Source: The Nation

Real-estate firm points to increased land, construction, labour costs

Real-estate services firm Jones Lang LaSalle believes that prices for top-end condominium units in Bangkok will rise further, despite strong competition.

This is because developers are well capitalised and remain confident that rising development costs and product quality justify the higher prices.

Although foreign interest has been rising since the outcome of the July elections, the global economic outlook remains shaky, so Thai buyers continue to be the main source of demand, lured by rental income, low interest rates and the desire to purchase property as a hedge against inflation.

Jones Lang LaSalle’s managing director Suphin Mechuchep said that although top-end condominiums were only a small segment of the market and were not necessarily representative of the Bangkok condominium market as a whole, the company had discovered some interesting movements in this sector.

Generally, the sector has continued to perform fairly well. Although demand from foreign buyers has not yet fully recovered, interest from this group has picked up since the elections in July. Thai buyers remain active, with most of the recent purchases being made by high-net-worth Thais who are buying for their own occupation or as an investment, she said.

Jones Lang LaSalle said recently completed luxury developments were enjoying an average sales rate of about 85 per cent, while newly launched projects had a lower average sales rate of 50 per cent. This is still a relatively healthy rate, when high levels of new supply entering the market over recent years is taken into account.

Jones Lang LaSalle’s data reveals that the number of top-end condominiums in completed buildings across Bangkok’s central business district rose from 10,324 at the end of March 2006 to 21,464 at present. An additional 3,867 units are expected to be completed between now and the end of 2013.

The real-estate firm said top-end units in some completed condominium developments had enjoyed price increases of as much as 40 per cent over the past three years. Certain newly launched projects are offering prices ranging from Bt90,000 to Bt230,000 per square metre, compared to a price range of Bt150,000 to Bt200,000 per square meter offered by comparable new projects launched last year. Units in prime locations within the central business district where land for new developments is becoming scarce, such as Phloenchit, Wireless Road, Lang Suan, Sala Daeng and Sathorn, are fetching the highest prices.

While sustained demand provides room for price increases, higher development costs, mainly for land and construction, have been another major factor pushing up prices.

“With new commercial and residential developments having mushroomed over recent years, vacant land and sites for redevelopment in Bangkok’s central business district have become increasingly scarce. In addition, most developers of top-end condominiums are aiming for the highest quality. All these things have contributed to the rise in condominium prices,” Suphin said.

Many developers are expected to increase the prices of their residential units as a result of higher prices for construction materials and rising labour costs. Steel prices, which are up by 10 per cent since early this year, are having the greatest impact on condominium prices, relative to other residential developments. The prospective increases in the minimum wage will also have a direct impact on construction costs.

“With the government’s plan to raise the minimum daily wage to Bt300, residential prices are likely to rise further, as development costs will inevitably increase. Some pundits forecast a 5- to 7-per-cent increase in the prices of new condominiums,” Suphin said.

After the Bank of Thailand imposed mortgage limits earlier this year, condominium buyers are reportedly holding off on purchases until stimulus measures initiated by the new government take effect. Notable among these prospective policies is the provision of mortgages that are interest-free for the first three years for first-time home-buyers. However, these measures are unlikely to have any impact on the top-end condominium market.

“Most people who buy top-end condominiums are not first-time homebuyers. While the government has announced its intention to launch measures to help home-buyers, we expect that these measures will be aimed mainly at home-buyers in the middle to low-end segments,” she said.

Source: Bangkok Post

For most expats, property is an essential part of their overall assets. Many have homes that are appreciating in value either in their countries of origin or where they currently reside. Owning property in a foreign country tends to be more popular among longer term expats, many of whom are in Thailand.

For those who move around with an international employer, the idea may not be as appealing. They may feel that a three- to- five-year posting isn’t long enough to realise value from investing with a secure exit strategy. This group is also often allocated a rental allowance but not permitted to use it to purchase a property.

Owning your home has great objective and subjective merits. Savvy investors take full advantage of the tremendous investment upside over time. Owning property allows assets to grow without rental expenses. It also allows you to renovate and create the dream home you have always wanted, without first having to seek a landlord’s approval.

Of course, several factors need to be considered before you put any money down. A comparative calculation of the costs of acquisition and ongoing maintenance compared with the cost of renting needs to be undertaken. You can then see what rate of capital appreciation is required in order for you to be ahead of the game in commercial terms.

There are now many more solutions for expats wishing to finance a home in far-off places. In Thailand, for example, there are now many choices which were non-existent several years ago.

Some expats are interested in diversifying their property portfolio into different geographical locations. Because they are truly international, this becomes less daunting and more desirable. Diversification balances the risks within the entire portfolio. This is sensible, provided you have diligently researched the places where you intend to purchase. This should not only cover the commercial, but also the legal aspects of ownership.

While it appears relatively simple to own properties in some locations, when you actually look at the feasibility of repatriating, the prospect can be daunting. Some locations present nightmarish administrative requirements that totally baffle the non-resident, while others provide non-residents great tax breaks.

When we plan for a specific event, we tend to see the significant challenges ahead and think about how to overcome them. While concentrating on these challenges, however, we often overlook the obvious. It tends to be the small difficulties that trip up many would-be investors.

So, if you are a budding property magnate and have visions of owning units of various types all over the world, where should you start?

There are some popular places where property seems to be a good buy in terms of both capital appreciation and the interim rental market, places where you might cover your costs and make a profit as well. However, it is important to consider carefully.

Property values in the US declined markedly in the recession and have yet to begin a substantial recovery. In the right areas prices are low and rental returns are high. This is partly because so many ex-owners are now looking to rent as they have not been able to maintain their mortgages. You may find that a property you consider to be a good buy is actually not, however, as the rental price you desire to cover your investment is generally unaffordable for prospective tenants.

There are also some areas in the US where communities have all but disbanded and where property would be of no use to anyone. Because the country is so large, it would be best for you to try and get a handle on specific areas that you may wish to target.

Australia is also a large country, but much of it is uninhabited and the remaining area is considerably smaller than the US. Here is a country where properties have boomed and perhaps investment returns will not grow as much as in the past. In Sydney, prices doubled from 1999 to 2004. Since then they have been more stable, even stagnating in some areas. However, this is preferable to the recessionary price declines that have hit some countries.

Singapore has had a fickle market over the past 15 years. Prices seriously declined between 1998 and 2002, and then stagnated. Then in 2007 they took off without warning. After a significant surge, they stagnated during the recession, but have since started rising again. Will there be sufficient future growth to make an investment today worthwhile? There is certainly a buoyant rental market, so it is worth a look.

Dubai was a popular place for property investors from 2003 to 2008. The recession halted growth, and the exit of so many expats caused serious declines in the rental market. There are varying opinions about this market and whether it will ever reach the growth that had been hoped for. The decline of neighbouring Abu Dhabi may be a sign. The two cities in adjacent states in the UAE are only 60km apart.

In the Middle East the escalating political problems are an emerging factor with as yet unknown parameters. Tunisia was the catalyst, and with the recent difficulties in Egypt, many nervous investors are wondering what will happen next. Egypt has always had a moderating effect on the Middle East and the latest developments could change the dynamics. It may be best to avoid the region for the foreseeable future.

The UK has always been worth considering. Although the economy is not as buoyant as some would like, certain areas around city centres are considered by many to constitute an economy within an economy. These property markets have been resilient and stable even through the bad times.

In general, property in London has risen steadily over many years because there is a genuine shortage in terms of stock and quality, and tenants are easy to find. Another contributing factor to London’s appeal is the continued weakness the pound, which has made property prices comparatively 25% lower than they were in 2008. Olympic fever has now begun and prices are expected to rise rapidly over the next year. If you wish to take advantage of these factors, it would be wise to do so in the near future.

Other parts of Europe do not look as attractive, and if you have an interest in a specific place, it is in your best interest to study the local conditions. You should soon be able to come to a decision on whether there is a case for you to enter the property market in your location of choice.

There has been mixed feedback from investors who have ventured into South American countries. It appears that the local administrative requirements in Brazil make it essential to have a representative there with full power of attorney to act on your behalf. Apart from the significant time difference, many of the administrative requirements cannot be easily satisfied from a remote location.

There are many places in the world where property might be an attractive and worthwhile investment proposition. If you are relatively young, it may all seem very exciting, but as we get older ease of management and maintenance are the prime considerations. Most expats therefore tend to specialise in their portfolios, limiting themselves to a specific property area.

These days many advisory firms have specialist property arms attached to them which can assist you with the acquisition and ongoing management of your property. If you have a specific interest, an adviser will be able to give you some guidance and help you through the process, enabling you to efficiently incorporate this attractive asset class into your overall investment strategy.

In an article by Property Report, the housing market in Bangkok enjoyed its boom time in the first half of 2010, mainly because of the incentives granted by the government.

Developers were very bullish and launched plenty of new projects, especially condominiums, in the third quarter. However, the Bangkok housing market has probably passed its peak, and will grow at a slower rate in 2011.

Rising interest rates will be a major concern, along with the central bank’s efforts to rein in protective measures such as stricter loan-to-value ratio for mortgages. Election year will also bring in uncertainties and investors may adopt a wait-and-see attitude.

There are some areas in Bangkok with vast quantities of housing supply, but it still does not fall into the definition of “bubbles” as prices have not been shooting up across the market. Many housing projects will likely spring up along the new Purple Line mass transit route, as it is the only new route now with realistic progress.

In another report by Kasikorn Research, the real estate market in Thailand has recorded high growth, as seen from new condominiums that reached 70,000 units by the end of 2010. Nonetheless, unsold units in the market have been accumulating, prompting concern about a market imbalance.

Intense competition among commercial banks has also raised a fear of risky lending practices, given volatility in the Thai economy amid global economic uncertainties. Moreover, consumer purchasing power will inevitably be affected by the current trend toward rising lending rates.

As a preemptive action, on November 12, 2010, the Bank of Thailand announced new loan-to-value (LTV) restrictions on residential property priced lower than Bt10 million. For high-rise residential property (e.g. condominiums), an LTV of 90 percent will become effective on January 1, 2011.

Meanwhile, low-rise residential properties (e.g. single-detached houses) as well as duplexes and townhouses, will be subject to an LTV of 95 percent, effective January 1, 2012. Kasikorn Research Center (KResearch) holds the view that this BOT action is aimed primarily at preventing a real estate bubble, thus ensuring market stability.

The BOT’s latest move may help cool some overheating property segments by discouraging new residential projects that could lead to oversupply in the market. Nonetheless, in a highly competitive environment, developers have been lured toward gaining a share of the burgeoning market, causing obvious supply-demand imbalances in certain locales.

Both developers and lenders should adopt more prudent risk management to maintain a market balance. For prospective homebuyers, decision-making on purchases should be based on their debt servicing ability and financial standing.

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The economic crisis has shaken the West’s confidence and the fact that the economies of China and India are growing by 10% and 9% respectively, compared with 3% for America and 2% for Europe, goes somewhere to demonstrate that shift happens.

At the end of last year, The Economist published an article “Now hope is on the move”, saying that in a recent poll “some 87% of Chinese, 50% of Brazilians and 45% of Indians think their country is going in the right direction, whereas 31% of Britons, 30% of Americans and 26% of the French do. Companies, meanwhile, are investing in ‘emerging markets’ and sidelining the developed world. ‘Go east, young man’ looks set to become the rallying cry of the 21st century.”

It was suggested by CBRE that faster resurgence than in 1997 crisis is expected this year because of “rapid global action and good local financial health” and predicted back then that “Thailand’s property market is expected to recover” in 2011″.

According to Aliwassa Pathnadabutr, managing director of CB Richard Ellis (Thailand): “We believe that this recovery cycle will be faster than that after the 1997 financial crisis because global leaders such as the US, the UK, Europe, Japan and China have launched measures to solve the problem. Meanwhile, Thailand’s property developers and finance firms are healthier, financially, than they were in 1997.”

There are always some that advocate the resurgence of the property market this year but caution needs to be added into the mix: the global property bust that led the world into recession did start to lift in 2010, with property prices up in Britain and stabilised in America. By late 2010 output and employment was up in most “mature” economies but Europe has been humbled by its sovereign-debt crisis, which is undermining the euro.

So we can’t be altogether sanguine about the recovery in property markets this year as some might have us believe. One of the major problems facing Bangkok is the continuing political uncertainty and the oversupply of rentable space relative to demand.

Surprisingly, though, Thailand Property Market concludes that Thailand’s economic fundamentals are strong as the country “continues to be an attractive place to do business” with the baht and the stock market at an all-time high.

Jones Lang LaSalle concludes in its report that this year is expected to see a much greater divergence in real estate activity and performance: global direct commercial real estate investment volumes rising by 25-35% on 2010 levels; Asia Pacific will lead the upswing in leasing markets, ahead of Europe and North America; prime property will continue to outperform secondary; and that the domestic corporate sector will come to the fore in Asia Pacific, particularly in India and China.

They also predict that “robust competition for trophy assets in the world’s high order business hubs will continue to push up capital values, with London, Paris and Moscow offices expected to achieve double-digit prime capital appreciation in 2011″, while in the major Asia Pacific cities, “prices may be forced up beyond usual risk return capitalisation rates, particularly when compared to levels that can be achieved in more mature markets such as London.”

Looking at the year ahead, we feel that in attractive investment opportunities to take advantage of selective value-add and opportunistic strategies there is every reason for optimism in US real estate markets for 2011 in spite of the fact that quantitative easing and pressure on expanding government budget deficits.

This could see the economic growth trajectory and outlook to be one of maintaining parity with caution and opportunity. It is also likely that Thailand will continue moving forward with the ‘emerging markets’ of China and India likely to expand. This could lead to their investing in attractive markets such as Thailand.

Source: Property Report

Condominium prices in the Thai capital have begun recovering after the political turmoil eased considerably in the second half of 2010, according to the Real Estate Information Centre (REIC).

REIC Director General Samma Kitsin said the condominium price index, which was conducted during the second half of 2010 to gauge condo price movements, particularly in metropolitan Bangkok, stood at 105.59 – up 4.16 points from the first half of 2010 and up 5.59 points from the same period in 2009.

Overall, condominium prices have increased in all price levels since the political situation had improved, the REIC concluded.

Classified by price range, the index of condominium prices below THB50,000 (US$1,650) per sqm stood at 110.17 – up 8.70 points from the first half of 2010 and up 10.17 points from the corresponding period in 2009. The index of condominium prices between THB50,000 and THB79,999 baht per sqm stood at 106.81 – up 3.39 points from the first half of last year and up 6.81 points from the same period in 2009. The index of condominium prices starting at THB80,000 baht per sqm or more stood at 103.32 – up 3.61 points from the first half of last year and up 3.32 points from the same period in 2009.

“It is noted that condominiums priced at less than THB50,000 baht per sqm increased against the inflation rate, and in tandem with higher incomes earned by buyers. Condominium prices between THB50,000 and THB79,999 baht per sqm rose at a close rate to the first half of last year,” he said in a report published by MCOT.

Condominiums priced at more than THB80,000 baht per sqm edged upwards from the first half of 2010 after a decline, because condominiums located in the downtown are of Bangkok had been affected by the political unrest, concluded Samma.

Source: Bangkok Post

Even though the extension of BTS service has expanded the rail commuter market beyond the capital’s core, Noble Development Plc remains focused on the central business district (CBD) as rental demand is stronger for areas with better neighbourhood facilities.

Next year the developer will launch four new condominiums worth a combined 20 billion baht. One will be on a nine-rai site on Phloen Chit Road, acquired for a record-high price of 1.3 million baht per square wah.

The Phloen Chit project worth 15 billion baht will comprise two or three 50-storey condominium buildings and an office building. The launch is scheduled by the end of March.

The company early this year acquired six rai from Raimon Land and recently bought another three rai from the Juengrungruangkij family, who had earlier planned a hotel. Construction will start in 2012 with completion in 2015.

“This plot is one of the most prime locations in Bangkok as there are no condominiums in Siam Square, Chidlom and Phloen Chit,” said Noble managing director Thongchai Busarapan.

“Though the plot has a high land price and required a high investment, we are interested in this plot. We are still focusing on the CBD. Compared to extended areas of Sukhumvit where land prices are much lower, the surrounding environment is much different and the CBD is still attractive to expatriates looking for rental units,” he said.

Another three projects will include a 1.5-rai plot near the Surasak BTS station where Noble spent 500 million baht. It will house 220 to 240 units priced between 100,000 and 150,000 per sq m.

The company believes the economic outlook will be positive next year despite the rise in interest rates, which most people have already factored in.

In 2011, Noble expects to realise 3.5 billion to 4 billion baht in revenue and nearly 3 billion this year, with a profit of 450-500 million baht. It aims to achieve 4 billion baht in sales in 2010.

Mr Thongchai said Noble had set aside 2 billion baht budget for new land plots within a 200-metre walking distance from mass transit in CBD areas.

All of the plots will be for condominiums, while it will resume low-rise housing projects in 2012.

Currently, it has a sales backlog worth 4.5 billion baht and a low-rise inventory of 1 billion baht. Its debt-to-equity ratio was 1.35 times at the end of third quarter and is projected to be 1.5 next year.

He says the Bank of Thailand’s loan-to-value curbs had little impact on its current customers who pay 30% down payments for all units.

However, 5% of its customers are speculators, 25-30% foreign investors looking for rental units and the rest is real owner-occupier demand.

Noble shares closed yesterday on the Stock Exchange of Thailand at 5.70 baht, up 10 satang, in trade worth 2.67 million baht.

Suburban Bangkok still has the lion’s share of condominium supply, mainly in the mid- to low-end segment but developers are shifting their focus to urban Bangkok with the prospect of better transportation.

Today the Bangkok Post reported that the city is “expected to have 236 kilometres of electric train lines and most railway crossings will be replaced by flyovers by 2015,” with construction of the Purple and Red lines under way. Later in the year, construction of the Green Line will begin and the Pink Line “will be accelerated so construction can begin this year”.

Moving forward to next year, work will be started on the Blue Line and the Purple Line and Bang Sue railway station will be upgraded to become the hub for most electric train services.

The report adds: “Under its 10-year electric railway master plan, the planning office foresees greater Bangkok having a combined 391km of electric railway lines by 2019 which will cover a catchment area of 525 square kilometres and serve 3.8 million commuters a day.”

“The planning office expects all 12 electric railway projects for greater Bangkok to be completed in 2029. They will have a combined distance of 509km, cover a catchment area of 680 square kilometres and serve 5.1 million commuters a day.”

The prospect of more commuters using these electric railways should hopefully relieve its. “nightmare” traffic jams and is likely to become very popular with condo buyers, especially where units are close to these new mass transit lines. The take-up and affordability of urban Bangkok is likely to be very high as a result.

After unrest in the city subsided in June 2010, confidence has returned to the market, with developers now looking to launch new projects. With small rises in interest rates they estimate that it is unlikely to have any significant or detrimental effect on the condo market and that it will boost to the dynamic in the condominium market.

Colliers International also predicted these trends that condominium projects for lower- to mid-range units will continue to be popular, and that the “big developers are also interested in entering this market.”

A recent survey by Thailand’s Agency for Real Estate Affairs (AREA), its president Dr. Sopon Pornchokchai said, “Of 103 condominiums completed last year in central Bangkok, of the total number of 40,000 units, 79 per cent were occupied.

Dr. Sopon indicated that in the survey there are no signs of oversupply in the Bangkok condo market, with its modest 21 per cent vacancy rate. He is quoted to have said: “The data we have doesn’t show any signs of oversupply at the moment. However, we have to keep an eye on unfinished units, which might affect a number of supply in the market. If the new condo units keep coming up in a big amount, oversupply could be [reached] in two years’ time.”

The research document pointed to Ramkhamhaeng having the highest occupancy rate (91%), followed by Ratchada/Lad Phrao (86%), Phahon Yothin/Phaya Thai (83%), Sukhumvit Soi 1-69 (80%) and Sukhumvit Soi 71-103 (79%). The yield for Sukhumvit 71-103  was 12.2%.

On 4th January 2011, the Bangkok Post reported that the Stock Exchange of Thailand (SET) composite index opened up 9.55 points, or 0.92 per cent on Thursday’s close, to stand at 1,042.31 points at the start of trading on Tuesday morning. The trade value was 2.59 billion baht.

RTTNews also ran a report suggesting that the Thai stock market had returned to action on Tuesday following a four-day break for the New Year’s holiday and that the SET “finished just above the 1,030-point plateau, and now investors are looking forward to a sharply higher open when the market christens the new year”. They added that the global forecast for the Asian markets is broadly positive, in the main due to positive economic data from the US, with property stocks expected to fuel the rally.

The continued influx of foreign capital into Thailand’s bond and stock markets caused the baht’s exchange rate against the dollar to appreciate rapidly last September after robust export growth.

With the Thai Ministry of Commerce’s upward revision of the GDP growth, the dollar/baht exchange rate standing at Bt30/$ the government and the Central Bank are said to be allowing a gradual degree of baht appreciation. As there is no overt signs of an export deceleration, it is expected that the baht will continue to appreciate.

Source: Bangkok Post

Return guarantees may be just gimmicks

Property funds have had a good year with attractive returns increasing their popularity among investors. However, some funds also have risks that investors need to keep in mind.

Two fund types have been especially popular this year. One provides returns from freehold assets and another offers a minimum return guarantee. For freehold assets, unitholders have ownership of the assets, while a fund that provides a minimum return guarantee offers extra reassurance.

Two funds – Luxury Real Estate Investment Fund (LUXF) and Sala@Sathorn Property Fund (SSPF) – are examples of investments that require thorough scrutiny of cash flow instead of focusing only on asset ownership or minimum return guarantees.

LUXF informed the Stock Exchange of Thailand in November that the return guarantor or asset owner, Pakoh Hotel, had been unable to commit cash collateral of 38 million baht to the fund.

The fund was initiated in May 2008 to purchase Six Senses Hideaway in Phangnga, owned by Pakoh Hotel.

TMB Asset Management as fund manager will call a meeting of unitholders on Friday to seek a solution.

“The case is a good example of a minimum return guarantee being just ‘extra comfort’. Investors feel good about putting money into something that provides a guarantee,” said Pravej Ongartsittigul, senior assistant secretary-general of the Securities and Exchange Commission.

Investors need to look at how healthy the financial status of the property developer is first, he said.

“If the property owners show good potential to create a strong cash flow, the revenue guarantee means nothing. If they offer guarantee it would be a premium,” he said, adding that fund companies and unitholders still have rights to ask for a minimum guarantee until the guarantee period expires.

“If the fund cannot make revenue as promised, investors should ask themselves what will they do with that fund, especially if the guarantee period is about to expire.”

Mr Pravej said the SEC believed some guarantee offers were just marketing gimmicks. As a result, the regulator in August required funds to provide more information including three-year financial status records.

In addition, asset managers are required to provide analyses to investors and the outcome of due diligence, either the financial status of the asset developer or the business trend. Included should be relationships between the guarantors and the property developers, asset managers and former asset owners.

“The SET imposed the rule to protect retail investors. However, good investors should keep in mind that there is risk in investment, translating to homework that should be done first,” he said.

Sala @ Sathorn Property Fund (SSPF) is another case. The freehold fund was initiated last year to invest in a a Sathon area office building purchased from St Louis Holding. However, St Louis owed some money to the Revenue Department, which last month seized its cash deposit account to repay the debt.

However, the cash is still kept in the account of the Sala@Sathorn Fund.

The consequence is that the fund manager Ayudhya Fund Management is required to deal with the case.

A fund analyst at Kim Eng Securities said four factors should be considered in property funds: size, as a larger size means higher liquidity; asset performance; management firm and asset reputation or brand; and dividend policy.