Rental guarantees, timeshares, and fractional ownership models
Submitted by DavidC on Fri, 08/06/2021 - 12:37
Rental guarantees, timeshares, and fractional ownership models
When it comes to acquiring property abroad, the buyer typically asks five basic questions and this is all true in Thailand. Fortunately, in the land of smiles, there are clear answers to these questions - if they seriously want to know.
Here are the basic questions which can be counted on the fingers of one hand
Building: Is the property worth the money? Is the property development designed and erected in compliance with the laws? Does Thailand’s regulatory framework allow the buildings?
Ownership: Who is the true owner of the property and what is the exact legal relationship between the foreign investor and the legal owner?
Risks/benefits: What are the benefits and the general risks of this type of investment and how has the developer shared these risks and benefits with the investor’s side in the specific case? Could he do better?
Legality: Are the investment structure and the commercial contracts legally valid under Thai legislation and fully enforceable at the local courts, or merely a non-binding promise?
Future-proofed: What are the long-term perspectives of the property investment, when things change? Does the investment has to fear stricter enforcement of Thailand’s corporate, civil or foreigner legislation?
This is specifically relevant in Real Estate 2.0 projects where the foreign investors are focused on the expected yield instead of looking for a second or retirement home. Typically, they intend to stay in Thailand for a few weeks on a tourist visa, or even by availing visa exemptions (“airport visa”). These type of tourist investors expect that their money will buy them more than a short-term villa rental agreement or a hotel accommodation.
Rental guarantees: Win-win through professional property management
Specialized property developers offer a package of sale or long-term rent agreements combined with rental guarantees, buyback agreements, and even cash refund options. Such structured property investment makes it easy and convenient for the foreigners to secure their piece of paradise without the need to provide own property management.
During the rental guaranty period, the property is rented back to the developer and during this time aggressively managed and marketed on a short-term basis (serviced apartment, condotel, AirBnB, or similar) to maximize the return of investment. Unknown subtenants will stay in the villa or condo while the investor (landlord) has no direct legal relationship with them.
A prudent investor will look behind this facade: Is the rental guarantee a legally valid obligation, a rental management service or just an empty promise? Does it efficiently shift all the rental risks to the developer? Will it survive an inheritance or an exit scenario? Are the details of the rental guarantee agreed in the beginning, or at a later stage when the foreigner has no negotiation power?
To hand the property keys back to the developer for a set number of years and in turn to receive regular rental income paychecks need a deeper insight than just reviewing the developer's marketing website. Basically, the foreigner needs a solid basis for a well-educated investment decision whether the guaranteed rental payment is more than a partial refund for an overpriced property.
Timeshares: The economic way to investment-like holidays
Timeshares are comparable with leasehold structures as both models do not grant any type of property ownership, and for this reason, might not qualify as a property investment at all. However, this does not mean that these structures are not reasonable enough to secure the foreigners stay in the land of smile for many years.
The term timeshare itself lost popularity after being misused by dubious profiteers. It is replaced by the terms private residence club (PRC), destination club, vacation club, and vacation home partnership. Needless to say, the branding of the concept is not as much relevant as its contents. There are no consistent distinctions in the use of these descriptions.
The core element in a timeshare is the arrangement which allocates usage rights based on time. Only one party will be allowed to use a particular house or an apartment for a specific time. Holiday destinations are in demand on high season which is based on the weather and public holidays. Thailand's rainy season is not the best time to enjoy beach life, while the festive season draws large crowds of interested timesharing parties.
Timeshare models are already for some years in the critical focus of Thailand's consumer protection legislation. To set-up an improper scheme in conflict with current legislation exposes the developer or provider to civil, and even criminal sanctions. It is in the interest of the industry to exclude the reprobates from circulation to protect the honest market operators.
Fractional ownership: Shared investment dreams
Fractional ownership describes a multilayered shared ownership of a vacation or resort property. Condominium conversion, fractional vacation homes and clubs, equity sharing, and other internationally used descriptions indicate a shared economy even before Uber and AirBnB became popular.
This community of part-ownerships has to be clearly distinguished from the group of joint owners as it is different from a partnership, or in family ownership (in Thai: Sin Somros). Fractional ownership is possible in a multi-building resort or a multi-unit development property that means instead of sole ownership on one unit, all owners have fractional ownership in all units.
The specific ownership structure depends on the model whether its company owned, trustee owned, or split-owned. The private investor might be co-owner, shareholder, or a trustor. The linkage between the foreigner and the legal ownership can be directly or indirectly and weak or strong. Also, the usage rights, cost obligations, and the “say” in the community may or may not correspond to the scope of ownership rights.
Secure your slice of property in paradise
A structured property investment should be accepted only if it‘s well understood. Easy answers of complex questions are mostly incomplete. The fair adjustment of benefits, costs, and obligations is not guaranteed per se. Timeshare scams and fractional fraud are not at all the rule and rental guarantees that are financed by overprices sales are not at all the standard. To distinguish between the glossy brochures (online and offline) and the sobering conclusions under the law makes the difference between a prudent investor and a blindsided one.
To develop an unbalanced and improper structured property investment scheme in an environment of sue-hungry-lawyers and foreigner-skeptical authorities is a short-sighted decision. On the other side, a well-defined long-term strategic and operational model will give more foreign investors the opportunity to own their slice of property in paradise.