In need of some restoration work

14 December 2008

The political tensions that culminated in the seizure of Bangkok's two airports by anti-government protesters have taken a heavy toll on foreign investor sentiment. The property business until recently had been weathering the storm better than most sectors, but even the healthy high-end market in Phuket is now facing challenges. Martin Phillips, who heads the Thailand operations of Engel and Volkers, discussed recent developments in an interview with Nina Suebsukcharoen

Q: HOW IS THE PHUKET PROPERTY MARKET COPING WITH THE POLITICAL CHANGES?

A: The Phuket property market is an important market and has traditionally been very robust. It has weathered past storms such as Sars and the tsunami.

However, there is a major difference between past and present events - the first two were natural, the current crisis is self-inflicted. It is not just the property sector that is suffering but tourism as well - it is a symbiotic relationship. People come on holiday or business and in many instances later decide to buy a holiday home.

Thailand is intrinsically linked to the global economy which is already facing huge challenges. To continue to self-inflict further damage on a fragile economy and threaten the job security for hundreds of thousands of people in the construction, property-related and tourism sectors seems senseless.

This is a great shame as Phuket was holding its own against the sub-prime crisis - it is a property market that carries little debt and therefore has an underlying strength.

Q: WHAT IS THE IMPACT OF THE GLOBAL FINANCIAL PROBLEMS ON PHUKET'S REAL ESTATE MARKET?

A: I believe that the political situation and recent domestic events such as airport closures are far more damaging than the global financial crisis.

The property market in Phuket had stability and has fared better when compared to the steep declines experienced in other parts of the world such as in Europe and the US. Investor interest has been encouraging for projects with yields and properties that represent value. There is interest at the high end but the middle market had been adversely affected. High-end buyers are also having to manage their own challenges in their businesses outside Thailand and this is physically keeping some of them away. Those who understand the unique ways of Thailand are continuing to express an interest and are bargain-hunting or seeking good investment properties.

Q: ARE BUYERS FROM CERTAIN COUNTRIES BACKING OFF?

A:The situation affects every nationality equally, so interest has eased across all nationalities. We are, however, seeing increased interest from the Middle East.

Q: HAVE THE CURRENT GLOBAL AND NATIONAL PROBLEMS LED TO PRICES DROPPING IN PHUKET?

A:There is a softening of prices reflecting the forces of supply and demand. However, prices are not coming off as much as in other countries. This is a location where people have generally paid in cash and can hold property long-term. Supply has certainly increased but demand has eased, so motivated sellers will be more flexible in their negotiations but there is no panic selling. While prices may have come off in baht on some properties, it is noteworthy that foreign-exchange gains are supporting the profits made by some sellers.

Q: WHICH SEGMENTS OF THE MARKET ARE HARDEST HIT BY THIS TURMOIL?

A:The hardest hit would be the middle segment, pure off-plan projects or projects with inadequate funding. Well-funded projects that are well advanced in development and the resale market seem to be attracting the most interest.

The high-end market remains resilient but Phuket and Thai resort markets now compete with Florida, Spain and the Mediterranean for high-end investment dollars. Thailand needs to understand that investors shop globally. If they perceive a higher risk in Thailand, they can simply look elsewhere.

Q: WHAT IS THE MOOD AMONG FOREIGN PROPERTY BUYERS, DEVELOPERS AND AGENTS? ARE DEVELOPERS POSTPONING THEIR PROJECTS?

A:Sadly, if the high season remains weak, we will see local property and tourist-related businesses [adjusting] to reduce costs and I am sure we will see job cuts in the short term. Some projects likely will encounter cash flow challenges leading to project delays. On the other hand, we will definitely see transactions in excellent projects and good resale properties in prime locations when correctly priced. Astute buyers will always purchase on opportunity in a prime location.

There is a massive injection of additional money in the global market - hundreds of billions of dollars - meant to stabilise the current financial crisis. What happens to this money supply in the future? There will be a huge supply of additional cash in circulation and no mechanism to pull this cash back quickly enough when the crisis has settled, as it will. This may well lead to global inflation but with it rapidly rising property values. Sometimes, we must look beyond the current crisis to the future and spot opportunities early.

Q: HOW IS ENGEL AND VOLKERS PHUKET DOING? ARE CLIENTS OPTING TO SELL RATHER THAN BUY?

A:We have seen a noticeable increase in listings in the past months but Phuket has always been a market with a good general supply of product. Many sellers are also holding, preferring to retain their homes for the long-term.

Our focus is on the sales and marketing of properties and we have been selective in what we represent, notably completed projects offering investment yields.

Our clients have increasingly asked us to rent their properties and we have now launched our short- and long-term rental services in Phuket.

We have therefore balanced our product mix. This year will show a similar revenue performance to last year.

Q: WILL IT TAKE LONG TO REBUILD PHUKET'S PROPERTY MARKET NOW THAT THE POLITICAL CONFRONTATION SEEMS TO BE EASING?

A:Is the political confrontation easing or is it just repositioning ? This depends on how and when the political confrontation can be resolved. If it's done peacefully and thoughtfully, then the recovery period will be shorter. If the situation does not improve, then the market will continue to be challenged.

Source: Bangkok Post