Longer lease terms will boost investor confidence
THE DURATION of land-lease terms has become one of the key factors determining the competitiveness of real-estate markets across Asean.
Since the term length dictates the level of return for investors and developers, markets with the longest lease terms tend to be the most successful in attracting long-term investment because they provide ample time for investors to maximise returns.
While maximum lease terms for land in Asean vary from country to country and are subject to a variety of exceptions, Thailand has one of the shortest, if not the shortest, maximum lease terms in the region.
With few exceptions, Thailand’s law generally allows owners to lease land for up to 30 years. In contrast, the maximum lease term for state land is 99 years in Singapore and Malaysia; 70 years in Vietnam; and 50 years in the Philippines, Cambodia and Myanmar.
In Thailand, only the initial 30-year lease can be registered with the Land Department. Despite some lease agreements that provide for 10-, 20- or 30-year extensions beyond the initial lease term, these extensions cannot be legally registered.
This means that the right to use the land and possession of any assets built on it will revert back to the landlord once the lease contract expires, with no guarantee that the landlord will allow the lessee to renew the lease. Without such a guarantee, many potential investors lack confidence in the renewal process, as the original agreement could be subject to dispute upon expiration.
This lack of investor confidence is reflected in developers’ unwillingness to agree to a 30-year lease for highly desirable land with significant development potential, especially when a project may require a long period of time to recover the initial investment outlay. But there are some developers who have secured 30-year leases with optional renewals for high-value projects because they trust certain landlords with good track records (such as the Crown Property Bureau).
Empirical evidence suggests that investors have more confidence in longer-term leases. For example, in certain sections of Bangkok’s commercial areas, the law allows land owners to lease of up to 50 years under a clause that the land must be acquired for commercial use. In addition, there were a few private redevelopment sites in Bangkok’s central business district that offered lease terms of 50 years. These sites enjoyed strong interest from both local and foreign investors, exemplifying the case that longer lease terms are better received by investors.
While longer terms make land leasing more attractive to foreign investors, participation of foreign investors is beneficial to land owners, whether they be private individuals/companies or state organisations/quasi-state enterprises, as it helps create a more competitive environment when a plot is put up for leasing.
As prime land plots or development sites are available for sale, they have become increasingly scarce in major Thai cities, and as foreign investors are generally not permitted to own land, a leasehold option has come into play.
Sooner or later, there will be an urgent need for Thailand to review its leasehold regulations to encourage investment on leasehold land, which will in term contribute to higher-quality and higher-value urban development and make Thailand’s real estate markets more competitive among its Asean peers.
Earlier this year, the Thai government has reportedly approved the extension of leases of state land for industrial and commercial uses in the country’s six special economic zones (SEZs) from 50 years to 99 years through a 49-year renewal option.This is a prime example reflecting the need and is also a positive step in the right direction.
Suphin Mechuchep is the managing director of JLL (Jones Lang LaSalle), a professional services firm specialising in real estate.