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Mortgages for Foreigners: An Idea Whose Time Has Come

By on May 06, 2011 in Residential

Published on Bangkok Post dated 1 May 2011 by Pornpimol Phuengkhuankhan, Director of Residential Sales Services at CB Richard Ellis Thailand

The 1991 Condominium Act is counterproductive to the wants and needs of the Thai property market.

With economies and property markets booming across Asia, many question why foreign demand for Thai properties has yet to return. During the pre-crisis period before 2008, foreign purchasers accounted for up to 35%of the demand for condominiums in Bangkok’s central business district. That figure included foreign purchasers from overseas, foreigners working in Thailand ad permanent residents.

Today, foreign demand is below 20%. The obvious reasons for this include the weak recovery of the US and European economies, the strength of the Thai baht and a negative foreign view of Thai politics. Another factor that has always limited interest in the Thai condominium market is the lack of mortgage facilities from local banks for foreign purchasers.

The lack of mortgage facilities is shutting the door on demand from a large regional market of buyers who would have considered purchasing condominiums in Thailand for investment or as second homes, but who are unable to put 100% of a unit’s asking price down. Even cash-rich investors often utilise mortgage facilities to leverage their investments.

It would be incorrect to say that local mortgage facilities are completely unavailable for foreign purchasers, but to truly understand this issue one needs to understand the complexities of the Thai property and banking laws and how the two are intertwined.

Under the 1991 Condominium Act, foreigners are allowed to purchase freehold condominium units at up to 49% of the total saleable area of a building, but as non- residents they must transfer the funds to pay for the property from overseas. In order to transfer ownership of property at the Lands Department, a non-resident is required to provide a Foreign Exchange Transaction Form,a document certifying the transfer of funds from overseas in a foreign currency for the purpose of purchasing the property.

This law makes it impossible for foreigners to obtain the Foreign Exchange Transaction Form using mortgage facilities from local banks as those funds would be released in Thai baht and banks would therefore be unable to provide the document that is required to complete the transaction. The document can only be issued if Thai banks issue the funds through their overseas branches, which some Thai banks have done in the past, but don’t any more.

For this reason, mortgage facilities are unavailable to foreign purchasers, unless they are permanent residents of Thailand an able to borrow locally. In this case, they are not required to submit the Foreign Exchange Transaction Form on transfer of ownership.

Even for expatriates being paid in Thai baht, the process is also complex. They are entitled to borrow locally in Thai baht providing they have a work permit, an ongoing employment contract and have been living and working in Thailand between three and five years. However, only 40-50% of their salary deposited into a non-resident account can be contributed to the property purchase;the remaining funds still must be from overseas. So in effect, they are allowed to borrow,but the law prohibits them from transferring ownership of the property unless part of the funding is transferred from overseas.

In today’s market, this law implemented 20 years ago is obsolete. It is inconsistent and counterproductive to the wants and needs of the local property market because it blocks out foreign demand for Thai properties. A more flexible law should be enacted to open up opportunities for foreign investment, one which eliminates the requirement of overseas funding or allows local borrowing by foreigners for up to 50% of the property value.

One of the reasons there is substantial demand to invest in markets such as Hong Kong, Singapore and other financial centres is the availability of mortgage facilities for foreign investors. Allowing foreigners to purchase without a requirement to transfer funds from overseas will not only increase demand for Thai properties but also allow local banks to lend to foreign purchasers and stimulate the local banking industry. Each bank must of course perform thorough credit checks and have stringent lending requirements.

At present three foreign banks with local branches offer foreign purchasers mortgage facilities – Standard Chartered, UOB and HSBC – whereby the funds are released from their overseas branches in foreign currencies and a Foreign Exchange Transaction Form is issued to the purchaser.

However, the mortgage facilities offered by these banks also have limitations. For example, the UOB mortgage is available only Malaysian and Singaporean nationals, and for HSBC and Standard Chartered, the borrower must be an existing private banking customer with a savings deposit in an overseas or local branch of the bank.

Thailand has a large reserve of potential foreign purchasers and the property market certainly has significant potential to grow both in terms of demand ad prices. However,this will happen only if obsolete laws are done away with and investor-friendly laws and bank policies that facilitate market demand are appropriately implemented.

“One of the reasons there is substantial demand to invest in markets such as Hong Kong, Singapore and other financial centres is the availability of mortgage facilities for foreign investors.”

4 Comments

Robert

The other point is that you buy a condo for a substantial amount, pay cash and have all the foreign currencies forms and then try and obtain residency under the Investment type “O” visa and learn that almost no one in Thai Immigration has heard of it. Spend hours then days trying to find anyone in Immigration who knows exactly how to obtain residency so you can live in your own home. Finally give up and do Visa border runs. Does not make sense to us.

John C. Murphy

I completely agree there is a lack of mortgage facilities catered for foreign purchasers from the local banks, and certainly the 1991 Condominium Act needs to be reviewed. Thai banks generally, because of these regulatory constraints have a limited range of products and largely because it is a limited market for them – especially with the fall in demand as you point out. Perhaps you would be surprised to learn that two banks actually approve loans to foreigners whether the individual lives here or not and/or secured against landed property. Naturally, you will not see this service promoted in their advertising materials – so probably best not to discuss on your website!

And yes overseas banks with local branches have in the past brought products to the market and withdrawn them sporadically and/or tightened their parameters (in light of the GFC) reserving only for their private banking clients. I believe it was BNP Paribas who were one of the first to bring solutions to market back in 1992.

Most financing solutions have really evolved around the securing of overseas assets whether that be investment portfolios or property holdings. However in recent years this strategy has become limited due to declines in value resulting in unavailable equity. Securing overseas assets is also generally risky business due to a currency mismatch. People can predict currency movement in the short term….maybe, however property tends to be a long term investment and nobody can predict foreign exchange in 10 to 15 years. So in order to proceed with this option an appropriate currency hedge also needs to be put in place.

When handling cases I try to create the complete solution for foreigners looking to invest in Thai property by offering advice and products from the whole of the market. This, as mentioned, is via the limited range of onshore financial solutions from the local banks, external security over overseas assets and to fill these gaps we have our own “Advance” facility. By evaluating the overall context of the property acquisition (i.e. the commercial proposition of the property from an investment perspective – the value, the market location and therefore expected yields it can produce) and the client’s situation/financial position – I can ascertain the most suitable avenue.

Personally I would most welcome a relaxation of the laws and policies here in the Kingdom as it would allow for more competition in the loan market to the benefit of the investor and it would obviously boost foreign direct investment into the country that I now call home. Until that point however, we have the solutions as outlined above. Should there be any change or developments with product offerings in the future – I will let you know immediately!

With best regards,

John

John C. Murphy
Property Finance Manager
Hamptons Advance Solutions

Bangkok Condo Editor

Robert –

Thank you for your comment. We agree, this is very frustrating. Whilst it is easier for buyers over 50, who can get retirement visas, this should be part of an extensive overhaul to improve foreign investment.

John –

Thank you for your your comprehensive analysis of the situation. The reality remains that most foreign buyers, unless they are resident expats, still cannot borrow at competitive international rates. This leaves 90% or more of the expat buyers self-funding.

Yes I agree, it would be nice to think that the incoming government will see the potential to improve investment inflows and provide domestic banking business by relaxing the current rules. We look forward to see what will happen next.

Many Thanks

vensun

It is the interest of property developers and real estate brokers to jack up prices while reducing the living spaces and so they always need all rules to be relaxed to fulfill their greed. Compared to 15 years back the condominiums today offer much smaller spaces with designs imitating Hong Kong and Japan condominiums thus projecting luxurious elevation and internally ignoring ventilation and natural light thus giving worse living standards to Bangkok residents than in the past. In Bangkok prices are continuously jacked up with the monopoly of the Thailand’s leading real estate agent virtually controlling the market. I think the government should restrict mortgage to not more than one unit per person for Thais and foreigners may be given mortgage facilities with high margin especially if the intend to stay in Thailand for long and have sufficient income. Opening mortgages to general foreign investors may be considered only when real estate prices are in bad shape or undervalued and definitely not at these exorbitant price levels for Bangkok with its supply capability.








 

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