COM 05/2015

Foreign Participation in Land Grabs in Thailand

Papawadee Tanodomdej, Research Fellow, The International Institute for Trade and Development (ITD)

Over the past decades, land grabbing has emerged as a pervasive phenomenon stirring heated debates and physical confrontations in many developing  countries.  Local  people  are  concerned  of  its  impact  on environmental, social and economic issues. There are reported cases in which foreigners allegedly have occupied agricultural land in several provinces, such as Suphan Buri[1]. Investors from the Middle East have also been reported  to be interested in leasing or purchasing land in Thailand  for  farming  purposes [2] .  Beyond  such  cases,  the  actual magnitude of how much land in Thailand is owned and occupied by foreign individuals and firms is unknown. Moreover, it is rather unlikely to be quantified, given the fact that a large number of cases are done illegally  or  legally  through  legal  and  administrative  loopholes.  To understand  the  context  and  impact  of  land  grabs  by  foreigners  in Thailand, this article first provides the background on a number of issues that are rising regarding foreign ownership of land in the country. This is followed by a review of the previous and existing legal framework on foreign  ownership  and  use  of  land.  Then,  the  last  section  discusses policy implications.

1. The history of foreign land grabs and its current situation in Thailand

Thailand has always been open to foreign investment, notably since the country started to adopt the first National Economic plan in 1961. Since then, the government has implemented various approaches to industrial and trade policies, ranging from import substitution to export-oriented measures. Regardless of the policy approaches, the general attitude has always been that the country’s economy is open to foreign investors, and various sectors of the economy have become more liberalized over the years. Foreign investment in Thailand has continued to contribute significantly to the economy. A large number of foreign businesses receive investment promotion from the Thai government, particularly through the Board of Investment. The right to lease land is considered to be the fundamental guarantee of foreign investment promotion.

Historically, the concern about foreign ownership of land is not new in Thailand. During 1855 – 1937, foreigners, especially Japanese, were purchasing land for farming. The intention was that Japanese farmers would emigrate to Thailand to cultivate rice[3]. Japanese investors would give Thai farmers some money to explore and occupy large plots of land in newly cultivated areas, and then purchase and occupy them later on. The concern among the local people was real, so much that the government enacted a number of laws and regulations that controlled foreign land ownership which will be discussed in the next section.

a) Problem of “Nominees”

Despite the legal instruments prohibiting foreigners to own land, some foreign businesses in Thailand are able to own land and real estate by using “nominees” through the following channels.

The first channel is to marry a Thai citizen, who will legally own the land. However, the right to use the land belongs to the foreign spouse. The  Department  of  Lands,  which  is  responsible  for  registering  and regulating land transactions, had a measure to prevent the use of nominees by foreigners: that is, both of the spouses have to provide a document confirming in writing that all the money used to purchase the land is a personal asset of the Thai citizen, not a marriage property or an asset that they have jointly acquired. But the measure has not been effective in preventing foreigners from using Thai spouses as nominees.

The second channel of using a nominee is to have a Thai citizen purchase the land, and at the same time, have the person make a loan, lease, or mortgage contract with the foreigner who actually pays for the land. This channel is very difficult for the authority to investigate.

These two options are often accompanied by a contract that grants either the right of habitation or the usufruct right to the foreigner. Both rights are granted under the Civil and Commercial Code. The right of habitation gives a person a right to dwell in the house of another person gratuitously. On the other hand, the usufruct right allows the grantee to use, possess, manage and occupy another person’s real property. The right of habitation differs from the usufruct right, in that the person granted a usufruct is allowed to transfer her rights to a third person, whereas the right of habitation grants only the use of a property for the residence of the grantee and family. A usufruct right exists as long as the holder of the right is alive or up to 30 years. However, once the holder of the right passes away, the land and property reverts back to the owner. In such as a case, no rent is paid to the property owner. In both cases, the contract is different from a lease contract, in which rent is paid and the transaction is legally regarded as a hire of property.

The third channel is to set up a business dealing with real estate properties that are registered as a Thai company. Even though more than half of the company’s stocks must belong to Thai citizens, the actual management and decision-making power rests with foreigners who own preferred stocks, which are senior to common stocks. A report by Potavanich[4] for the Office of the Ombudsmen indicates that business transactions that use nominees seem to be increasing, which may have serious implications for the country’s economy, society, and security.

For instance, certain occupations that used to be reserved for Thai citizens could be conducted by, or under the control of, foreigners. Not only is there a loss in tax revenue, but the nominee problem could be linked to international crimes as the income and other financial flows from land transactions cannot be easily identified and monitored.

In this context, there has been rising concern in recent years among the general public and the government about the nominee issues which eventually lead to the amendment of the Foreign Business Act. The draft of the new Foreign Business Act has defined the definition of “foreigner” by considering not only the proportion of company share but also the decision making and management power of the company. This new definition of “foreigner” is able to reflect the actual nationality of a corporation.

b) Rental and long-term lease

The long term lease is an increasingly popular way in which foreign individuals and firms can occupy and use land and property, not just through personal relationship in the form of nominees. With assistance from local and international law firms, foreigners are able to draw up various contractual agreements that make sure that their rights are secured. The lease of land could either be for residential or business purposes for the duration of 30 years. The usual practice is a clause in the contract stipulating the possible renewal of the contract for another

30 years, which is not the same rental contract under the Hire of Immovable Property of Commerce and Industry Act B.E.2542. Nevertheless, there is little evidence for land grabbing by foreigners for agricultural uses, other than a few cases that have already been reported in the media. The land grabbing by Thai conglomerates is clearly more pronounced and extensive. This is not to mention the prevalence of contract farming, which is debatable in term of the benefit that the land- owning farmers shall receive. There are reported cases in which the Bahrain-based Islamic bank Al Salam has signed an agreement with Thai agricultural and food company Charoen Pokphand Foods to jointly invest in agricultural businesses. But it seems the land is still owned and utilized by their Thai partner, not the foreign counterparts.

In addition to long-term rental agreements, timeshare is increasingly becoming another popular form of ownership arrangement for foreigners who desire to live or invest in Thailand. The growing interest in timeshare properties indicates the increasing diversification and segmentation of the rental property market, especially for condominiums in resort towns. The usual arrangement is that multiple individuals or companies hold rights to use the timeshare property, with a specific time period allocated for each year. Some properties allow timeshare owners to stay the same time every year for the amount of days or weeks that they pay for. Other properties use the point system, in which owners buy and use the points wherever and whenever they prefer. In terms of property rights, the arrangement could either be partial ownership, leasehold, or usufruct right, in which the buyer has no claim to ownership of the property. Even though there are no comprehensive surveys of the timeshare market in Thailand to date, several news reports indicate  the  market  is  growing.  For  instance,  according  to  Thailand Timeshare News[5], Anantara Vacation Club, an international timeshare service, enjoyed a 100 percent growth in vacation club sales in 2013, while club ownership grew by 75 percent to over 4,000 club owners in Asia. Owners of timeshare properties could sub-let their units to other people and earn income without having to report the transactions to any authorities. They may request the property management companies to deal with sub-letters on their behalf, but these companies are not required by law to report such transactions to the authorities.

c) Foreign participation through real estate investment funds

Another important trend is the increasing number of real estate investment funds, for which foreign participation is actively sought and happily welcomed. This is due to the continuous increase in the number of  new  properties  and  the  growing  need  for  funds  among  local developers. Property investment funds have expanded rapidly in the past few years in Thailand. According to Fitch Ratings, the number and the value of assets under management of property investment funds in Thailand continue to grow in 2014 and 2015[6]. The market capitalization of property funds listed on the Stock Exchange of Thailand jumped from 96.5 billion baht at the end of 2011 to 243.0 billion baht at the end of 2013. The number of funds also increased from 33 to 46 during the same period. Because of the expectation for greater returns, such funds are regarded by many investors as a more attractive option than bank deposits and fixed income investment. It is also expected that regulatory changes to establish a real estate investment trust (REIT) structure for these funds will lead to further growth of the sector.

For the time being, foreign participation in the Thai property market through real estate investment funds may not possess the same level of ownership and other property rights as the traditional ways of buying, owing, and occupying land. This is partly due to the fact that the financial market is extremely fluid; foreign investors can participate or pull out of the Thai market relatively easily and quickly, so the level of foreign ownership constantly fluctuates. Meanwhile, these equity owners generally do not have direct influence on the strategic directions and day-to-day operations of the funds. In other words, they do not have direct power to dictate how land and properties are developed and utilized. As such, the effects of this type of property ownership are very different from those of direct ownership. In fact, foreign investment still accounts for only 16% of the total value of the domestic real estate investment funds in 2013. According to the Bank of Thailand, the ratio is  still  relatively  low  and  does  not  indicate  any  unusual  signs[7]. Nonetheless, as this sector continues to grow, there could be important implications for land policy and planning, which deserves close monitoring and evaluation.

d) Increase in land value and decrease in affordability

One major concern is whether foreign participation in the local land market has driven up land prices, which has in turn crowned out local buyers who generally have lower purchasing power than foreigners. In the case of Thailand, this is particular applicable to popular resort cities, such as Pattaya, Phuket, and Chiang Mai, as well as industrial areas, such as Chonburi and Rayong. In these cities, expensive condominiums and land subdivision projects, many of which are located in prime areas, are beyond the affordability of most Thais. Because of the increase in land and housing prices, Thai workers usually live in suburban and exurban areas where land is relatively less expensive and drive cars or motorcycles to work.

The pattern of the soar of land value is demonstrated through the investment of wealthy upper-class Thais and foreigners in the local market. As long as they possess significantly higher purchasing power than the middle-class Thais and the property tax systems remain inadequate, they can benefit from the increase in property value. Luxury condominiums with astronomical prices are no longer rare in the central areas of Bangkok. For instance, a 1500 square-meter unit in the Mahanakohn project in Bangkok was bought by an Indian businessman for 480 million baht (USD 15 million)[8], and a beach-front villa in the Vertigo project in Phuket was sold for 227 million baht (USD 7 million). Properties such as these are only for the upper-class Thais and  the foreign investors with large amount of funds, who benefit from the constant increase in land value.

The effect of rising in land value, which is partially explained by the constant inflow of foreign investment in the property market, could be felt by middle class in Bangkok and other big cities. The prices for townhouses, detached homes, and condominium units in the past few year are beyond the average income of middle class. For instance, a company worker whose income is about 15,000 – 20,000 Baht cannot obtain a mortgage that is large enough to buy a condominium unit near the city center where jobs are concentrated. The price per square meter of a condominium unit in the downtown area is about 70,000 – 120,000 baht and the unit prices range from two to four million baht. The middle- income workers thus have to buy cheaper properties in the suburbs and endure a long commute everyday into the city.

e) Scarcity of agricultural land

The concern on food security drives the countries which heavily depend on food imports to invest in food production outside their countries where there is a better climate, fertile land and less constraints on natural resources. This pattern is demonstrated through the interest of Gulf States, South Korea and Japan in investing in developing countries’ agricultural sectors such as in Thailand, Lao PDR and Cambodia.

For Thailand, even though its continuing economic expansion in recent decades has been mainly attributed to the increasing output in the industrial and service sectors, agricultural production is still growing and remains the backbone of the economy and society. The strength of the country’s agricultural sector relies greatly on the natural endowment. Fertile soil and abundant land have allowed farmers to cultivate rice and other staple crops. While agricultural is no longer the largest economic sector of Thailand’s economy and trade, more than half of the land is still used for agricultural production. There are 168.5 million rais (269,600 square kilometers) of land that is suitable for agricultural production, or about 52.5% of 320.7 million rais, the total area of the country. Such amount of land is utilized by as many as 24.5 million people who are still considered farming population.

However, the pressure on agricultural land has intensified since the 6th National Social and Economic Development Plan in 1987 due to the demand for industrial and residential land. The economic boom driven mainly by export-oriented industrialization since the 1980s was accompanied by massive rural-urban migration, which further propelled the trend of urbanization. While agricultural land was increasingly converted into built-up areas to serve new economic activities, investors from Gulf States, Japan and South Korea are interested in agricultural investment in Thailand to serve their countries’ food security. It has been reported through media that foreign investors acquire land through Thai nominees and hire the farmers who are the former owner of the land to cultivate rice or other productive crops for them. Despite the violation of the Foreign Business Act which prohibits agricultural activities conducted by foreigners, the farmers are able to earn a living through their traditional way of life. In this context, the equitable wage that the farmer should receive from the foreign investors is as important as the illegal pattern of land grabs which stimulates the landless farmer incidents.

Even though there is currently no evidence on the economy-wide effects of land grabs in Thailand by foreign entities, large investment associated with land grabbing usually induce structural changes to the local economy and society. For instance, the extensive and ongoing encroachment of forest areas for corn, maize and rubber plantation by tenant and landless farmers is one example for large scale land grabs for agricultural production.

2. Laws and regulations on foreign ownership of land

Despite the media’s recent interest in foreign land ownership, the fact is that Thailand has had laws controlling foreign land ownership for a long time. In 1856, during the reign of King Rama IV, foreigners who had lived in Thailand for less than 10 years were not allowed to purchase and own land within Phra Nakorn District and its surrounding areas in Bangkok, where the Royal Palaces and other key institutional building were located. Foreigners were allowed to rent only. This restriction was later included as part of the Bowring Treaty with the United Kingdom in 1856. Much later on in 1943, the Land Act B.E. 2486, as well as the modified version in 1950, stipulated that foreigners could own land according to international treaties for specific activities and with maximum limits; for example, not more than 25 rais for agricultural and 50 rais for industrial production. The size of foreign ownership allowed for those under international treaties was reduced to 10 rais both for agricultural and industrial purposes in 1954 in the Land Code B.E. 2497.

Even though the Land Code allowed foreign land ownership, the Revolutionary Council Order number 281 (24 November  1972) restricted the types of businesses that foreigners were allowed to engage in. The restricted sectors included a wide range of agricultural production, ranging from farming, gardening and forestry to raising livestock and fishery. Furthermore, the Foreign Business Act B.E. 2542 categorized businesses into 3 groups, one of which is not allowed to be operated by foreigners. The forbidden businesses include rice and other farming, gardening, raising livestock, forestry and timbering, fishery, herb extracting, and land transactions.

Due to the financial and economic crisis in 1997, the government enacted a number of national acts that deregulated the control of foreign ownership of real estate properties in Thailand. These include the Land Code Amendment Act (No.8) B.E. 2542, the Condominium Act (No.3) B.E. 2542, and the Hire of Immovable  Property for Commerce and Industry Act B.E. 2542.

Pursuant to the Land Code B.E. 2497, foreign entities were able to own land as long as there are international treaties between Thailand and the respective governments of the foreign entities, subject to the permission of the Minister of Interior. Thailand used to have international treaties with 16 countries, namely the United States, the United Kingdom, Switzerland, Denmark, Germany, Norway, the Netherlands, France, Pakistan, India, Belgium, Sweden, Italy, Japan, Myanmar, and Portugal. However, all of these international treaties stipulating the right of foreigners to own land were terminated as of 27 February 1970. Therefore, there are no longer international treaties that allow foreigners to own land in Thailand. Nonetheless, the present legal framework allows foreigners  to own land through 3 main channels.

a) Investment

Since January 2002, the Land Code, Section 96 bis, allows foreigners to own not more than 1 rai (0.16 hectare) of land for residential purposes, under the following criteria.

1. Invest more than 40 million baht in Thailand, and the investment remains in the country for more than 5 years;
2. Obtain permission from the Minister of Interior;
3. Invest in one of the following categories;

• Bonds issued by the Government of Thailand, the Bank of Thailand, state enterprises, or those that the Minister of Finance underwrites the principal or interest;
• Real estate investment fund or mutual funds established with the purpose of solving problems in the domestic financial system as permitted by the Investment Promotion Act; and
• Invest in businesses that are listed by the Board of Investment as those to be promoted under the Investment Promotion Act;

4. The land to be acquired by foreigners must be located in Bangkok, Pattaya, municipalities, or in residential zones as designated by city planning laws, and must be located outside military security areas;
5. The land must be used as residence by the foreigner and his/her family in such ways that do not violate the good conduct of the community;
6. If the foreign owner violates any of the regulations or conditions, he will have to sell the land within the time frame determined by the director of the authorized department;
7. If the foreigner who acquired the land does not develop the land for residential purposes within 2 years after registration, the Director of the authorized department can sell the lan

In addition to the Land Code, the Investment Promotion Act B.E. 2520 and the Industrial Estate Authority of Thailand Act B.E. 2522 allow foreign companies which received investment support and authorization from the Board of Investment to own land in a certain amount that is deemed appropriate by the Board, even if such an amount may exceed what is allowed under other laws.

In case of real estate investment, Condominium Act B.E. 2542 allows foreigners to own residential suits, however the Act limits the proportion of ownership at 49% of the total floor space of the condominium.

b) Inheritance

Foreigners may be able to acquire land through legitimate inheritance, but the inherited land and other plots of land that he/she owns cannot exceed the size stipulated by the Land Code: that is, not more than 1 rai (0.16 hectare) per household for residential and commercial purposes, and not more than 10 rais (1.6 hectare) for industrial and agricultural activities.

c) Marriage

As for foreigners who are married to a Thai citizen, the Thai spouse can purchase land, provided that both of them provide a document confirming in writing with the authority that all the money used to purchase the land is a personal asset of the Thai citizen, not a marriage property or an asset that they have jointly acquired.

d) Long-term lease

In addition to the ownership of land, a foreigner can lease real estate properties for commercial or industrial purposes in Thailand for more than 30 years but not more than 50 years according to the Hire of Immovable Property of Commerce and Industry Act B.E.2542. The leasehold can be used as collateral and is transferable to legitimate heirs and can be subleased to other people in whole or in part unless stipulated otherwise in the lease contract. However, the type of commercial or industrial activities shall not be the activities restricted by the Foreign Business Act B.E.2542.

3. Policy Implication

Land grabbing is an important issue by itself, whether it is engaged by foreign or domestic entities. In the case of Thailand, it is widely known and occasionally reported that certain Thai families and conglomerates have been buying up a massive amount of rural and urban land. Thus, the impact of land grabs in Thailand cannot be attributed solely to foreign participation. The ineffectual property tax system triggered land owner to keep their land unutilized or under-utilized for a long time. Although the issues of land grabs by foreigners are in the attention of media and invoke the negative feelings of many Thai stakeholders, the participation of foreigners in land grab can bring benefits to the local economy, in term of employment, income generation and infrastructure development. The fact that the ASEAN Economic Community (AEC) will be officially launched in 2015 shall draw the attention of the public sector to analyze the land-related investments and formulate the appropriate policies and legal instruments that lead to more equitable distribution of risk and benefit. There are several policy options that the Thai government should specifically develop and implement to promote more efficient and equitable ownership and utilization of land, as follows.

a) Develop coherent land policies and legal framework

The country’s land policy with regard to foreigners’ ownership and utilization has somewhat reflected an open attitude towards foreigners, as indicated by several legal provisions that allow foreign investors to own and use land for business purposes. Nevertheless, several regulatory constraints and limitations on foreign land ownership still remain. When the demand for land and properties in Thailand continues to grow among foreign individuals and businesses, the limitation in the land-related regulation are not adjusted to the demand pressure. As a result, there continue to be land-related transactions that are conducted through illegal channels and legal loopholes. Such informal and underground transactions create problems for the government to track and monitor.

Consequently, the country’s land policy and legal framework on land ownership and utilization by foreigners have to reflect changing conditions in the global and local economy and the country’s social and economic policies. As land and trade are inextricably linked, future land policy cannot be developed without considering the overall economic and trade policies of the country. Some controversial and sensitive issues need further public deliberation such as the duration of lease for foreigners and the prohibition of foreign investment in agricultural production, so that some revision to the current land laws could be made to reflect the changing market conditions. Since Thailand prefers to attract foreign investment, the property right of land owners who are foreign investors shall be properly defined to ensure the right to recoup the investment on property. Another option is to consider allowing ownership of the buildings, if not the land, so foreign investors have some sense of security. At the same time, safeguards should be put in place to deal with possible negative impacts on local  communities. There need to be measures to alleviate legitimate concerns that a very long-term lease is tantamount to giving outright ownership, which has important policy implications in terms of national security and the government’s ability to manage the economy in the long run.

b) Develop and implement national and regional land use plans

A national land use plan, preferably backed by a statutory national land use act, has to be put in place, together with regional and urban land use plans with implementable and enforceable control measures. Any land development, whether by a local or foreign entity, will have to follow the plan without exceptions. Many socio-economic and environmental problems that are often cited when discussing the issue of foreign land ownership are not direct results of foreign land ownership per se. Rather, they are the consequences of inadequate land use policy, planning and enforcement in the country.

c) Reform land and property tax systems

In terms of legal fiscal measures, the most important and urgently needed reform is in the property tax system. In order to enhance land use efficiency and equity, regardless of the nationality of land ownership, Thailand must revamp its land and property taxes. A proper tax reform should target personal wealth to create a more just system, since the current tax system is unfair to wage earners. While wages are heavily taxed, property and financial assets are minimally taxed. As such, the out-of-pocket and opportunity costs of property ownership are low, making it possible for rich people to own land without having to maximize its value. Adequate property taxes will not only compel land owners to utilize their land more efficiently, but will also help generate income for local governments, which now have mandates to provide an increasing array of basic services to the public.

The new property tax system should also take into account land- use and building controls in each area. Such controls include zoning regulations in Comprehensive Plans and Buildings Codes. Land value of a plot is determined not only by the availability and accessibility of infrastructure and other services in the area but also by the degree of regulation. Therefore, the rates of property taxes should correspond with the variation in building and land use intensity that is allowed by land- use and building regulations. Currently, the land administration system and the urban planning system in Thailand are not in line with each other, even though the law that permits foreign land ownership contains reference to Comprehensive Plans. This is another set of legal and administrative issues to be resolved.

d) Streamline land administration systems to enhance good governance

At the moment, various laws and regulations on land ownership and development in Thailand are not synchronized, creating both confusion among officials and investors and legal loopholes that foreign investors could  maneuver  through.  Such  legal  incongruence  is  attributed  to various factors, including institutional and organizational fragmentation and competition among government agencies with land-related mandates. Also, political pressure and lobbying from interest groups often block more effective and equitable reforms.

A land information system can serve as an important component for effective and efficient land administration. The Department of Lands is currently upgrading its national land registration databases,  while other department are also improving their own databases. But these efforts need to be extended to improve and streamline the disparate systems and processes across various departments and ministries that have information related to land ownership, sale and transfer, and land and building use. All the legal, fiscal and technical changes would not produce meaningful results, unless bureaucratic transparency and accountability are also enhanced. Promoting good governance in the land administration system is thus essential to making land ownership and utilization more effective and equitable. Because foreign land ownership and utilization often rely on legal loopholes and illegal methods, government officials could be bribed to turn a blind eye to, or sometimes directly participate in, the practices. A lack of complete, reliable, and publicly-available databases of land ownership, utilization, and transactions could lead to rent-seeking activities that facilitate land grabbing from the rightful owners. Such a database would be useful in establishing and improving the land-value assessment system, which is another important component of an adequate administration system.

Meanwhile, the government should develop and disseminate clear procedures for registering land ownership and seeking permits for land development and transactions. This would allow everyone to have equal access to and benefit from the land administration system. Responsive, transparent and accountable land administration systems are thus important for enhancing efficiency and equity in land ownership and use. In the case of Thailand, the land administration systems should be improved in accordance with the current efforts to decentralize other administrative, fiscal and political functions to local governments.

[1] Bangkok Post. (2009, August 24). Foreigner’s own 90% of Phuket beach land. Retrieved from: www.bangkokpost.com

[2] Gulf Daily News. (2009). Eastern Promises! Retrieved from: http://farmlandgrab.org/5809

[3] Asawai, S. (1990). Foreign Land Ownership Issues in Thailand: A Case Study of the Japanese During 1855 – 1937 (in Thai). Bangkok: Thai Studies Program. Thammasat University.

[4] Potavanich, P. (2011) Nominees. (in Thai). Bangkok: Office of the Ombudsman.

[5] Thailand Timeshare News (2014). Available from http://insidethegate.com/gatehouse/2014/05/ thailand     -timeshare-news-may-24-2014/#sthash.bwsyxLUc.dpuf.

[6] (2014). Fitch: Thai Property Funds to Continue to Grow. 7 August 2014. Available from: http://www.reuters.com/article/2014/08/07/fitch-thai-property-investment-funds-to- idUSFit71327920140807.

[7] Prachachat Thurakij. (2013) Foreign money buying up condos, rushing to speculate. (in Thai). Retrieved from: http://www.prachachat.net/news_detail.php?newsid=1362106223.

[8] Prachachat Thurakij. (2013) “The top of the top: most expensive land and condominiums in 2013” (in Thai) 30 December 2013. Available from: http://www.prachachat.net/news_detail.php? newsid=1388333306.