ground floor) and residence (upper floor)?
AW : Unfortunately, foreigners are not eligible to purchase landed property that is not within a real estate project boundary. A shophouse in the old quarters of Hanoi is classified as a standalone landed residential property that is not within a real estate project boundary; the only way foreigners can buy such a unit is to buy it through a local Vietnamese proxy. That said, such a procedure carries with it significant risks as the Ownership Certificate dubbed the “Red Book” will be under the name of the proxy.
Vietnam legal system is a variation of the Civil Law as opposed to the more widespread Common Law system. Hence, a trust document is not recognised as a legal basis of property ownership. Therefore, having a proxy “own” a property with no acceptable legal documentation and recourse on the part of the person financing it, is a high risk endeavour. That said, you are advised to seek separate advice from a lawyer before proceeding as this feedback is purely to the best of my knowledge and is not to be construed as legal advice.
SAFE TO BUY VIETNAMESE PROPERTY YET?
Q :Vietnam has amended existing laws to encourage foreigners to buy property since July 2015. However, I understand that the government has yet to finalise the regulations guiding the implementation of the amended laws. So, at this point in time, can I purchase Vietnamese property without any hindrance or delay?
AW : Yes, you can. The law has been passed and has taken effect. However, various government departments such as taxation, foreign investments, and the Ministry of Construction, have not been issued a circular from the state regarding the procedures guiding the implementation of the law.
For example, what are the necessary documents foreigners need when applying for ownership certificate and how to check if the quota for foreign ownership of properties in a district has been met, etc.
The issuance of this guiding circular or decree has been delayed due to the grey areas with some points in the law needing to be clarified. It was supposed to be out at the end of September 2015.
That said, no delay is expected upon purchase of property because when you buy an off-plan new launch in Vietnam, the developer will submit the necessary documents for application of Ownership Certificate only upon the completion of the building and handover of the apartment unit a few years down the road.
The developer guarantees in its Sales and Purchase Agreement that the Ownership Certificate can be obtained, otherwise the paid amount will be refunded to the buyer.
Ho Chin Soon is a map maker, author, valuer and is Chairman of Ho Chin Soon Research, a property information company that specialises in land use and ownership maps. He can be contacted at firstname.lastname@example.org Website: www. hochinsoon.com
WHERE ALONG HIGH SPEED RAIL ROUTE TO STAY TO COMMUTE TO WORK IN SINGAPORE?
Q : I work in Singapore CBD and currently own a condominium in a nice neighbourhood. However, with the Singapore – KL High Speed Rail coming up in a few years’ time, I am seriously looking at staying in Malaysia and commuting to Singapore to work. Which part of the route along the HSR should I stay at? I understand it takes 2.5 hours door-to-door including immigration to arrive from KL to Singapore. Would Iskandar be the best place especially around Puteri Harbour/Horizon Hills area. I also understand there is a ferry terminal already built linking Puteri Harbour to Singapore. Or should I stay somewhere further like Melaka or Seremban which is far cheaper and yet the commute time is not too long?
HCS : The location of the High Speed Rail station in Singapore is in Jurong Country Club which is not exactly the CBD. At this point in time, we are not sure what the price of a “season ticket” is and by “season ticket” we mean a ticketing system and pricing for regular travellers who make, say 3 to 5 trips per week back and forth.
Staying at Batu Pahat or even Ayer Keroh in Malacca and working in Singapore is possible with the high speed rail. Much depends on where you actually work in Singapore and how much the “season ticket” is going to cost you.
The other factor is the RTS (Rapid Transit System) which is between Bukit Chagar in Johor Bahru and Woodsland North in Singapore. This is where the MRT train from Singapore punches into Johor Bahru. The Woodsland North is part of the Thomson East Coast Line and one can imagine the flexibility once a person takes the MRT from Bukit Chagar at Johor Bahru and being able to connect to almost every part of Singapore.
As for the ferry from Puteri Harbour, the magic will begin when the Singapore Government allows the ferry from Puteri Harbour to stop at Tuas at Singapore which will have an MRT Station.
So the answer to the question depends on where your work place is in Singapore and how easy it is to get on the High Speed Rail station located in Gerbang, Batu Pahat, Pagoh, Ayer Keroh or Labu or even Bandar Malaysia; how near to Bukit Chagar MRT station in Johor Bahru one is and perhaps a residential development that is within walking distance from the Puteri Harbour ferry terminal. And of course, not to forget the prices of “season tickets” for whichever mode one chooses.
OLIVIER MONANGE is a partner at DS Avocats which has offices in Singapore and Paris – www.dsavocats.com
OWN A PIECE OF FRANCE
Q : I understand it’s better to purchase commercial rather than residential property in France for foreigners. Are the buying procedures similar or different between the two? Please outline briefly the procedure for foreigners; and the restrictions, if any, in terms of land tenure, stamp duty, RPGT, minimum purchase price and holding period, rental restrictions, taxes on rental income, etc.
OLIVER : There is no restriction for foreigners to buy property in France which can either be freehold or leasehold. The buying procedures for both commercial and residential are quite similar; in any case, the agreement must be witnessed by a notary public. Both landlord and tenant must abide by the use of the building, for example, retail, office, residential.
In some areas (like Paris), it’s very difficult to change from residential use to commercial.
The lease terms for both commercial and residential are quite different and are subject to specific rules regulating them. Although the lease duration is regulated, the tenant (commercial and residential) is usually entitled to renew the lease. However, the landlord can decline to renew; and can terminate the lease upon certain terms and conditions.
Both landlord and tenant are free to agree on the rental rate; thereafter, any adjustment is subject to the existing regulations governing rentals at the time. Rentals for residential properties are regulated in some areas (Paris for instance).
In terms of returns, commercial property performs better than residential. Rents are usually taxed in France (20% withholding tax) if paid to non-residents. However it’s possible to set up an entity in France that will acquire and lease the property; in such a case, the entity is subject to corporate income tax and can enjoy amortization and deductibility of financial costs. For the time being, the income tax rate is 33.33% which might be reduced after the general election.
Q: Apart from Paris, which other cities in France are popular with foreigners or are tourist attractions?
OLIVER : South of France (“la Riviera”) is quite popular with foreigners, including many Asians. Some other big cities, like Lyon (for gastronomy and proximity with the Alps) or Bordeaux (the biggest wine region with Bourgogne), can be attractive too.