Clearing
a huge backlog of projects remains a challenge, though at
least many big developers are healthier now, with optimistic
foreign investors on board
A buyers' market without buyers
Krissana Parnsoonthorn
Even though the worst is over, Thailand's
moribund property business will need from five to seven years
to solve a range of complex problems, from financial to marketing
and construction, that confront developers, creditors and buyers.
Serious gluts remain in sectors such as residential, office,
retail and industrial estates.
Market fundamentals remain weak because people's buying power
has declined over the two years of the crisis. As a result, active
transactions, new project launches and construction were rarely
seen in 1999. Resales of houses seized from loan defaulters have
been the main trend.
Most real estate developers have spent the past year restructuring
huge debts with creditors, while some have succeeded in finding
foreign partners as new major shareholders.
On a positive note, creditors and developers, contractors and
material suppliers have been trying to understand each other and
accept the painful reality, resulting in speedy compromises on
debt restructuring in many cases.
Meanwhile,
there is hope that more consumers will be in a mood to buy, with
interest rates at historic lows, and other inducements such as
a reduction in the property transfer fee to just 0.01% for those
who transfer houses before the end of 2000.
Commercial banks began competing heavily in mid-1999 to reduce
interests on housing loans to attract more customers. Rates in
November were as low as 8.5-9.5% for floating-rate mortgages,
and fixed rates as low as 5.5% were on offer for one-year terms
at some banks.
The Ruam Jai Housing Loan, a pooled home loan programme, was
introduced in August. The Government Housing Bank (GHB) allocated
bonds worth 46 billion baht to raise funds to relend to home buyers
for 30-year terms. Fifteen commercial banks participated by borrowing
some 25 billion baht from the GHB to fund new mortgage lending.
With excessive liquidity, banks preferred housing loans because
of lower risks. Buyers found that their home loan applications
would be approved much more quickly than in the past -- as long
as they met strict requirements.
However, house sales were not as active as hoped or expected,
mainly for two reasons. First, many home buyers believed prices
would go down further. Second, many white-collar workers continued
to feel insecure about their jobs, and were sitting on their money
in case of emergencies.
According to the Land Department, only 32 developers, accounting
for 1,024 rai, sought development permits nationwide during the
first nine months of 1999.
Total land transactions topped 2.51 billion baht, down by 11.8%
from the same period a year earlier. Total new condominium registrations
were 8,018 units, a plunge of 74.7%.
Some retail developers, meanwhile, caught a glimpse of a business
turnaround and announced new plans toward the end of 1999. The
Mall Group led the way with a plan to build a huge shopping complex
in Nakhon Ratchasima, to open later in 2000.
The second surprise was Bangkok Land Plc, which joined with the
UK-based Asian Land Fund to develop a 1.5-billion-baht shopping
centre covering 80,000 square metres at Muang Thong Thani.
Central Pattana Plc followed by dusting off two suspended projects
on Thon Buri-Pak Tor Road and in Chon Buri.
In general, non-performing loan problems made banks hesitant
to extend new credit to help developers finish incomplete skeletons
in Bangkok and some major provinces.
At the end of October, NPLs in the banking sector topped 2.45
trillion baht or 43.82% of all outstanding credit, according to
the Bank of Thailand. The figure had improved from a peak in May
of 2.55 trillion baht or 46.79%.
While the central bank sees encouraging signs in the economy
overall, deputy governor Kitti Patpongpibul said the property
business would take a longer time than most to recover.
Leading companies including Land & Houses, Quality Houses,
Supalai and the Floraville Group have been lucky enough to clear
their backlog of resale houses, thanks mainly to their good reputation
among consumers. Marketing consisted mainly of price reductions
-- and claims that future houses would be more expensive because
of higher material costs.
Still, property values continued to fall -- witness the discounts
of up to 50% at some projects whose developers wanted to raise
cash quickly.
The downturn in values in turn created opportunities for foreign
investors and strong local players to shop for discounted projects
with good prospects. But transactions were limited because of
the inefficiency of the domestic market.
Major foreign interests in the Thai market came in the form of
stakes in high-potential companies, mainly listed ones, not direct
investments to take over and operate projects.
Foreign investors from the United States, Europe, Australia,
Hong Kong and Singapore said their main concerns in Thailand were
a reasonable return on investment and more flexible real-estate
regulations.
In the first half, Golden Land Development Plc, whose principal
shareholders were Khunying Sasima Srivikorn and her family, succeeded
in attracting new partners. They included the Quantum Fund linked
to investor George Soros, New World Group, Sloan Robinson Fund
and Morgan Stanley, taking a total stake of 47.24% in Golden Land.
The stake of Khunying Sasima and her group fell to 8% from current
20%.
Sansiri Plc followed in March, with US-based Starwood Capital
Group taking a majority 51% stake. The Lamsam and Chutrakul families
saw their holdings fall to 13%.
In
September, Land & Houses Plc, the country's largest developer,
brought aboard GIC Real Estate Pte from Singapore as a new partner
with a 20% stake.
Noble Development Plc followed, with Lehmann Brothers acquiring
a 30% interest in October.
Armed with fresh funds, the four developers have set their sights
in 2000 on acquiring distressed assets and properties to be managed.
Some developers did not find foreign partners but agreed to allow
creditors to hold stakes as part of debt restructuring. They included
Quality Houses, Krisda Mahanakorn and LPN Development.
Developers would have preferred to transfer assets to repay creditors,
but the latter were often reluctant to agree, given the uncertainty
of land valuations and the poor chances of disposing of them in
the short term.
Two major contractors that were victims of the property slump
-- Kasem-kij Construction and Sino-Thai Engineer -- sought permission
from the Central Bankruptcy Court to rehabilitate their operations.
Special measures
The government also made attempts in 1999 to revive the market.
In addition to the pooled Ruam Jai loan scheme, it expanded the
role of the National Housing Authority (NHA) to rehabilitate some
partly-built projects. The NHA is now studying ways to invest
15 billion baht over the next two years in projects with good
market potential.
Securitisation and development of the secondary mortgage market
were also given increased attention.
As well, there were legal amendments aimed at spurring the market.
Among them:
Lifting the foreign ownership ceiling in condominium projects
to 49% in general cases, from the previous 40%, and to 100%
(for only five years) if the buildings are located in Bangkok
and surroundings.
Relaxing payment terms for foreigners, allowing them to pay
for condominiums in baht.
Allowing a foreigner to acquire up to one rai each for residential
purposes if he or she brings in at least 40 million baht for
investment.
Extending land leases to 50 years, from an average of 20,
with a renewal for another 50 years.
Passing foreclosure and bankruptcy laws, considered as a milestone
to encourage foreign participation in the industry.
Asset sales
The Financial Sector Restructuring Authority (FRA) completed
its mission to liquidate the bad loans of 56 closed finance companies.
The government and some real estate brokers said the liquidation
did not lead to any 'fire sales'' in the real-estate market as
some analysts had warned.
The Asset Management Corp (AMC) won auctions for assets worth
190.81 billion baht, of which 97% were property loans. The majority
of bad property loans were sunk in land, making it difficult for
the AMC to restructure debts with developers.
As the bidder of last resort, the AMC is expected to be very
flexible in helping developers survive a critical time. It will
likely become a major shareholder in some developers in the near
future, if it accepts swaps of debt for equity.
In some cases, the AMC will also accept transfers of land or
help developers sell some plots to interested investors. Developers
would have the option in many cases to buy back their assets and
shares in five to seven years. As well, the AMC will try to find
credit back-up for developers to complete projects, in addition
to post-financing for buyers.
Some surviving finance companies and banks, meanwhile, began
selling their non-performing property loans. For example, DBS
Thai Danu Bank sold assets worth 110 million baht to the newly
recapitalised Golden Land in September. More such cases are expected
in 2000.
Market overview
The housing sector remains very much a buyers' market, with developers
struggling to clear inventories.
Agency for Real Estate Affairs Co forecast that 127,192 housing
units would be left in builders' hands by the end of 1999.
But many of the projects surveyed were finally cancelled, leaving
the total number of active units for sale at 59,560. New projects
launched at the end of third quarter contributed 1,122 units.
Of the active units, 48% were condominiums, 17% detached houses,
19% townhouses, 1% duplexes.
The survey found that among active houses for sale, 59% had their
prices reduced, 25% were unchanged and 16% were slightly more
expensive. Based on category, prices of low-cost condominiums
fell the most.
The Government Housing Bank had forecast that total housing demand
in 1999 would be only 60,000 units for Bangkok. It estimated that
unoccupied houses in Bangkok would total 330,000 units by the
end of 1999, down from 350,000 in 1998.
Leading
developers such as Land & Houses, Supalai, KMC, Property Perfect,
NC Housing and the Wang Thong Group concentrated on selling their
units left unsold and resale houses. Only few additional phases
were added to some established estates.
L&H innovated by offering custom-designed houses as value-added
products. It will open sales when the units are finished, and
selling prices are 10% higher.
Auctions became another alternative for selling houses. Auctioneers
from the United States as well as Union Auction Co, a leading
car auction firm, played a role in stimulating considerable interest
among buyers.
Offices
Bangkok's office market performed the poorest when compared with
other sectors, many real-estate brokers agreed.
CB Richard Ellis said the total vacant office space at the end
of the third quarter of 1999 was 2.5 million square metres. Jones
Lang LaSalle said almost 280,000 square metres of new office space
were completed in the first half of 1999, but it predicted no
further new supply for the next two years.
Total net absorption of A-Grade office space in the central business
district in the third quarter was 218,000 square metres.
Both consultants agreed that demand was slowly increasing, with
vacancy levels continuing to fall slightly. The average vacancy
rate declined marginally to 40% in October and average rents for
Grade A office space improved slightly to 275 baht per square
metre per month, said JLL.
Retail space
The retail space market in Bangkok showed signs of revival in
the last quarter of 1999. Retailers started taking new space for
expansion as they believed the economic recovery was beginning
to reawaken consumer demand.
Companies including Watson's, Zen Restaurants, Au Bon Pain and
Adidas announced plans to open new branches. Among other things,
they attributed the reduction in value-added tax, interest rate
reductions and deficit spending as improving consumer sentiment.
Total retail space in Bangkok was 3.5 million square metres in
1999, with take-up rates and rents improving gradually.
According to Jones Lang LaSalle, new supply totalling 70,000
square metres came on the market in 1999, a far cry from the peak
of almost 500,000 square metres in 1995.
Average rents for ground-floor retail space in the CBD rose by
8% in the third quarter to 12,500 baht per square metre per year.
Better prospects of rental generation also resulted in an 8.5%
increase in capital values for ground-floor space in prime locations,
based on a 20-year leasehold, said JLL.
Serviced apartments
Strong demand from foreigners working in Thailand led the serviced
apartment sector to perform better than almost all others.
Access Thailand Investment Funds saw the opportunity and acquired
a luxury serviced apartment complex, The Pines in Soi Ton Son.
Sansiri Plc said that during the first half of 1999, 291 new
serviced apartment units entered the Bangkok market, increasing
the supply to 8,459. In the second half of 1999, it forecast that
an additional 455 units would be finished.
Of the total current supply, 32% was in the Sukhumvit area, 25%
in the central business district, 18% around Chong Nonsi, Ratchadapisek,
Phahon Yothin and Phaya Thai, 11% in Srinakarin, 6% riverside
and 8% others.
It is expected that a total supply in 2000 will reach 9,284 units
in 80 buildings.
However, projects with a total of 742 units may put on hold because
their owners have been facing a credit crunch.
Sansiri said that average serviced apartment occupancy rates
across Bangkok in the first half were 69%, down from 71% in the
second half of 1998. Grade-A projects in the CBD still enjoyed
high occupancies of 77-79%. Some top-class projects in Sukhumvit
achieved occupancies as high as 93%.
However, it was reported that some tenants were moving away from
Sukhumvit projects with poor maintenance and insufficient facilities,
which should send a message to any developers looking to catch
buyers' attention.
Meanwhile,
there is hope that more consumers will be in a mood to buy, with
interest rates at historic lows, and other inducements such as
a reduction in the property transfer fee to just 0.01% for those
who transfer houses before the end of 2000.
In
September, Land & Houses Plc, the country's largest developer,
brought aboard GIC Real Estate Pte from Singapore as a new partner
with a 20% stake.
Leading
developers such as Land & Houses, Supalai, KMC, Property Perfect,
NC Housing and the Wang Thong Group concentrated on selling their
units left unsold and resale houses. Only few additional phases
were added to some established estates.
