Global Mortgage Finance
(Thailand Property and Land Finance Specialists)
Published 1st August 2016 - Developer Finance in Thailand
With several billion baht of lending established over the years, many a time the question has been asked to me, by would be construction companies “Do you do developer finance?”… The solution has often been, to utilise other collateral an owner of a project could offer (whether condo or land), in order to provide a refinance (Mortgage) or purchase and provide a right to buy back (Kai Faak), in exchange for cash. A would be developer then may have cash on the table to begin and complete their project, using collateral from another location. Other collateral however, is not always available.
Traditionally for most, developer finance in Thailand would come from the major retail banks. Over several months of negotiating with bank staff, bank management and perhaps even senior bank figures depending on the loan size, a developer would often need to convey a sizeable amount of paperwork in order to cement a deal. Projections, forecasts, historical statements of income, present income, present sales, credit checks, terrorist checks, fraud checks, property/construction analysis, competitor analysis, exit strategy and for condominiums, plans for an occupancy permit, design blueprints, condo license planning etc… all of this plus much more, shall most likely be required to help establish a construction finance loan. All of this before the project has even got off the ground. Often however, banks have than been known to prefer waiting until a project has already started and perhaps achieved around 50% of sales before a consideration to finance the development can be given. This way, a lender will perceive less risk in their investment with a sizeable amount of sales already under the developer’s belt, construction costs in theory are covered from sales down payments and finance is more a way to help solve liquidity during the construction process. With this in mind, there appears to be a catch 22 segment of the market.
A developer, whom has access to the major Thai retail banks but perhaps has been declined due to low sales OR does not wish to offer other collateral, may struggle to get the project off the ground. It could be the next best landmark project in Thailand but without decent early sales, capital or finance, the development will may not even begin. In these circumstances, private finance maybe considered. These types of lenders often can use the proposed development land (even if construction has already started) as collateral, though it maybe the requirement is for Kai Faak registration. This may cause issues with a proposed EIA approval on a condo building later down the line as with a Kai Faak registration, the development land is no longer owned by the developer as titles are transferred into the lenders name. In theory, a developer should really own the land for which they are about to build and sell units/plots on. Private lenders may offer a mortgage registration, though would likely come at a higher interest cost since to a private lender, they are generally interested for interest income only and don’t wish to get caught up in a lengthy legal process to liquidate collateral or be stuck with a half build project and hence why the higher cost to make their worthwhile.
With this in mind, it has been useful to see a new product launched onto the market, which allows for an early stage finance & mortgage option. Take for instance a most recent example.
A small but established developer, who planned to build a new condo resort, happened to be in one of the scenarios above. Having built 2 low rise Condominiums previously though unable to use these as collateral since, built under different companies and prefer not to mix up business interests plus of course some units already transferred to end users, this was to be a third attempt and follow on project. A proposed development land value of THB 200,000,000 already had a deposit paid, to reserve a prime location plot and finance was needed to purchase the remaining balance whilst also, allow a little capital to get the showroom up and running to begin sales. Of course once the project is under way with at-least 50% sales, major banks could be more easily available though for now, we are still in the early stages.
Prime Location Land with the following criteria is considered great for development:
• Freehold title deed – Chanote only (Nor Sor 3 or Leasehold not acceptable)
• Public road access width of at-least 6 meters
• Land plot width of at-least 12 meters
• Land not exceeding sea level by 80 meters
• Land not exceeding more than 30 degrees gradient
• Land with full utility access (electric, water, telephone)
• Land with no present indications to be existing of forestry or national park area
Now having obtained the fact, that this was a Prime plot of land to the Lenders preference, a loan of less than 50% against the Valuation price was needed to get things moving, around THB 80 million. Short-term finance of around 1 – 2 year maximum would allow the final payment to purchase the land and also provide a small allowance to begin work on the project, marketing etc. to help drive sales up and above that vital 50% mark and thus opening up full potential of the major banks lending. Usually a lender will provide a minimum of a 3-year term for the loan to be worth their while and with access to pay off early on an early redemption fee, around 2.00% in this example.
Upon submission of the following to a lender, it was possible via looking at historical lending with valuations in the area and via online content, to provide an estimate loan size within a few days:
• Chanote
• Google Map & Area Perimeter Drawing
• Recent Photos
Having now ascertained to be a possibility with sufficient finance available on the lenders side, the developer knows if the paperwork is available to meet lending requirements, there is a good chance funds can be made available. Paperwork could now be the difference in being offered a Mortgage registration or Kai Faak or even, still a decline. There is no exact answer to decision making here since ultimately, is down to a panel discussion & feeling on the day of application, judgements could change however, the more evidence to show sufficient affordability and sustainability regarding sales and construction with historical evidences of success and ability to repay both now and in the future would certainly not go unnoticed. A Mortgage registration & Kai Faak would most likely incur similar interest on the borrowing (approximately 12% per annum) though the major difference is of course land transfer costs. A Mortgage is a debt registered on the title costing around 1.00% at the Government land office however, Kai Faak is a full title transfer of ownership, which is highly likely to cost more.
A big factor in the process, which must be of consideration to the borrower and cannot be overstated, is the valuation assessment. This could be the death of many cases since, if undervalued or underestimated, loan to value ratios may not be sufficient for finance to be forthcoming. The lender will send a preferred valuation company to do their due diligence. If left to their own devices, it is highly likely that the valuation will come in, at a lenders suitable risk value or less, which of course means less than expected or even required and the deal is than lost. While a lender is keen to lend and not waste time, ultimately they have to abide by a set internal policy, which would likely be capped at a ratio against the independent and third party valuation, usually around 50%. It is highly recommended to do your own due diligence on land values in the area and provide contact details or highlight, which plot/area/units that could help with the appraisal value. While the valuation is likely to be a pre-determined market value, I am yet to find consistency with appraisal companies values and opinions of many others. A borrower always has the right to challenge an appraisal valuation if, it is felt under the expectation and by providing evidence, a valuation can be increased. It is therefore better to do this at the start rather than try and challenge the decision later, particularly in Thailand... If there are known registered sale values, sale prices or market valuations in the area, all submissions of these at the start can be accounted for and used as a reference.
Luckily for the above example, a Mortgage registration was achieved on the developing land with a decent valuation and within 1 year was fully paid off as a major retail bank than took over the deal.
In summary, early stage (pre-construction) developer finance can be available if the model fits lenders requirements on a short-term basis. Main obstacles tend to be the valuation company assessment, lack of desirability in the land or, the registration type (i.e. Kai Faak or Mortgage). Careful attending to the paperwork and valuation, could be the difference between success and a non-starter.
For further information on how to obtain Developer Finance options in Thailand, feel free to drop me a message:
For further information on how to "Finance Property & Condos in Thailand", please feel free to email enquiry@globalmortgagefinance.com OR call 66 (0) 81278 5382 and either shall be happy to assist.
Link to Website of Samui Phangan Real Estate Magazine where Published - Link