Who is Buying in Thailand?

16 September 2011

Recent times have not been particularly kind to the Thai real estate market. Virtually every level of the property sector has been affected, although some markets fared better than others. Prices have dropped overall, and many agents have been forced
to look at new strategies in order to maintain sales and stay in the black. Even with the market moving into a more positive frame, the factors that caused the slump are still cause for concern.

The causes

So, what really caused the downturn? There were two major culprits. Unlike other real estate markets around the world, Thailand was largely spared the threat of a bursting investment bubble. Instead, falling foreign investment can be largely attributed to the tenuous political situation, which scared off many potential buyers, and the seemingly unstoppable strength of the Thai Baht. The importance of these two factors is clearly demonstrated by the success of regional competitors such as Hong Kong and Singapore, whose markets have grown so much they have required the introduction of artificial cooling measures.

The wider global financial crisis obviously played an enormous role too, especially in Thailand’s resort areas, where many of those considering purchasing second homes or property as an investment either held onto their money or looked for cheaper options elsewhere.

However, the news was not always bad. Although the market was affected as a whole, some sectors were able to perform quite well despite the overall damp climate. “Pre-construction sales for new condominiums have been incredible,” says Clayton Wade, owner and managing director of Pattaya-based Premier Homes. “This sector managed to do well throughout the crisis and in spite of Thailand’s own political upheaval.”

The effects

In Bangkok, foreign investment may have diminished, but domestic growth continues. Bill Barnett, managing director of C9 Hotelworks says that smaller, entry level apartments have continued to perform well and in resort areas, the trend has been fairly similar. Smaller, inexpensive units have been ruling the day, especially on Phuket, he noted. “Low priced, detached and semi detached houses, from THB2-4 million (US$66,800-133,600) did well. As primarily homes to domestic buyers.”
As foreign investment dropped, the sectors that traditionally sold well to foreigners had a particularly rough period. High prices for branded residences and other off plan luxury properties meant they suffered when compared with previous years, particularly in the resort areas, while a proliferation of new developments also meant secondary sales fell. “As there are so many new condominium buildings and new housing developments that continue to be developed and constructed,” said Wade, “all of us in the industry have found it very difficult to sell a second hand residential property during the last eighteen months or so.”

As prices fell and sales dropped, agents looked for creative ways to stay in business and move property. Of course, one of the major attractions for buyers was lowered prices, and some areas saw major discounts. Barnett said that on occasion, customers were given reductions as high as 50 per cent, but the overall trend was less stated. “Many buyers expected at least 20-30 per cent off though,” he said.

The drop in prices attracted new bargain hunters, who were eager to take advantage of what David Wade, managing director of Tropical Homes Real Estate Co., claims was the most advantageous market for buyers since the tsunami in 2005. “There are always people who look for opportunities and have the cash to take advantage of them during difficult times,” he said. Real estate firms also took steps such as offering higher commissions to agents, or longer pay off periods on financing to help tempt unsure buyers into making a purchase. The lack of individual buyers also prompted greater investment by agencies into rental and hotel markets, which are now performing well.

As the world economy looks to continue its bearish ways, it is certainly possible Thailand’s real estate market and foreign investment figures will continue to suffer. However, the last few months have shown something of an upswing, and have given those in the industry considerable hope for the future. The crisis of confidence brought on by Thailand’s political situation has eased, and many agents and developers have a more positive attitude. “Moving forward, we expect the market to improve further as Thailand stabilizes in a post election period,” said Phillips. “A lot of confidence has been restored in the regional markets.”

The rebound

2011 has been a year of recovery for the Thai real estate sector. Foreign investment interest is returning, and as the new government settles in, so does market confidence. The traditional Thai property markets of Bangkok, Phuket and Pattaya all experienced increases in demand in the first half of 2011 as well as quarter-on-quarter growth.

In fact, CB Richard Ellis recorded a doubling of Phuket villa sales from Q1 to Q2. While foreign investment into residential real estate has in the past been driven largely by Europeans and North Americans, the global financial crisis has seen a shift in terms of global demand and the recovery is due mainly to strong Asian based demand. “Asia based foreign investors are still the biggest net buyers of private Phuket property and we have seen a strong showing by Indian based buyers and Indian expatriates in Thailand, which is quite encouraging,” said Martin Phillips, managing director of Phillips Property, a Phuket-based real estate agency.
Chinese, Singaporeans and Japanese investors, whose currencies have not weakened against the Thai baht as much as the US dollar has, are coming to Thailand to escape tight regulatory measures in places like Singapore, Hong Kong and Kuala Lumpur where high demand has created fears of a real estate investment bubble. “Selling prices in Thailand are still lower than in other neighboring markets but the quality of the properties is the same as in Hong Kong or Singapore,” said 67
Patima Jeerapaet, managing director of Colliers Thailand.

Russians have also made a strong entry into the Thai real estate market in the last couple of years, driven by rapid economic growth and their increased awareness of Thailand as a holiday destination. Russian tourist numbers to Thailand have skyrocketed in the last five years from just over 107,000 arrivals in 2005 to an estimated 1.17 million this year. There is no doubt that this increase has sparked greater Russian investment interest, especially with regard to villas and condominiums in Pattaya and Phuket.

Price factors

Experts estimate that residential real estate prices in Bangkok still average at just 1/6 of the prices charged in Hong Kong and Singapore leaving plenty of room for potential market gains. “We are also 20 per cent cheaper than Ho Chi Minh City,” said Simon Derville, deputy vice president of Research and Development for Raimon Land, adding that while the rest of the region has witnessed significant price gains in the last 5-10 years, prices in Bangkok have increased proportionately, according to demand. “It’s not that we are not growing fast enough, it’s that the others growing too fast,” he said.

Although Phuket is definitely seeing a resurgence in villa sales, the shift to Asian investors has also prompted a shift in the type of real estate sold across the Kingdom: “We’re seeing individual investors returning to the downtown Bangkok condominium market,” said Eilidh Callum, senior economist for CB Richard Ellis. “The Pattaya market has also seen foreign buyers for condominium properties, which are popular with Russians, European and Asian based buyers.”

Market shifts

Thai ownership laws still allow a maximum 30 year lease on land and property, renewable perhaps, but not without careful contingencies in place. Freehold ownership remains limited to condominium units where the building is majority Thai owned. While such restrictions certainly affect investment choices, buyers have always managed to work with them in the past and many experts believe they will continue do so, especially with support readily available from experienced agents and legal firms.

The shift towards condominium purchases may therefore be more a result of the nature of the buyers than legal restrictions. “Before, foreign investors were mainly Americans or Europeans looking for holiday homes in the beach resorts,” said Derville. “But the foreigners tend to be Asian now, so they buy with a different motive, they want an investment.”

Political instability compounded by the global financial crisis is still quoted as a main obstacle when it comes to the foreign real estate market, but the challenges are not all detrimental. “We have seen the market thinned in terms of undercapitalised developers and weaker real estate agencies,” said Phillips. “For the investor, there are some very good deals to be had for fast movers. This is a cash market, so the absence of a credit induced bubble was positive.”

Looking forward

The new wave of foreign property investors is certainly a welcome sign for many in the Thai property industry, as they have rapidly filled the gap left by traditional European sources that dried up in the crunch of the economic crisis. Whether the former investors return is only part of a broader question when it comes to what the future holds. Despite positive sentiment, the crystal ball remains a touch murky, with so much contingent on the new government’s policies. “Foreign demand for Thai properties relies very much on the political stability and economic outlook,” says Aliwassa Pathnadabutr, managing director of CB Richard Ellis Thailand. “Politics is a factor that remains uncertain and this will influence the market direction.”

The fact that the recent election was peaceful and the government ratified is an indication of some stability, clearing the vitriol that sparked mass demonstrations, stalling economic progress and putting fear into the wallets of foreign investors. “The new Prime Minister, with no political background is the new hope to start a new phase,” Aliwassa says. This first baby step forward is positive, but greater internal impetus is still needed.

Economic obstacles

Foreign freehold quotas and limited lease terms, combined with a lack of financial planning options remains a hindrance to overseas investment, effectively forcing cash-only purchases. These concerns are nothing new to insiders or frustrated investors, but it is not only property-specific decisions that will spur new investment incentives. Policies affecting overall economic growth will undoubtedly have a domino-like effect, trickling down to the property market, for better or worse. “Rising interest rates and inflation trends may start to dampen local sales and, in turn, become psychological barriers for foreign buyers,” says David Collins, CEO Savills Thailand.

While the beleaguered US dollar and weakened Euro have squeezed the flow of traditional investment sources, it is also turning potential investors away from Thailand. Drawn by the allure of cheaper prices, many Asian investors have begun to flock to these bruised markets. A weaker Baht may therefore be one way to draw back these investors. “As we have seen in recent years, investors now have other cheaper options,” said Frank Khan, director of residential department of Knight Frank Thailand. If the currency were hovering around THB32 to the US dollar, it would incite further investment.

New money

In the meantime, new key foreign markets are still expected to pour money into the property market in Thailand. Pattaya, long a popular spot with foreign nationals, may epitomise things to come. “The demographics are changing,” says Mark Bowling, senior sales manager at Colliers, Pattaya, pointing out that buyers from India, Russia, Australia and Hong Kong have all been snapping up properties.

As a sign of such new demand, Colliers plans to place a Russian-speaking agent in Pattaya towards the end of summer and with foreign demand dominating the market by upwards of 80 per cent, things could indeed be on the up. Bowling expects the upcoming high season to bring “an explosion,” especially for off-plan projects.

Other resort markets may not fare quite as well, however. “Generally elsewhere, the outlook is expected to be mediocre aside from a few trophy sales,” says David Collins, CEO Savills, Thailand. Though this could change if Russian investors extend their buying muscle beyond Pattaya. Frank Khan agrees that the residential resort market is “very soft”, but Khun Aliwassa pointed out that expected high tourism numbers during the coming season could pull in extra sales of holiday homes, due to a correlation between the two.

In the immediate future, buyers from Bangladesh, China, Singapore and the Middle East are expected to become important streams for property investment, particularly in Bangkok, where Khan is “very confident”, predicting strong growth alongside expected new mega projects. But don’t count the Europeans out just yet. Recent data from UK-based Rightmove indicates that searches for Thai property in May increased by 24 per cent from the previous month, the second highest amongst all country searches. On top of that, June’s data show a further increase of 12 per cent from May. “Thailand will not go anywhere,” said Khan. “They still (the foreign investors) love Thailand for the resorts and for the lifestyle”.

Source: Property Report South East Asia