A Concise Guide to Buying Off-Plan Property in Thailand
When most overseas investors consider buying property in Thailand, they tend to focus on resort destinations such as Phuket, Koh Samui, and Pattaya. These are all developing real estate markets, still not mature by international standards, and feature a high percentage of off-plan stock. In this article, we explore the key considerations for investors when buying off-plan property in Thailand, using Phuket and Koh Samui as examples, highlighting the main points to be aware of before making a purchase.
Understanding Your Reasons for Buying
Having a clear understanding of your primary motivation for purchasing property is an essential first step. Are you looking for a holiday retreat, an investment property, or a place to live? While you may have multiple goals, clearly defining your priorities will guide your decision-making process. For personal use, proximity to international schools, shopping centres, or medical facilities may outweigh a coastal location. Conversely, for investment purposes, factors like a beachfront setting or scenic views are often paramount. Separating personal preferences from investment goals is crucial for making the right choice.
Spend Time on the Island
Both Phuket and Koh Samui offer diverse locations, each with unique amenities and investment potential. Buyers should spend ample time on the island, exploring neighbourhoods and understanding the nuances of each area, rather than relying solely on online research. While online research is valuable for understanding market trends and identifying potential agents, nothing compares to first-hand experience when evaluating the suitability of an area for your needs and goals.
Understanding Property Ownership Structures for Foreigners
Ownership laws in Thailand vary depending on the type of property:
- Villas, Houses, and Townhouses: Foreigners cannot directly own land in Thailand but may either lease it for 30 years or use a Thai limited company to hold the freehold. When a Thai corporate structure is used, the foreign investor typically serves as a director of the company. However, Thai law requires that for each foreign director, there must be at least two Thai shareholders, and the total Thai shareholding must constitute a minimum of 51%. These shareholders must be genuine stakeholders and not just nominees. Also, the company must operate as a legitimate business, with annual accounts duly submitted. Leasing, on the other hand, simplifies the process by eliminating the need for a corporate structure but restricts ownership duration to 30 years. Company ownership, while allowing freehold tenure, comes with additional requirements for operational compliance and ongoing costs.
- Condominiums: Foreigners can own up to 49% of a condominium development’s total saleable space on a freehold basis – registering the unit directly in their own name – offering perpetual ownership.
- Apartments: By contrast these are either sold with a tenure of 30-year lease or via a corporate holding structure.
Understanding these structures and consulting a lawyer to ensure compliance is crucial.
Choosing the Right Real Estate Agent
Buying property in an unfamiliar market like Thailand requires expert guidance. A knowledgeable real estate agent is vital for navigating the complexities of the market, recommending reputable developers, and introducing reliable legal advisors. While buyers should verify their lawyer independently, agents usually recommend trusted professionals who are familiar with local regulations and due diligence practices.
Risks of Buying Off-Plan Properties
Buying off-plan properties carries inherent risks, especially in less mature real estate markets like Phuket and Koh Samui, where regulation is limited. While off-plan properties offer advantages like customisation and potential capital gains, buyers must be aware of the associated risks, which include:
- Delays in Completion: Construction timelines often extend beyond what developers initially promise, particularly in larger projects. Factors like weather, labour shortages, or cash flow issues can contribute to delays. Compensation for delays should be built into contracts.
• Projects Not Being Completed: Tragically, there are cases in both Phuket and Koh Samui where developments have not been completed at all. This is more common in underdeveloped property markets with minimal regulation. Although these markets are maturing, reducing the likelihood of such issues, buyers must be aware of this risk and take steps to mitigate it.
• Large Developments and Developer Funding: If you’re buying into a large development, it’s particularly important to evaluate the financial stability of the developer. In less mature markets like Koh Samui, some developers rely heavily on sales revenue to fund construction. If the project does not sell quickly, this reliance can lead to delays or, in the worst-case scenario, the development may never get completed.
• Front-Loaded Payment Schedules: A payment schedule that is front-loaded, requiring a disproportionately large percentage of the total purchase price to be paid in the early stages of construction, is another red flag. This not only exposes the buyer to additional risk if the project faces delays or fails to complete, but it also indicates that the developer may not be well-funded. A well-capitalised developer typically offers balanced payment schedules that align with construction progress.
Payment schedules vary by project and property type. Below are two real examples – both can be considered reasonable because they’re not front loaded and tied to construction milestones:
Condominium/Apartment Project in Koh Samui:
• Reservation fee: 100,000 THB
• 10% upon contract signing (including the reservation fee)
• 40% within 30 days of contract signing
• 20% upon completion of structural works
• 20% upon completion of doors, windows, and unit enclosure
• 10% upon handover
Villa Project in Phuket:
• 10% reservation deposit
• 40% upon contract signing, with land transferred to the buyer’s name
• 20% upon completion of structural works
• 20% upon installation of windows, doors, and roofing
• 10% upon handover
In the case of the villa, the larger initial first instalment of 40% is justified because the land is transferred to the buyer at this point, which is a substantial part of the property value.
To mitigate the risks of buying off-plan, buyers should conduct thorough due diligence on the developer, assess their track record, and examine past projects for quality and timeliness. Additionally, buyers should ensure their interests are sufficiently protected by a payment schedule that is not front-loaded and is tied to construction progress. Opting for projects by well-funded developers or smaller developments with fewer units can also reduce the likelihood of encountering these issues.
Key Advantages of Buying Off-Plan
- Discounted Pricing: Off-plan properties typically come with discounted prices, allowing for potential capital gains upon completion. This lower entry cost also enhances the return on investment (ROI) for rental properties.
- Customisation: Buyers can usually personalise finishes and layouts, creating a home that reflects their preferences.
- Settlement in Instalments: Payment schedules tied to construction milestones reduce the cash flow burden compared to completed properties which typically require settlement in full upon signing contracts.
Maintenance Fees and Running Costs
Both condominiums and villas involve ongoing costs:
• Condominiums: Maintenance fees cover communal amenities like pools, gyms, and security. These fees are typically calculated per square metre of living space.
- Villas: Villas fall into two main categories, each with different cost considerations:
- Stand-Alone Villas: These villas may either be entirely independent properties built in isolation or part of a collection of properties with no communal facilities or services. In both cases, owners must independently arrange for private services such as garden maintenance, pool cleaning, and general upkeep.
- Villas Within a Community: For villas or houses within a managed or communal development, similar to condominiums, maintenance fees apply to cover shared facilities and services, such as security, landscaping, and communal pools. Owners benefit from these shared amenities and services. Generally, the maintenance fees will not cover the property’s private pool and garden maintenance, which will need to be arranged independently.
Understanding Closing Costs
Closing costs, often underestimated, include government transfer fees, taxes, legal fees, and, for freehold villas, the cost of setting up a Thai company or taking one over. Transfer fees and taxes can amount around 6% of the declared price. Buyers should also factor in costs for furnishing the property or preparing it for rental use.
Managing Exchange Rate Risk
Exchange rate risk arises when the purchase price of an off-plan property is set in one currency, but the buyer’s funds are held in a different currency, with payments spread over an extended period rather than being settled in full at the time of contract signing. Currency values are subject to constant fluctuation, and this volatility can pose a significant risk for investors. If the currency in which the funds are held weakens against the pricing currency during the payment period, the overall cost of the property could increase substantially.
This risk is particularly pronounced when the property price is set in a more volatile currency. Fluctuations in exchange rates can have a considerable impact on the total investment cost, potentially making the purchase more expensive than initially anticipated.
Strategies to mitigate this risk include:
• Transferring all settlement funds to Thailand immediately after signing contracts and holding them in escrow. This approach ensures the total price is locked in the pricing currency, eliminating further exposure to exchange rate fluctuations. However, this approach removes the advantage of spreading payments gradually over the construction period, which can ease cash flow demands.
• Negotiating a fixed exchange rate with the developer for future instalments. This arrangement provides certainty over payment amounts, regardless of currency fluctuations.
• Requesting the property price be set in the buyer’s home currency, thereby transferring the exchange rate risk to the developer. While not always accepted, this strategy completely removes the buyer’s exposure to currency volatility.
By proactively managing exchange rate risk, buyers can protect their investment from unforeseen financial strain caused by currency fluctuations, ensuring greater predictability in the overall cost.
Key Takeaways
Buying off-plan property in Thailand offers exciting opportunities, but it requires careful planning, thorough research, and professional guidance. Understanding your reasons for buying, spending time on the island to explore its diverse locations, and familiarising yourself with ownership structures are all crucial first steps.
Mitigating risks, such as choosing reputable developers and managing exchange rate fluctuations, can significantly enhance the security of your investment. Additionally, evaluating payment schedules, understanding closing costs, and planning for maintenance and running expenses will help ensure a transparent and manageable acquisition process.
Off-plan purchases provide several key advantages, including discounted pricing, the flexibility of paying in instalments tied to construction milestones, and the ability to customise finishes and layouts to suit personal preferences.
By approaching the purchase with due diligence and a clear strategy, buyers can make informed decisions and maximise the benefits of investing in these dynamic and growing real estate markets.
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