No serious bumps in the road are expected for the Thai real estate sector, but some negative factors that emerged in 2004 _ including higher construction costs and a looming oversupply at the high end _ will challenge business leaders

by KANANA KATHARANGSIPORN

Steady as she goes

OAfter a rocky ride due to oil prices, rising interest rates and unrest in the Deep South, Thailand's property sector for 2005 will likely remain steady despite there being no end in sight for some of the negative factors that began emerging in 2004.

The general election is expected to stimulate the sector indirectly, while the new government in whatever form it may take after Feb 6 will likely continue the current policy of supporting the property sector.
Despite the uncertainties, property demand in 2004 grew constantly with the value of land transactions nationwide in the first eight months hitting 337.59 billion baht, up 51.7% from the same period of 2003, according to the Lands Department.

The property market also showed strong improvement, with heavy demand in the residential sector. The number of housing registrations in the first nine months of 2004 stood at 41,978 units, up 35% year-on-year. Analysts say the statistics are especially impressive even though the market saw an almost overnight change in the pace of residential sales from the first quarter of 2004 and the final quarter of 2003.

Sluggish residential sales in the first half of 2004 did not indicate a downturn in the residential market, since some residential units that should have been listed under 2004 statistics were hurriedly booked in the last two months of 2003 in order to take advantage of tax privileges before they expired on Dec 31 of that year.

Anant Asavabhokin, the president and CEO of leading developer Land & Houses Plc, pointed out that future residential demand for the first half of 2004 was buried under the deluge that came in November and December of 2003.

In October 2003, the number of housing registrations stood at a modest 2,500 units, but soared to an astounding average of 8,800 for the final two months of 2003.
He said homebuyers who planned to buy a house in the first quarter of 2004 rushed out and instead made their purchases in the last two months of 2003 in order to cash in on the tax breaks before they expired on Dec 31, 2003.

Therefore, for a more accurate picture of market demand, the overflow seen in the statistics for these months should actually be added to January and February 2004, when the numbers dropped to 2,930 and 3,950 units, respectively.

Manop Bongsadadt, a property expert and lecturer at Chulalongkorn University, suggested that the number of housing registrations in Greater Bangkok in 2004 would end at around 55,000 units, up from 50,594 units in 2003, although the market has seen much delayed decision-making from homebuyers.

Regarding the property market in 2005, in his view it will likely be mediocre as unrest in the Deep South lingers. But he added that campaigning ahead of the general election will undoubtedly help stimulate the country's economy as the new administration is likely to continue offering some demand-side stimulus measures.

With the current government widely expected to be put back in charge of running the country after Feb 6, its experience in boosting the economy will serve to benefit the property sector. While its favourable policies for supporting the sector will continue, they will probably not be as exciting as in 2002-03, when tax breaks and incentives were the name of the game.

"The property sector has been the focus of a lot of attention as it is a job-creating industry with a multiplier effect on all sectors. I think financial support for homebuyers such as long-term housing loans with fixed interest rates may return as interest rates rise," Mr Manop said.

However, the new government should strive to manage the country's finances well and work hard to solve the unrest in the Deep South. Meanwhile, developers should take a more professional approach and do more research on demand, choose only the right locations and work out effective marketing strategies, he said.

Rising rates not a deterrent

INCREASING INTEREST rates in 2004 have inevitably discouraged prospective homebuyers. Many commercial banks, however, agree that the projected increases in 2005 are unlikely to have a strong impact on housing demand, as all long-time borrowers will have to undergo at least five cycles of the ups and downs in interest rates anyway.

To reduce their own risks and adjust to the interest-rate uptrend, most commercial banks adjusted the structures of their loan rates to floating rates based on the minimum lending rate (MLR) from long-term fixed ones in the fourth quarter of 2004. This trend explains why the joint programme of the Government Housing Bank and the Social Security Office, which offers a five-year fixed rate of 2.5%, has drawn an overwhelming response, with more than 200,000 applications for housing loans worth more than 150 billion baht.

GHB president Khan Prachuabmoh said the overwhelming demand for housing loans under three million baht each, the largest the state bank has to offer, showed that demand for houses remained strong among the medium-to-low income earners, prompting the GHB to revise its strategy to offer the five-year fixed rate again.
"The historic low mortgage rates at present have increased the purchasing power of homebuyers. Those planning to buy townhouses are now looking at single houses instead. This trend has boosted the sales of medium-priced single houses this year [2004]. After all, a one-million-baht house now requires a monthly instalment of only 4,000 to 5,000 baht, compared with 10,000 baht previously."

He also believes that borrowers can still service their housing loans even though interest rates are likely to rise by one-half to a full percentage point in 2005. "They can pay as long as the rates do not reach double digits. But once they do, we will help our borrowers ease the burden, possibly by extending the fixed-rate term."
In any case, he does not see interest rising beyond the record-high rate of 10% next year.

"I have urged developers to help maintain steady growth to sustain the overall property market," he said.
"The Real Estate Information Centre, which keeps track of all figures and developments in the market, will be fully operational by the end of 2005. It will help developers make more accurate decisions in developing the right projects in the right locations. With the help of the data provided by the centre, they can determine how many units have already been developed in a given area and what their odds are. They can easily avoid past mistakes that once led to a bubble in the industry.

First-quarter trough a statistical blip

WHILE RESIDENTIAL developers surely enjoyed the furious pace of housing sales in the last two months of 2003 _ the best for the Thai property market since the financial crisis in 1997 _ many were stunned to see sales in the first half of 2004 plunge.

Driven mainly by a stampede of homebuyers rushing to take advantage of government tax incentives, the party led to such an extended hangover in the sector in early 2004 that some listed developers opted to revise their sales targets sharply downwards.

But do the lower sales projections signal growing oversupply, as some pessimists have predicted?
Anant Asavabhokin, president and CEO of leading developer Land & Houses Plc, said the lull could be explained as nothing more than a statistical aberration caused by continuous growth during 2003, followed by a minor stumble in the first half of 2004 after tax incentives expired.

He asserted that the number of housing registrations in November and December 2003, at 8,800 units each _ more than triple the 2,500 units recorded in October _ were an exceptional phenomenon resulting in future homebuyer demand being sucked away, as shown in the numbers for early 2004.

"Some developers were overconfident in residential development due to the good signs from 2003. They targeted their sales in 2004 to grow by 30%, even though the country's largest industrial conglomerate, Siam Cement, grows by only 8% a year."

Mr Anant said the future for the property market would be bright if voters on Feb 6 hand the government of Prime Minister Thaksin Shinawatra another four years in office.

"Many businesspeople need those policies to be continued. I think the property market needs clarity in the form of a functioning real estate database. Some governments in the past lacked accurate, up-to-date real estate market information. This led to misinterpretations of the actual market situation and led to the bubble's burst in 1997," he said.

Current Finance Minister Somkid Jatusripitak continues to support residential market growth as the real estate sector is regarded as an important engine driving economic growth for the whole country.
"Property developers are very happy with the government since it supports the sector. Some past governments never paid any attention to the property business."

Mr Anant expects the property market in 2005 to remain healthy, but developers must increase their level of caution regarding new developments and work to carefully manage cash flow.
"Growth in 2005 will be more reasonable," he adds.

The residential market is estimated to record 15% growth by the end of 2004 and 2005 with total sales of 60,000 units and 70,000 units, respectively.

Mr Anant anticipates that the market over the next three years will reach a peak of 80,000 units, which he calls an appropriate level since it is equal to 1% of the estimated population of Bangkok.

In his view, the good news in 2005 will include ongoing residential demand coupled with improved liquidity at local financial institutions. There will be also a decrease in the number of competitors in the property sector as natural market forces weed out unprofessional developers. Meanwhile, those developers who focus on quality rather than quick turnover will see a gradual increase in sales.

Location will play a more significant role in 2005 as mass transit, new city zoning regulations and the Initial Environmental Evaluation (IEE) study requirements come into effect.

However, an increase in interest rates and oil prices, especially for diesel, which is likely to start rising when subsidies are ended in March or April, will continue to pose challenges for property developers throughout the year.

"Competition in the market will be all about cost," he said.

Optimism in almost all segments

THE THAI property industry is in robust and good health with increased sales in most sectors, as shown by the significant improvements seen in inbound foreign investment and office rents, according to the property consultancy and agency CB Richard Ellis (Thailand).

Managing director David Simister said that there had been a change in the volume of activity and an adjustment in the speed of buying decisions. Careful and thoughtful review of projects for sale has created a more discerning and better-informed buyer.

However, the property industry moved forward in all major sectors in 2004. The office market has surprised many with the speed with which rents have increased and takeup has improved due to new company starts and expansion of existing businesses.

"This is a genuine indicator of real growth in the economy. Individuals and businesses are making decisions to invest, expand and open new operations based on economic opportunity and a receptive market place," he said, adding that the increase in white-collar salaries indicates that the economy is improving. The company estimated takeup in the office market in 2004 would exceed 300,000 square metres, with rents now in excess of 500 baht per sq m for grade A , central Bangkok locations.

Mr Simister also noted that demand for office space would outstrip supply as less than three new office buildings and no new ground-up office developments will be added to the market in 2005. Office building projects with mass transit accessibility will set new benchmarks for rent increases in deals to be concluded in 2005.

He added that the industrial property market has seen more activity with new investment from companies setting up businesses in Thailand and major players making land acquisitions to maintain an inventory of land for new industrial estates.

The retail market has seen little new space come onto the market in the form of completed developments in Bangkok in 2004.

The improvement in the capital's consumer sentiment has set the scene for the opening of Siam Paragon in late 2005.

In the resort market, signs of improved health can be seen in the country's major tourist destinations. Transaction statistics at the land office in Phuket show activity has more than doubled from 2003 levels, with the number of foreigners buying homes in Phuket likely to show a further 30% increase in 2005.

He added that small and medium-sized developers should not follow blindly in the footsteps of the major players. Instead, he urged them to take a stab at niche markets like residential developments for European pilots in the booming area around Suvarnabhumi airport, adding that cash-flow management and accurate property potential estimates offer the key to success for small players.

Meanwhile, consumers should also carefully estimate their own payment potential as the risk of higher oil prices will begin having an effect on construction costs, which will result in higher housing prices of at least 15%, he said.

According to the Bank of Thailand, the price index for single detached homes in the middle and low range in the third quarter of 2004 rose by 5.5% from the same period of 2003. The increase was driven by the rise in construction material costs, which in August 2004 reached 152 points, an increase of 11.3% year-on-year.
For low-income earners, some 250,000 Baan Ua-arthorn, low-cost housing units will be added to the market in 2005. Meanwhile, there will be more developments of townhouse projects as houses and condominium units become more expensive combined with reduced consumer purchasing power due to higher interest rates and inflation.

Mr Manop also saw new demand coming in the residential market.
"Housing sales in Hat Yai in 2004 were brisk as many people sought to move away from the trouble in the Deep South."

He added that in 2005 there will be more demand for small-sized condominiums near the mass transit systems from middle-income earners.

There will also be some changes brought about by the new city zoning rules that will come into effect in early 2005. Developers will face greater challenges as the possibilities for new projects in all segments will be more limited.