Taking a look at the merits of owning a leasehold condominium

Economy April 25, 2014 00:00

By Aliwassa Pathnadabutr

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From my experience in selling Bangkok condominiums, 70 per cent of buyers will turn down a leasehold condominium without even looking into the details of the property.

Most of them hold the belief that a leasehold condominium is a depreciating asset and, therefore, they would rather buy a perpetual freehold title.

By definition, a condominium is "a strata title property within a juristic development where the owner has a perpetual freehold title and the common property is managed through a juristic management committee and subject to the Condominium Act".

Based on this definition, there should be no leasehold condominiums, but the term was commonly used in the market as referring to a long-term lease apartment with the rent being paid up front.

In Thailand, the maximum leasehold period that can be registered is only 30 years. Even if the developer or landlord wishes to grant a series of extensions up to 90 or 120 years, no leasehold term can go beyond the 30-year cap.

The only option is to renew the lease by following the legal process of registration for the renewals, which can only be done at the end of each 30-year period.

Despite the term limit, there are various reasons for leasehold condominiums continuing to be developed. Firstly, because the land-title deeds belong to an institution such as the Crown Property Bureau, a foundation or the government, whose land will not be available for freehold title.

Second, individual landowners do not want to sell the land freehold titles, as they want to maintain ownership for the next generation – so they prefer to sell just the leasehold right for 30 years.

Third, in a market where the majority of buyers are foreigners, most developers tend to choose leasehold ownership, which enables them to sell unlimited space to foreign buyers, while freehold ownership is only allowed for up to 49 per cent of the overall property.

Lastly, in resort development, which aims at hotel-managed units with guaranteed returns, developers commonly sell the units on leasehold titles rather than freehold as the hotel needs total management control of the property to ensure proper maintenance and services.

CBRE Thailand has experience in selling both freehold and leasehold condominiums. I have found that leasehold condominiums have some advantages over freehold ones. It is fair to say that a freehold condominium of equal quality and equally good management is a better investment than a leasehold property.

However, the fact that most developers or landlords who own the property intend to keep their asset for the long term remains. They have a superior attitude as to building quality and maintenance standards.

In addition, leasehold property is not subject to the Condominium Act. Therefore, management decision-making can be done by the landlords themselves, who either manage the property on their own or appoint and enter into a long-term contract with a top-quality manager or hotel operator.

The drawback of freehold condominium is management through a juristic body, which relies on a concept of majority votes and democracy. This is ideal in principle, but in practice it can create disputes over services and budgets which demonstrate lack of strong and clear leadership, consistency and efficiency in management decisions.

Moreover, a juristic body where the juristic committee changes annually cannot effectively enter into long-term service contracts.

With more and more problems of property management in freehold condominiums being experienced by buyers, I have noticed that more people – especially end-user buyers – are starting to consider buying a leasehold condominium located in a prime location.

Buyers could then be assured over property management either by using a branded hotel chain or being managed by the landlords themselves, who can ensure continuity in the operation and project and who can plan for long-term maintenance, renovation and management of the property.

This is one of the advantages of leasehold. I still believe, however, that even with this advantage, the majority of buyers still prefer freehold.

Leasehold property using the strength of management will be effective in prime locations where freehold land is rarely available. In Bangkok today, we see luxury leasehold properties with strong sales performance in both occupational and investment demand on Rajdamri Road, including The Residences at The St Regis Bangkok and Magnolias Ratchadamri Boulevard.

This does not mean that every freehold condominium is an inferior product to every leasehold property, but it does highlight the need for freehold-condominium owners to learn and develop good property-management standards.