Requesting Advice On Leasehold Purchase

[mcombes]

Hi there,

I'm looking into buying a condo in the 2-5 MB range, in an upscale property or not, most likely not, and preferably in a recently built property, as a starting point to live in Bangkok-CBD. Then sell the condo within a couple years, and purchase a new condo, this time in an upscale property. Not only should that second condo be a living place, but also an investment, so hopefully the location should help its value appreciate quickly.

I understand the difference between freehold and leasehold, and the impact the immediate surroundings may have in the value of the property when reselling it, but (for plenty of reasons I'm not going to spill here) I would buy the first condo on leasehold. It doesn't matter so much if it's value has appreciated at the time of the resale.

The question is: will it be difficult to resell the condo? What factors could prevent this plan from working?

Thanks for your input,

-m

[johnnyk]

Big factor re: leasehold IMO is that you would be selling a diminishing asset (i.e. a piece of paper good for 30 yrs and ticking down every day).

[quiksilva]

The biggest obstacle you will face is demand.

What you are talking about here is 'flipping' and this works well in a booming market when there are plenty of buyers around. The truth is that boat has sailed.

Plus

Leasehold is also always going to be much more difficult to sell vs freehold property.

The more of these factors you add in to a transaction the less likely it will work.

[steveromagnino]

At that price I would buy NOW at one of the Asia Property @Life, LPN, Ideo type level developments.

They are in that price range, with good liquidity. For the most part, decent locations.

And most importantly, there is HUGE demand always for this level of property, so you can cash out easily enough.

Leasehold is certainly giong to drop in value slightly, whereas freehold is less likely to (depending on what you paid to get it).

Since many of the developments are near completion, e.g. @Life Pahonyothin 18 I think it is, then you may be able to buy the contract prior to handover, the sellor makes a nice 20% gain on the overall price and a bigger return that that, and you end up with a nice mid end property.

[mcombes]

Thank you all for your replies.

Johnnyk: Agreed, leasehold depreciates.

quicksilva: I'd like to see some market data about that. Out of curiosity and to get a general feel about properties, I've visited the Empire Place (freehold) and the Bangkok Residences (leasehold), both located in the Sathorn area, on Naratiwas road. Both are new upscale developments, to be completed before the end of 2008. According to their salespeople, the Empire Place is almost completely sold out (at 87%, with about 35% foreigners), while the Bangkok Residences seem to have plenty of condos left. There's another new development on the other side of the Empire Tower (forgot the name), which is also under completion. I chatted with some of the staff working there, who told me the building was already sold out. And next to it, there's another building just coming out of the ground. According to the staff, this building is already also entirely sold too!

Now I'm sure there's a good deal of bull to cut through, from salespeople and other staff (always the little white lies in your face), but it makes me wonder why a totally unfinished or nearly finished building would be sold out while another one, not 300m apart would still have plenty of condos to offer. Is it just the freehold vs. leasehold problem, or management track record..? Or is there a bigger stinker in the equation?

steveromagnino: I'll look those up, thanks.

-m

[steveromagnino]

Now I'm sure there's a good deal of bull to cut through, from salespeople and other staff (always the little white lies in your face), but it makes me wonder why a totally unfinished or nearly finished building would be sold out while another one, not 300m apart would still have plenty of condos to offer. Is it just the freehold vs. leasehold problem, or management track record..? Or is there a bigger stinker in the equation?

Ah...if in that area then you are comparing some different buildings; AFAIK Infinity (not on your list) sold out in 3 months; closest to skytrain.

The Met (higher price) still selling now total of 400 units.

Empire Place was what about 85-120k per sqm? freehold? That was a pretty decent deal, has been on the market for a while. DTZ was it that looked after this one? You have to also look at the developer, the facilities, the build quality. The street as well, Sathorn is a better st than around the corner unless you are giong around the corner towards the skytrian station.

Definitely Bangkok residences is further away from the intersection right, cannot recall the exact building, is this a refurb or an NPL or is that the one a bit further down? Has the Radisson associated with it? Is about 80-90k leasehold?

And isn't it a 55 year lease or some other bizarre number with a guaranteed rental yield? I saw it I think they only really have been marketing heavily in the last 6 months at the most, i.e. it is a new project, so you cannot compare with Empire which was launched quite a while earlier.

And of course, Empire Place is TCC which is like the richest guy in THailand and a very strong company, so easy for people to trust. Mind you after seeing the finishing/interior in Infinity and Athenee Residences, maybe just having a big property company behind you might make some people think twice, a few negative comments about both places.

So biggest thing is the launch of marketing blitz for the different projects.

[mcombes]

steveromagnigo: Right, Golden Land's Infinity is one of the buildings I had forgotten the name. There's also a W Hotel going up nearby (completion by end of 2011), and another office/boutique building.

The Met, too expensive for now.

Empire Place if freehold. Starting price is now 7 MB for 1br and 11 MB for 2br.

Bangkok Residences is one of the two same looking oval buildings further down Narathiwas (next to a future BRT stop), the other building being for a Radisson hotel. It's entirely leasehold, 57 years. Odd number as you mentionned. Starting now at 81k/sqm for 1br and 72k/sqm for 2br. Correct, I heard they haven't marketed the place as aggressively as others, which may explain why it's still not sold out. From the communications I exchanged with the staff there, my guess is that management is also fairly inexperienced. I can't say if it's refurbished or NPL. Salespeople from Empire Place next door told me it was refurbished, although I kind of remember seeing the buildings going up last year... I'm not too familiar with the guaranteed rental yield thing. They have a 8%/year cash refund program (2 years) for investors. Is that the same thing?

[steveromagnino]

steveromagnigo: Right, Golden Land's Infinity is one of the buildings I had forgotten the name. There's also a W Hotel going up nearby (completion by end of 2011), and another office/boutique building.

The Met, too expensive for now.

Empire Place if freehold. Starting price is now 7 MB for 1br and 11 MB for 2br.

Bangkok Residences is one of the two same looking oval buildings further down Narathiwas (next to a future BRT stop), the other building being for a Radisson hotel. It's entirely leasehold, 57 years. Odd number as you mentionned. Starting now at 81k/sqm for 1br and 72k/sqm for 2br. Correct, I heard they haven't marketed the place as aggressively as others, which may explain why it's still not sold out. From the communications I exchanged with the staff there, my guess is that management is also fairly inexperienced. I can't say if it's refurbished or NPL. Salespeople from Empire Place next door told me it was refurbished, although I kind of remember seeing the buildings going up last year... I'm not too familiar with the guaranteed rental yield thing. They have a 8%/year cash refund program (2 years) for investors. Is that the same thing?

yeah, I read something like that.

Actually, I've talked a bit with my boss who owns quite a few condos (as in, something greater than 100 units in various projects) and he actually quite likes this project.

The long lease term means you might even see some capital appreciation for the first 20 years, before you get down to the last 30 years ticking away....

There will never be a BTS stop at Narathiwas; this is the new BRT (bus rapid transit) system that runs into the connecting station at Chongnonsi and around to Rama 3.

72k is a decent price and that is fully furnished right?

Far from it to encourage anyone, but without looking at the build quality and knowing that Infinity (which is probably similar quality i.e. about B+, even though it is a grade A+ building in most respects) is now trading around 140-180k per sqm, I'd say a 50% discount from that is not too bad at all.

Pacific Star right? They are a pretty big fund out of Singapore if I recall correctly. Do you get services from the hotel? That is a selling point; branded residences are the hot thing right now.

I would also get a decent lawyer, not some bush lawyer Soi Nana Lawyer but someone like Baker McKenzie to go through the contract and see whether there is some sort of mortage backed aspect to the lease forcing the property to go to 57 years. In theory a hotel I think can be 50 years, but that's the longest; usually resi is 30 registered years.

As I understand the 8% is a payment back to you should you not live in it, and they guarantee you 8%; always a bit questionable; you might be able to negotiate the price lower if you intend not to take this up, and usually in the projects i've ever seen with this clause, we price it with a XX,XXX,XXXX baht + (value of property X 8% X 2 years / discount rate) so in theory you might be able to get it a bit cheaper with that guarantee; not a lot I'd ask for extra free stuff maybe.

As far as refurb, again could be totally wrong but wasn't this originally destined to be an office and was converted midway to become resi?

Quiksilva; where are you mate?

Edited August 26, 2008 by steveromagnino

[mcombes]

Correct, the place is fully furnished (SB Furniture stuff).

The developer is VCAL Business Group (Pacific Star is for Sathorn Gardens). I did some more research and found out Bangkok Residences Sathorn used to be called Sathorn Heritage, and Sathorn Princess even before. The buildings were erected in 1999, and were left as skeletons for a while until the project restarted in 2005. The initial design was entirely different, towers were slightly higher (40 floors, now 38). Both towers were supposed to be residential.

I can't find any info on VCAL...

What bothers me about this place is that it's their marketing consultant, an external firm, who answers questions. I get replies like "use of all facilities is free of charge (including spa, day care, biz center...)", then when I ask for confirmation, I get "oh, right, those will not be free of charge, the management will decide about the price when the project is completed, and when there will be a management team". That sounds like a lot of inexperience to me; not very reassuring.

You are absolutely right, a decent lawyer is required in any case.

Correct again. The 16% 2 years (8%/year) cash refund is for investors who are not allowed to live on the premises for 2 years. As an example, a 2br condo goes furnished at about 9.5 MB. Add a decoration expense of about 2.5 MB (about 20 k/sqm). Cash refund minus management fee is about 1.7 MB total after 2 years (payable in 4 terms).

Thank you for your time and all that great info, that's a lot of help to further guide my research!

This being leasehold, and you said your boss liked the place, would you consider buying a condo there as an interesting/safe opportunity?

[steveromagnino]

Correct, the place is fully furnished (SB Furniture stuff).

This being leasehold, and you said your boss liked the place, would you consider buying a condo there as an interesting/safe opportunity?

Are you in BKK?

Let me line up a drink with my boss, you talk to him directly, his family forgot more about real estate that I will ever know.

PM me, you can learn all the inside info that is too hot to type here; _)

[quiksilva]

Sorry steveromagino, been busy ol chap.

The developer is one of the key men behind TFD (Thai Factory Development). In this instance the 57 year leasehold interest is based on two 30 year lease terms, both of which has already been registered.

mcombes, so long as you are not reading developer's literature you will see that transactions have fallen sharply in the last few months. Flipping today is a very difficult prospect. A few years ago you were almost guaranteed to make 20%. Today it is much harder, not impossible though. Picking the right project is critical.

A good strategy right now is to look for pricing mistakes by the developer. Where they have set the prices too low for a unit. Eg They often set one price for the bottom 5 floors another for 6 upwards and perhaps one or two more price bands. Occasionally the price differentials between these bands are too great. 10,000 Baht per square meter is about normal, so if its more than that, and the project is genuinely selling, as some are (but not all), then it might be worth it.

[Burgernev]

Re: Leasehold being a diminishing asset, I agree. The latest leasehold contracts where I am have started including a clause, at lawyers request, that the lessee can extend/renew for an additional 30 year period at any time during the initial registered 30 years. Another un-enforceable 'option' like the 30+30+300+30+3000+30 ?

What's going to happen to all leased land when its 10-15 years away from the end of the 30 year term. Some lessors may sell it and stuff the lessee, some may extend for a nice fee, option to extend or not. If I had a leasehold property and wanted to sell with just 10 years left, I think it would be in my interest to offer the lessor a serious sum to extend me there and then for 30 years so I can sell.

Will be interesting.

Cheers,

Edited August 28, 2008 by Burgernev

[mcombes]

Steveromagnino: Thanks for the offer, I'm in BKK at the moment for a few more days, then back to my home country, but I'll PM you.

quicksilva: The few properties I've looked into all quote their condos according to floor level. The more you go up, the more the price, usually per floor. For example with Bangkok Residences, it's progressive: add 500 B/sqm/floor.

I certainly agree with you and would definitely stay away from leasehold unless there is a very compelling reason to go there, such as the prospect of making a quick buck while unloading it fast. As of today, with rising costs across the board, financial crisis worldwide, local political tensions (with the prospect of the military returning to power and the catastrophic effect this would have on the economy), I'd rather go the sensible road: pay cash on the table for a mid-range condo or borrow at fixed rate for an upscale one.