Friday, January 29, 2010

The Thai Property Market Under the Current Global Morass

The Thai Property Market Under the Current Global Morass

Due to the failing global fortunes and the Thai political issues, there is a slowdown in transaction volumes in this quarter. Thai market caution has resulted in muted demand, a low level of speculation, low borrowings to value, and possibly as low as 50% debt to current valuations, with buyers acting well within their financial capacity. But so far there has indicated no significant price correction. "CB Richard Ellis Thailand expects this situation to continue for another 18 months. More importantly, with the bulk of products under construction having sold well, we see no chance of a property market crash," reported by David Simister, Chairman of CB Richard Ellis Thailand

(PRWEB) October 21, 2008

Most global property markets and falling -- where does this leave Thai property and the foreign dominated resort market?

Not the most comfortable question to ask or answer in view of the current global morass. A recent letter to the Bangkok Post expressed surprise that despite failing global fortunes Thai property commentators were talking up the local market, and questioned the objectivity of property articles. Thailand also has its own unique problems with the country politically divided and a government with little capacity to concentrate on the overall economy, let alone real estate or foreign property investment.

As a long-term player in Thai real estate and a resort property owner, I would like to give a little confidence and optimism to fellow investors and owners and to the Thai property market in general, backed by fact and reason.

The results and transactions being recorded by my company, CB Richard Ellis Thailand (http://www. cbre. co. th/en/index. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt), not surprisingly, show a slow down in transaction volumes in this quarter but so far have indicated no significant price correction. At the start of 2008 and well into the first quarter, we have seen strong take-up for well-placed projects, including new launches. We are also witnessing strong re-sales as condominium (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Bangkok. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) projects reach completion, with the majority of sellers recording healthy uplifts in value from their off-plan purchases. Where projects have completed and transferred this year, we have seen no evidence of defaults and Bangkok buyers with typical deposits of 30% have had no hesitation in completing the transactions and taking ownership of their properties. Is Thai property somehow insulated after six years of a rising and well-supplied market; is property still in short supply; and what makes the Thai market a good place to ride out the global financial storms?

Surprisingly the answers lie, I believe, in three unlikely areas: Thai politics, Thai banking policy and the law regarding property finance.

The Thai political arena has been troubled now for well over three years, long before the overthrow of the Taksin government. Without going into the political background, Thai real estate investors have been displaying caution in real estate investment since 2005. Purchases have been made for use or investment rather than short-term speculation. Sales to Thais, with the exception of Phuket (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Phuket. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) and Koh Samui (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Samui. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt), have been the bedrock of commercial success for developers. That's not to say that foreign sales have not been significant but, without the presence and support of Thai buyers, developers could not complete condominium projects. Sales of specifically foreign-pitched projects such as leasehold villas in Phuket (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Phuket. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) are of relatively low volume in comparison and their fortunes are regulated by ownership laws, which I will come onto later.

In my opinion, Thai market caution has resulted in the following: muted demand; a low level of speculation (despite rising prices); low borrowings to value; and possibly as low as 50% debt to current valuations, with buyers acting well within their financial capacity. Thailand, unlike most western markets, is not directly driven by the availability of debt finance, nor are maximum mortgages the norm. Thai banks enforce a strict approval policy, only granting mortgages where they are comfortable with applicants' ability to service debt.

The Thai banking industry learnt a very hard lesson in 1997, but that lesson has been well learned and, both in project financing and domestic mortgages, prudence has been the order of the day. Whilst banking legislation has not been radically overhauled since the Asian crisis, banking practice has, and the Bank of Thailand has ridden hard on enforcing caution in respect of real estate. Thai banks have, compared to the global scene, stayed away from structured finance and concentrated on sober domestic business, with property loans rarely reaching 70% of the banks' own valuations.

The final piece of the picture is foreign buying, which has been 100% in cash. Most prestigious condominiums built in the last five years in Bangkok and the resort markets have enjoyed strong foreign interest, sometimes up to the full foreign quota of 49% of the sellable area. To purchase and register a condominium under the foreign quota, the buyer has to show he has brought in funds covering the full purchase price from abroad. This, coupled with the fact that Thai buyers are not maxing out mortgages, means that Thai real estate developed in the last five years has been a cash-driven market. The principal result of this is that Thai real estate is far less dependant on debt than most global property markets. The Thai property market is actually well insulated from a debt crisis.

Of course that does not mean business as usual, and more project launches and upward-bound prices. But let's look at the market fundamentals. Taking the recent 2008 development site transactions that CB Richard Ellis (http://www. cbre. co. th/en/index. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) has been party to, land prices for prime sites are not falling. Carrying out a development appraisal produces unit prices in excess of those at current projects. New Bangkok central business district condominiums cannot be built for today's values. Prices of THB 250,000 (USD 7,270) per square metre in the central business district and THB 150,000 (USD 4,360) per square metre in Sukhumvit will be the new benchmark prices for quality new developments. Thai buyers have been well aware of the shortage of prime sites and rising construction costs, and know well that today's purchases will be cheap compared to future launches. These prices are still less than one-quarter of Singapore's.

CB Richard Ellis has produced, since the 1997 crisis, a comprehensive Bangkok market report (http://www. cbre. co. th/en/Research-Bangkok-Property-Report. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) and this year has started to do the same for Phuket (http://www. cbre. co. th/en/Phuket-Property-Report. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt). In both markets, we are witnessing a slowdown of launches and in some areas a dearth of products for sale. We expect this situation to continue for another 18 months. More importantly, with the bulk of products under construction having sold well, we see no chance of a property market crash.

We feel our view is well supported by ongoing unit sales and particularly by a healthy number of re-sales in new projects recently completed. In absolute terms, Thai real estate values and volumes are modest when compared to other Asian commercial hubs and Thai real estate offers foreign buyers access to a lifestyle and cost of living that is difficult to rival. We continue to run these market reports quarterly so, if our predictions and analysis are wrong, we would expect this to become apparent relatively quickly.

Foreign resort property is driven by external liquidity and there are clearly fewer potential international or regional buyers as the global crisis washes through Asia. This market is more difficult to monitor because there is little statistical evidence to prove ongoing demand, other than the last quarter's sales and the number of current enquiries. The logic is that demand must drop; however, in the case of Phuket (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Phuket. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) and Koh Samui (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Samui. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) where we have high-end sales offices, the trend we are noting is reduced demand, but ongoing serious property searches by committed buyers and an almost total lack of new high-end products. Given the lack of good oceanfront sites, we are bullish on the limited volume of developments that are proceeding. There is some evidence in the UK market and elsewhere that, at a certain level, wealthy demand is unaffected. We see this born out by take-up at the W Koh Samui (http://www. cbre. co. th/en/koh-samui-villa-apartment-condo-projects. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt) and in resort sales in Phuket (http://www. cbre. co. th/en/PropertyAgency-ResidentialSales-Phuket. asp? utm_source=PRweb&utm_medium=pressrelease&utm_campaign=DCSglobalmkt). My feeling is that the villa market at over USD 2.0 million is still strong and the bargains here won't be in terms of price reductions but in the chance to pick up absolute shorefront properties at a time when prices are steady.

Thai property is not a market for foreign buyers to enter lightly, as debt finance is not available and Thai property laws need to be fully understood, but it remains one of the most inspirational lifestyle markets in Asia and to my mind a true alternative in terms of value and experience to the Caribbean or Mediterranean. It has proved to be resilient to numerous external problems and I, for one, am convinced that it will prove to be, for tomorrow's buyers, an excellent medium-term investment.

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