Off-plan property is a property that has yet to be built as opposed to buying a completed property. This basically means buying a promise of a property. It is common for property developers to commence construction of a project and still refer to the property as off-plan.
Off-plan property can consist of both condominium and house developments. However the condominium market is by far the biggest in the Pattaya region at the time being. For this reason the information below relates to buying an off-plan condominium unit.
BENEFITS OF BUYING OFF-PLAN PROPERTY
The principal benefit of purchasing an off-plan condominium unit is that you get a brand new condo just by signing a contract and without further involvement in the construction process.
Another benefit is that off-plan condos typically are sold at a discounted price to the market value of already completed condominium units. It is common practice that property developers increase the price of the units during the construction period.
The initial capital requirement to secure an off-plan condo is relatively low. Even that the payment plans varies from developer to developer it is standard to only pay a reservation fee and a small deposit upon contract signing. The remaining payments become due according to the construction stages. The optimal payment plans have the largest amount due upon completion.
RISK OF BUYING OFF-PLAN PROPERTY
All forms of investments come with a certain degree of market risk. The primary risks described below as well as tools to mitigate these risks.
Market risk is the risk of market prices are going to fall. The primary driving force of the property prices in the resort areas of Thailand are related to foreigners and the development in the global economy. Though Thais has been increasing there investments in the resort areas, especially in the Pattaya area.
When buying an off-plan property the basic risk stems from the fact that, due to the nature of off-plan, that you enter into a contract without having been able to view and evaluate the finished product. The decision to buy an off-plan property is often based on advertised perspectives in magazines and on the internet. According to the Condominium Act property developers are obligated not to misrepresent the condominium, wherefore the Condominium Act offer purchasers of an off-plan condominium unit some consumer protection.
However the main risk of buying off-plan property lies in the risk of non-completion. Non-completion covers the situation where the developer is not able to complete the property due to inadequate capitalization of the developer. The risk of non-completion is to some degree present for all off-plan investments regardless of the size of the developer. However the risk of non-completion is much lower for larger enterprises with a solid track record than for a first time developer.
As mentioned the risk of non-completion relates to inadequate capitalization of the developer. From the view of the property developer selling off-plan property before construction has commenced is a way to finance the construction. This means that the capital requirement for the developer is significantly reduced. Further they will often be able to present the sale record to a bank to borrow money. In fact many developers advertise that a project is “backed” by commercial banks.
When buying into off-plan property in Thailand it is also worth considering the currency exchange rate risk. When buying off-plan property the first payment is paid when making the reservation and the last payment when the construction is completed. The construction period for condominiums often takes 2-3 years. In this period the exchange rates can fluctuate a lot and can affect the final purchase price in Thai Bath.
Above has the main risks of buying off-plan properties in Thailand been outlined. Below follows a description of how the risks can me mitigated. Summarized the risks are:
- Market risk
- Completed property differ from expectations
- Risk of non-completion
- Currency exchange rate risk
Ideally everyone wants to invest when the property prices are expected to rise. In reality it is impossible to predict the future price development with a high degree of certainty. When considering the market risk it is important to keep in mind that people investing in resort areas mainly buy properties as a second home, vacation property or rental property. Baring in mind that most investors are foreigners the markets depends to a large degree on the development in the global economy rather than the Thai economy.
COMPLETED PROPERTY DIFFER FROM EXPECTATIONS
As mentioned above the developers of condominium are bind by the Condominium Act to deliver the promises made in marketing materials. However it is often worth the time of paying attention to material specifications to make sure that the quality will live up to the expectations. The level of material specifications differ from developer to developer. High end developers will usually emphasize the quality of the materials. It might also be worth the time viewing a developers other projects to assess the quality.
RISK OF NON-COMPLETION
The risk of non-completion is the most significant risk with the highest economical impact. Non-completion can be due to multiple reason such as; inadequate capital, poor financial planning, poor management, failed compliance with building regulations and insufficient sales.
Therefore it is recommendable to perform due diligence of the developer and the project before signing the purchase contract. A thorough due diligence include an assessment of; the developers financial position, reservations and sales statistics, the track record of completed projects in Thailand, the developers advisors, land titles and ownership structures.
EXCHANGE RATE RISK
As currencies fluctuate on a daily basis the risk is that the currency in which you hold money weakens against the Thai Bath during the construction period. The simplest way to avoid the risk is by transferring the full amount to a Thai bank account. Further all banks offer financial instruments to “lock” an exchange rate.
PAYING FOR YOUR PROPERTY
Due to the currency exchange controls in Thailand and the requirements related to the purchase of property by foreigners some specific procedures for remitting money to pay for the property needs to be followed. To follow the specific requirements outlined below is highly important as it influence the ability to transfer money out of Thailand upon re-sale.
Foreigners which are not residents in Thailand need to bring funds into Thailand by either transferring funds into a bank account in Thailand or use a foreign credit card to withdraw money in Thailand. When transferring foreign currency into Thailand it is important to state the purpose of the transfer “to purchase property in Thailand”.
When foreign currency is remitted to Thailand for the purchase of property, the primary evidential document is the “Foreign Exchange Transaction Certificate” which is issued by the receiving bank for transfers exceeding 50,000 USD.
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