One of the largest Asset Management Companies in Thailand reports an oversupply of condos. Could this lead to a bubble and non-performing loans?
After the 1997 Asian financial crisis many Thais could not make the payments on their mortgages and lost the land, buildings and homes that they owned (Read articles). This real estate became what is known as Non-Performing Assets (NPAs). Recently, the US has experienced much the same problem with their crisis.
The problem starts during good economic times with high incomes. People invest their excess money in assets such as stocks, bonds and real estate. Real estate prices begin to rise, so people borrow more and more money to buy real estate and become highly leveraged (Read article).
People start believing that a new era has arrived and that prices will always rise and never go down, so borrowing a lot to buy expensive real estate is safe, they think.
A real estate asset price bubble occurs when the prices of real estate rise to levels much higher than the long-term sustainable value.
Eventually, real estate prices fall sharply down to their normal long-term sustainable value.
People who borrowed a lot of money to buy real estate are caught making large monthly payments for real estate that is worth a lot less than it was before.
This collapse in value happens during a recession when incomes have fallen.
Individuals and businesses are making a lot less money than they used to and can't afford to pay for the real estate anymore.
Owners decide to stop making payments and walk away leaving a Non-Performing Asset (NPA) behind them and the bank takes the secured asset away from them (repossesses the real estate).
Asset management companies (AMCs) step in and buy up large amounts of these assets at sharply reduced prices. Then they sell the assets again and try to get people using the asset productively again for a business or as a home (Read article).
In the end, though, the economy loses a lot of value and is stuck with a lot of unused real estate. One can still see ghostly unused buildings scattered all over Bangkok (Read article).
In Thailand's case, the money lost during the 1997 crisis is concentrated at the FIDF in the form of debt that Thailand still has to pay off (Read articles #1 and #2).
In today's article BAM, probably the most important AMC in Thailand, warns of an oversupply of Bangkok condos, it is a warning sign of a possible asset price bubble in real estate. This is important because BAM is the company that ultimately has to sell these condos if their owners can't pay for them anymore.
1997 Asian Financial Crisis - the economic problems that Thailand suffered from 10 years ago (that the whole world has suffered from recently) (See Wikipedia)
bail out - give money to prevent failure
make the payments - pay the money you have to pay on time (paying back a loan, for example)
mortgage - a loan from a bank to buy real estate with real estate as the security
security - a valuable thing (asset) that you agree to give to a lender if you (the borrower) fail to pay back the loan
secured asset - same as "security"
non-performing - not performing at the level or standard required (not paying a loan back in time, not performing a task sufficiently well, etc)
Non-Performing Assets (NPAs) - "a debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments" (Source: Investopedia)
Non-Performing Loans (NPLs) - the borrower is no longer paying back the loan and making required payments on time (loan in default)
asset - something owned by a person, company etc., particularly money and property ทรัพย์สิน (See Economist glossary)
asset price bubble - when asset prices rise to unreasonably high levels given true asset values, investors make a lot of money, and are very enthusiastic about the market, then one day asset prices suddenly drop (the crash), investors lose a lot of money as well as their enthusiasm for the market, besides causing market instability, bubbles also have a negative effect on economies because they temporarily misallocate funds into non-optimal uses" and then quickly pull them out (See glossary)
sustainable - can be continued for a long period of time into the future
repossess - when the bank takes a secured asset away from a borrower when they fail to pay back their loan
recession - a difficult period when the economy of a country stops growing and starts shrinking, there is less trade and industrial activity and high levels of unemployment (See Wikipedia)
Asset Management Companies (AMCs) - special companies with special rights to deal with "significant banking sector problems," also known as "debt-management companies" (See past Bangkok Post articles and 2004 ADB paper and ADB book and paper on China )
asset management firm - same as "Asset Management Company"
stuck with - have something you don't want to have (and can't get rid of it)
scattered - located in many different places of an area, spread out at many locations
X concentrated in Y - there is a lot of X located in area X (more than other areas)
Financial Institutions Development Fund (FIDF) - the fund under the central bank responsible for bailing out banks and other financial institutions after the 1997 financial crisis (See history and role of the organization)
Bangkok Commercial Asset Management (BAM) - one of the first and largest Asset Management Companies in Thailand (See website)
ultimately Y - Y happens in the end, after many events happen
BAM warns of condo oversupply by Somruedi Banchongduang
BAM warns of condo oversupply Bangkok Commercial Asset Management (BAM) is warning of a possible condominium oversupply in the lower segment next year despite the current absence of a property bubble.
''Condos priced below 3 million baht are in oversupply. If investment in this segment continues, there will be a surplus of 20% to 25% next year,'' said Sumate Maneewattana, the company's president.
However, he said that fortunately, the overall property market shows no signs of developing into a bubble situation over the next year, with only 10% condo speculation at present with real demand at a high 70% to 80%.
Non-performing assets (NPAs) under BAM's management total 37 billion baht in terms of cost assessment, of which 1.87% are condominium projects with 691 million baht from 1,383 units
Land represents the largest proportion of company NPAs, at 22.85 billion baht or 61.76%, said Mr Sumate.
BAM, the country's largest asset management firm, expects to increase its NPAs under management to 40 billion baht this year by purchasing assets from financial institutions. It is trying to buy 500 million baht worth of NPAs from TMB Bank this year.
Non-performing loans under company management total almost 234 billion baht. BAM is looking to buy another 8 billion baht worth - five billion baht from Siam Commercial Bank and three billion from Bank of Ayudhya. The purchases will be concluded next month.
Mr Sumate said BAM recently sold NPAs totalling 5 billion baht and expects to meet this year's 6-billion-baht target for asset sales.
For the first nine months of the year, the company booked revenue of 10.48 billion baht, beating the target of 8.97 million. The better-than-expected revenue stemmed mainly from asset management and NPA sales.
For the full year, BAM is targeting revenue of 11.96 billion baht.
BAM posted a net profit of 2.35 billion baht for the nine-month period, beating the full-year projection of 2 billion. The performance was supported by the company's business strategy for NPA sales.
(Source: Bangkok Post, business section, BAM warns of condo oversupply, 29/10/2010, Somruedi Banchongduang, link)
oversupply - to much on the market, prices drop, many go out of business การมีสินค้าล้นตลาด
segment - a part of something ตอน
lower segment - here: cheaper, less expensive condos
current - of the present time ปัจจุบัน
absence - a period of time when a person is not present at work, at school, etc. ช่วงการขาดงาน
absence - not being present (in this case because of travelling to London) การหายไป ไม่ปรากฏตัว
property - land plus any buildings built on the land
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
surplus - an amount above the required or necessary amount
speculation - buying an asset hoping that its price will go up and you will make money, it could go down with a loss of money, assuming the risk of loss in return for the uncertain possibility of a reward (See Wikipedia)
demand - the need and desire to buy goods and services by households and businesses
assessment - the process of making a judgment or forming an opinion, after considering something or someone carefully การประเมิณสถานการณ์
proportion - a percentage of something, a part of a whole
firm - a company บริษัท
institutions - large and important organizations, such as universities or banks สถาบัน
financial institutions - banks and other companies that operate like banks, investing large
TMB Bank - one the largest retail banks in Thailand, formerly known as "Thai Military Bank" originally providing financial services to military personnel and their families (See Wikipedia)
looking to buy - making plans to possibly buy (have not made final decision yet)
concluded - ended
target - goal, the amount you are planning to achieve เป้าหมาย
meet target - reach goal, achieve goal
revenue - income from business activities รายได้
booked revenue - revenue that was recorded in accounting system and reported in financial reports (at the end of the quarter and year)
expected - believe will happen คาดว่า (จะเกิดขึ้น)
better-than-expected revenue - the company made more money than it believed it would make
targeting revenue - has goal to reach a certain amount of revenue
profit - money that you make from selling goods and services after all your costs have been paid กำไร
projection - guessing a future amount, a calculation or guess about the future based on information that you have การคาดคะเน
beating the projection - doing better than the goal they set at the beginning
performance - how well or badly something works (or whether an investment provides a reasonable return)
strategy - a plan to achieve a goal over a longer period of time (longer than a "tactic") ยุทธวิธี, กลวิธี, ยุทธศาสตร์