The residential market outlook for the first quarter of 2017 should remain relatively consistent with recent performance. Though many analysts are optimistic about economic improvement this year, there are still many uncertainties that could reduce confidence among property buyers and developers. Furthermore, the recent heavy flooding in the South is likely to affect overall economic growth.
One noteworthy development in 2016 was the emergence of record prices exceeding 300,000 baht per square metre for many new super-luxury residential developments in Bangkok's central business district (CBD). New projects in 2017 are expected to breach 400,000 baht per square metre, and some of the priciest super-luxury condominiums, such as 98 Wireless by Sansiri, have already surpassed this figure.
The period directly following the floods of 2011 generated a boom in demand for high-rise projects in Bangkok and homes in vacation areas such as Chiang Mai and Khao Yai as buyers looked for "safe havens" from threats of future floods. This led to massive supply growth in new condominiums in Bangkok, which spiked in 2013-15, as developers rushed to meet the new demand. Today the picture is very different and challenging for developers as the mid- to low-end market is saturated.
The majority of projects launched during the 2013-15 period were completed and transferred in 2016, which flooded the market with new and resale units. Household debts have continued to rise, which has led to difficulties in obtaining mortgages as banks have tightened their lending requirements, and the economic and political situation both domestically and internationally has been turbulent and difficult to predict. When combined, these factors have led to a bearish economy in which developers are not able to close projects due to declined loan applications and slower presales for new projects.
Amid declining sales in the mid- to low-end markets, developers discovered a new opportunity in the luxury to super-luxury segment, which was the result of two primary factors. First is that most developers had been focused on developing mass market products featuring more basic specifications, smaller units, lower buyer expectations and lower prices, which made it easier for buyers and investors to make decisions on purchasing. The effect was that buyers of luxury products did not have as many options. Secondly, affluent buyers do not need to rely as heavily on external funding sources such as bank loans, which gives these buyers more control over purchase decisions. As a result, when a contract is made, most customers in this segment have no problems when it is time to take ownership of the property.
With the milk of low-end projects souring over the past two years from the oversupply, many developers have turned to the affluent market to try and capture the luxury market demographic and it has worked well for the past three years.
The 2014-16 period represented a boom in the luxury and super-luxury category, with CBRE recording more than 30 luxury projects in the CBD area. This trend is expected to continue this year. Most big-box players are getting into the luxury market as the trend has continued to gain steam, and even developers that have traditionally focused almost solely on the mid- to low-end markets are launching new luxury projects.
LPN, traditionally an affordable housing champion, is expanding into the luxury market after the success of its first high-end project, Lumpini 24, via its Lumpini Suite brand which includes the upcoming Lumpini Suite Phetchaburi-Makkasan condominium. Pruksa, another affordable housing specialist, is looking to expand into the premium space this year by launching six projects worth 9.9 billion in total.
The issue, and risk, is that the real demographic of buyers in the luxury market is vastly smaller than in the mid- to low-end market, which means that saturation of the luxury market could occur much more rapidly.
Furthermore, luxury buyers are more demanding and their expectations of what defines a luxury product are more stringent and nuanced than expectations are for lower-end products. It takes more than fancy specifications and pretty buildings in the CBD with high price tags to be a successful luxury project. The higher the prices are, the more complex the buyer's requirements will be.
Developers must truly understand the needs and expectations of the luxury buyer to ensure they are offering the aspects that are valuable to this demographic. Ultimately, this trend is going to turn even the luxury segment into a buyers' market. But developers must weigh carefully what kind, where and how many of these super-luxury products they will launch, or they may find themselves in the same situation they are in with the mid- to low-end market. This time, however, the issue will not be conditions external to the buyers, but the attitudes of the buyers themselves, who are not compelled to purchase such expensive products amid saturation in the market and the high cost of investment.
One way to minimise the risk of oversaturation of the luxury market is to put keen effort into building the right products in the right places. There are still many opportunities open in the luxury segment, but developers must put a lot of effort into creatively designing products that meet real needs and desires of luxury buyers. It is our experience at CBRE that developers who find the right mix of location versus price versus design still attract buyers because, for the luxury segment, the real question is not as much about price as it is about perception of unique value propositions, in both short-term and long-term investment situations.
That is why fancy specs, pretty facades and a location somewhere in the CBD with a high price tag are not enough to classify a product as a luxury residence that buyers will find intriguing. The developer must deeply understand the luxury buyer and be able to forge a unique value proposition that will be meaningful to the premium-class purchaser. n
Aliwassa Pathnadabutr is the managing director of CBRE Thailand. She can be reached at bangkok@cbre.co.th; Facebook: CBRE.Thailand; Twitter: @CBREThailand; LinkedIn: CBRE Thailand; Website: www.cbre.co.th
