I n the heart of Bangkok – at the junction of the city’s two different mass transit systems – stands Exchange Tower, a high-end retail and office complex with a façade reminiscent of a 1920s-era, Art Deco-style building.

The 6,000 sq m of retail space is filled primarily with True Fitness, a massive gymnasium. The 35,000 sq m of Grade A office space is about 70 per cent leased out to clients, including Bristol-Myers Squibb, the pharmaceutical company, and Japan’s Fujitsu.

For nearly seven years after the devastating 1997 Asian financial crisis, the stylish high-rise, then nearly 90 per cent completed, stood empty – virtually paralysed by the monetary woes of the Thai family that originally set out to develop the property in the mid-1990s. It was only after Singapore’s City Developments Ltd. acquired the building that it was finished last year.

CDL, one of the island state’s largest property companies, also played a big role in the revival of another once-abandoned Bangkok building: the Millennium Hilton, a 543-room hotel on the banks of the Chao Praya River. CDL, along with US-based real estate fund Westbrook Partners, acquired the derelict hotel from a state-owned asset management company, after the crisis-hit original owners walked away from the project.

The Singaporean company also has a “significant interest” in Real Estate Capital Asia Partners, a private real estate fund also involving a US investor, which last year took a 95 per cent interest in Phuket Jungceylon Project, a then-financially ailing hotel and 2m sq ft retail complex that is about to open in Phuket.

Over the last few years, several other big Singaporean property developers have made highly visible forays into Thailand’s property sector which, prior to the 1997 crisis, was dominated by domestic companies. While some have stepped in to revive stalled projects, others have started fresh ones, mainly in the residential sector.

But the flow of foreign capital into the Thai property development sector could be constrained by potential changes in the legal and regulatory environment – changes intended to ensure that Thai soil remains under Thai control, with only limited exceptions.

Proposed amendments to the country’s Foreign Business Act – an important piece of legislation that regulates foreign investment – looks set to close a loophole that has traditionally allowed foreign companies to skirt foreign equity restrictions in many sectors of the economy, including property ownership and development.

The legislation may also mean that some existing foreign investors may be forced to sell down their holdings to their Thai partners, or otherwise restructure their companies – potentially prompting outflows of foreign capital from the property sector.

“We are in the very early stages of this but, ultimately, if this whole thing plays out according to the way it’s going, you would see an outflow of foreign funds from property,” says Dan Tantisuthorn, a researcher at Jones Lang Lasalle. “That would increase the demand for Thai capital, which would put pressure on asset values.”

CDL declined to answer any questions about its Thai investments or the likely impact – if any – of the proposed legal changes on its local portfolio. A spokeswoman for the company said the relevant executives were travelling and unavailable.

A country that basks in its historic success at fending off colonial intrusions, Thailand has always explicitly barred foreign ownership of land – granting limited exceptions only to companies whic built factories in designated industrial estates, or had received privileges from the Board of Investment, the state agency.

But in practice, Thai authorities long turned a blind eye to widespread circumvention of its foreign ownership restrictions in both property and other businesses – an evasion facilitated by ambiguities in the laws that defined whether a company was foreign or Thai. Until now, companies have been deemed legally Thai – and thus eligible to own land – as long as Thai citizens hold the majority of the equity, even if foreigners actually have control over a company through a majority of the voting rights.

Such lenient rules facilitated a wide range of investments -- from foreign families buying holiday homes to big foreign property companies taking the lead in both residential and commercial developments.

But last year, Singapore’s Temasek Holdings used such a corporate structure to take over Shin Corp, Thailand’s largest telecommunications company, despite a nominal 49 per cent foreign equity limit in telecoms. The controversy over the deal culminated in the military coup against Thaksin Shinawatra, the former prime minister, who had founded Shin Corp before entering politics.

In the backlash against that deal, the new military-installed government has proposed revising the definition of what constitutes a foreign company.

Though not yet law, the proposal has already dampened demand for new office space, as companies put potential investments on hold. Meanwhile, industry analysts say, the Land Department has already been stepping up scrutiny of companies involved in fresh land deals if they have any foreign shareholders.

“Transfers of property have slowed to a crawl,” says Arthur Napolitano, managing director of Kudu, a boutique residential property developer focused on contemporary design. “The message has clearly gone down the line that you need to scrutinise any company that has a foreign shareholder in it.”

According to Jones Lang Lasalle, Thailand’s Central Business District has a vacancy rate of about 11 per cent in prime buildings, down from about 35 per cent in the years immediately following the Asian financial crisis. Yet most of the new buildings that have come on to the market recently are buildings that were started before the crisis, were then suspended and have recently been completed,

It is difficult to assess how individual foreign companies operating in Thailand, including property developers, would be affected by the rule change, given the sensitivity of the issue, and most companies’ reluctance to discuss it openly.

The draft law, now under consideration by the National Legislative Assembly, could yet be altered in unforeseen ways. But, until the matter is clarified, demand for office space is likely to remain weak, while new building starts will be limited.

Mr Napolitano says: “Everyone is waiting with bated breath to see what is going to happen. It affects everyone – from the guy interested in buying a luxury villa in Phuket to the large international investor talking about $40-$50m investments.”