Mid-Year Economic Review 2002

PROPERTY

Market enters reform phase

Krissana Parnsoonthorn

In July 1997 when the baht was floated and the economic crisis erupted, Thailand's property sector was among the hardest hit. Many construction activities were suddenly abandoned, leaving unfinished, skeletal buildings strewn across Bangkok.

PROPERTY

The housing industry began improving in late 2000, led by a steady recovery in the middleclass market, spurred by low interest rates. The office sector has been less impressive

The property boom and speculation in the early 1990s were blamed as the key factors in triggering the economic turmoil as about 40% of non-performing loans in the financial sector had been sunk into property.

Fortunately, the industry began improving in late 2000, led by a steady recovery in the middle-class housing market.

However, the housing rebound does not mean the nightmare for the sector is over.

The momentum created by low interest rates on home mortgages _ as low as 1% for the first year at some banks _ is boosting demand while new supply is very limited.

During the boom era, property prices were inflated and the market was open to both professional developers and business with no real-estate expertise to speculate endlessly.

But five years after the bubble burst, many industry players have fallen by the wayside. Leading listed developers_ Land & Houses, Golden Land Property Development, Sansiri, Noble Development, Five Star Property and Amarin Plaza _ have secured foreign partners, while key non-listed players such as NC Housing, Wang Thong Group and Lalil Land & Houses have grown stronger after restructuring their debt.

THE PROPERTY CRASH

The Bangkok Metropolitan Administration says there are more than 320 unfinished and abandoned buildings in the city.

Since the onset of the economic slump, credit lines to real-estate firms were cut due to the drying up of the financial markets between 1997 and 1998, and more than 350 buildings and projects were abandoned in Bangkok.

The big burden of maintaining land banks fell on developers' shoulders, with many trying to use short-term loans to finance long-term projects.

Developers who had borrowed loans in US dollars without hedging currency exchange fluctuations were in an even more perilous position, posting huge forex losses the day after the baht was floated on July 2, 1997. Bonds were defaulted on and interest and loan payments were missed.

There was virtually no real-estate lending between 1997 and 2000 and the chain reaction from the property crash hit construction firms and material suppliers as huge bills from developers went unpaid.

Developers and contractors have since been busy restructuring massive debts with creditors. Many non-professional developers faded from the market. The survivors now total between 200 and 300, compared with 2,500 during the heady boom days.

Demand shrunk and sales were rare, even though some developers were offering big discounts of up to 50% to clear their inventories. Consumers were not confident about spending their money, or keeping their jobs, amid economic uncertainty.

Interest rates were as high as 15% in late 1997 to early 1998 and a lot of houses were seized by lenders as homeowners defaulted on home loans.

A serious oversupply was seen in certain sectors such as housing, offices and industrial land. Property prices went down in almost all locations with raw land prices falling more than 50%, before hitting rock bottom in 1999.

THE TURNING POINT

A modest recovery in the middle-class housing market began in late 2000. The use of low interest rates to spur demand by the Chuan Leekpai government since 1999 gained momentum.

As well, the retail property sector began to grow again with international discount-store retailers expanding rapidly in Thailand.

Record-low interest rates have been one of the main drivers of the residential market. Significantly, more homebuyers are now opting opted for fixed-rate mortgages instead of floating rates in order to guard against future uncertainty.

Mortgage terms have also become more generous. The Government Housing Bank led the trend by offering loans for up to 100% of property values in 2001, and extending repayment terms to 30 years from 20.

The Thaksin government last year introduced further measures to help the housing market recovery. They included a reduction in the property transfer fee to 0.01%, a tax deduction for down payments between 100,000 and 200,000 baht for home purchases and a cut in the special business tax to 0.11%.

Golden Land is among the large listed developers that have made a successful turnaround and are building again.

Civil servants have been encouraged to buy houses with low-interest loans jointly offered by GHB and the Government Pension Fund. Employees of state enterprises can now use partial savings from their provident funds to guarantee home loans at the GHB.

In fact, the previous governments of Chavalit Yongchaiyudh and Chuan Leekpai had also taken numerous steps to stimulate the property sector. They included the establishment of the Property Loan Management Organisation and the amendment of legislation to allow foreign ownership of condominiums, but with little effect.

Meanwhile, the National Housing Authority is pursuing a greater role in reviving partially built residential projects. The agency managed the sales of five pilot projects for Krung Thai Bank and is now in talks with the Thai Asset Management Corp to handle some distressed assets with market potential.

In 2000, surviving developers resumed their sales activities but most of the units offered were from existing projects. New projects only began in 2001.

According to the GHB, housing registrations in Greater Bangkok in 1997 totalled 145,355 units and fell to 63,864 units in 1998, 33,383 in 1999 and 32,028 in 2000.

The housing market reversed the trend in 2001 with 6% growth, a total of 34,023 registered houses. This year, the sector is expected to grow by between 20% and 25%, particularly in the detached house market.

Anant Asavabhokin, president of Land & Houses, said that when classifying the market by segment, detached houses had made a comeback starting in 1999, followed by townhouses in 2000, as almost no new supply had been put on the market between 1997 and 1998.

This resulted in an improvement in sales revenue for many listed developers in 2001 and early 2002.

Amy Rodil, research director at CB Richard Ellis (Thailand) Co, said the supply of city condominiums was running out and vacancy rates declined to 26% in the first quarter of this year from 48% in 1997.

Several condominium auctions held in 2001 also spurred buyer interest, and resale prices of city condominiums are now on the rise.

In 1999 and 2000, the total supply of condominiums in central business districts of Bangkok remained unchanged at 30,942 units and then rose to 31,788 units in 2001.

The first condominium project to go on the market since the 1997 crisis was Lumpini Place Sathorn on Narathiwas Ratchanakarin Road in 2001. LPN Development, its developer, reportedly sold 600 units in a few weeks.

But the office market is still the worst performer with almost 2.5 million square metres of space left unoccupied across Bangkok at the end of last year.

The total stock was 6.98 million sq m, according to Jones Lang LaSalle and Nexus Property Consultants.

Apisit Limlomwongse, managing director of Nexus, said that as a result, Bangkok had become one of the cheapest places in Asia to do business. Rents of Grade A office space in the CBD average 385 baht per square metre per month, 10 times cheaper than in Tokyo and eight times cheaper than in Hong Kong.

However, the trend is for office vacancy rates to continue to decline following stronger demand from manufacturing and finance service firms. At the end of 2001, vacancies stood at 25%, down from a peak of 40% in 1999.

MARKET REFORM

The property market is now in a transitional period of structural reform. All parties _ developers, creditors and consumers _ have been changing their attitudes and behaviour after learning a painful lesson from the property crisis. New business practices are being formulated.

With a limited number of players remaining in the market, giant developers can gain more market share in a short period.

This can be seen clearly in the housing market. For example, Land & Houses held a market share of 31.5% in Bangkok in the first quarter of 2002, jumping from 7-8% in early 1997.

Surviving developers are more careful about undertaking new projects. They will focus on core business activities but diversify risks by developing smaller project sizes in prime locations where demand is confirmed. Feasibility studies will be conducted to ascertain demand, which will in turn support cash flows.

Market analysis and information on new buyers' trends and competitors are necessary. This has prompted some companies to build their own databases.

New land plots will be bought in case developers need to use them. A cautious approach to foreign borrowing is being followed rigorously.

Mr Anant of L&H initiated the pre-built house strategy in 2000. Developers have to finish construction of houses before sales are finalised, assuring that consumers get what they pay for. The approach was new to Thailand but it has paid off handsomely for the country's largest developer.

"The built-before-sales strategy will help developers save costs and time. In the end, their production efficiency and productivity will be increased and cash flows will be managed," he said.

The strategy is totally different from the old style of development under which developers sold tailor-made houses off-plan and then used down payments as working capital for construction costs.

Analysts said most developers saw benefits in the new business model pioneered by L&H but some did not implement it as they still enjoyed healthy sales and did not want to assume all the risk.

Banks too, have learned lessons from the 1997 crash. They will extend loans only to feasible projects, mostly residential, and their lending is limited to around 50% of each project's costs. That means developers must have more funding to invest on their own.

Creditor banks have become increasingly realistic in solving property-related NPLs and distressed assets. Special asset management units have been set up to handle them.

Today's homebuyers are sophisticated and smarter. They have choices and bargaining power and prefer to see completed units before buying as it is a buyer's market, said Assoc Prof Manop Bongsadadt, a lecturer in the Faculty of Architecture at Chulalongkorn University.

"In my opinion, speculators have disappeared from the market but we have long-term investors who are eyeing higher yields than interest on deposits," he said.

There is a shift too in the purchasing power of homebuyers who, due to low interest burdens on home loans, can buy bigger houses than before.

On average, buyers will pay monthly instalments of 5,700 baht for a one-million-baht house, compared with more than 10,000 baht in 1997-98.

However, Assoc Prof Manop said one area that had yet to improve was consumer protection. He said the government had been very slow to pass the enactment of the escrow account law, while standard buying and selling contracts were inadequate to prevent housing fraud.