Condos flood the market

Condominiums will continue to dominate the Greater Bangkok residential market this year as concerns over future floods have not faded despite the government’s massive spending on flood protection plans.

Many developers believe floods this year will not be as severe as those of last year as it is predicted there will be fewer storms in Thailand. However, many single house and townhouse projects are prepared for them.

“Developers are alerted to apply flood protection systems to their housing projects in flood prone zones to build customer confidence even if there will be no floods,” says associate professor Manop Bongsadadt, a renowned property expert.

He says it is worth preparing for unpredictable situations. Preparation is the best strategy to restore the confidence of homebuyers. They will compare projects nearby where flood protection systems are not developed and will choose those with flood-prevention measures.

“If the great floods are repeated this year, the housing market will definitely slow down. Demand will stall until next year,” says Mr Manop.

Housing demand is actually strong as interest rates are stable and the economy is good despite having missed export targets. Also, consumers are hardly feeling any impact from the Euro crisis.

Regardless of concerns about flooding that has shifted the focus of prospective buyers of single houses and townhouses to high-rise units, condominiums remain in demand with the mass transit plans – those that are under construction and expected new routes – being a key driver.

The most dominant route is the Purple Line as it is the one that is closest to reality, being scheduled to open by 2015. Another reason is more availability of land plots for new condominium developments, compared to other locations where a mass transit or an extension line passes.

From this phenomenon that happens to every mass transit, there is a prediction about housing trends from Issara Boonyoung, president of the Housing Business Association.

“When a mass transit runs to distant areas like Bang Bua Thong or Bang Yai where low-rise units [townhouses and single houses] dominate the market, land prices will be higher to a level that a low-priced townhouse is not feasible,” he says.

Mr Issara predicts lower-priced condominiums located five kilometres from a mass transit station and provided with a commuter service between the project and the station will replace lower-priced townhouses.

“If it is feasible to price a townhouse at less than 1.5 million baht, lower-priced condominiums will not be chosen. But if the townhouse costs more than two million baht, a lower-priced condominium will be a choice.”

For the townhouse and single house segment in flooded locations, the market has resumed since the second quarter. However, the seven-month figure of new low-rise projects shows the low-rise market will need more time to spring back.

According to the Real Estate Information Centre (REIC), 63% of the total units newly launched during January to September this year were condominiums, with around 46,000 units, up 42% year-on-year.

Meanwhile, the number of low-rise units totalled only around 24,000 units, decreasing by 29% from the same period last year.

“One of the major reasons is that many developers whose projects are in flood zones are not ready to come back as they need to raise the level of the project, which takes a long time, and to build homebuyer’s confidence,” says Mr Issara.

The number of newly registered housing units in the first half of the year represented a rising condominium demand in the past few years to 60% from 51% in 2009, REIC figures show.

REIC also reported growth of 74% in the number of newly registered condominium units in the first half of 2012, compared to the same period in 2011 and a drop of 12% for low-rise units in the same period.

Even the number of transferred houses on the resale market followed the trend. In the first seven months of 2012, the number of transferred condominiums rose 7% from the same period last year while overall residential units, single houses and townhouses dropped 6%, 12% and 16% respectively.

The number of condominium units transferred in the period accounted for 43%, up from 38% in the same period last year.

However, windfalls may go to projects that are prepared with flood protection systems as low-rise demand remains strong and demand in many flooded zones like Rattanathibeth, Bang Bua Thong and Bang Yai has come back.

REIC forecasts a total of around 95,000 new housing units will be launched this year, up from 82,000 units last year. About 60,000 units will be condominiums and 35,000 low-rise units.

CondoS: Size does matter

Soaring land prices, scarcity of plots in prime locations and rising construction costs have seen condominium prices per square metre continue to increase.

However, purchasing power for condominiums cannot catch up with the rising trend in unit prices. Condominium developers, therefore, try to minimise unit sizes to maintain or increase prices per unit as little as possible.

Some developers choose to reduce unit sizes rather than stick to their usual unit development size. Some extend the floor-to-ceiling height to create additional space to control a unit price package that is more suitable to buyer purchasing power.

According to REIC, over 63% of the total number of newly launched condominium units in the first nine months of the year were sized smaller than 30 square metres.

“Developers try to build smaller units as development costs rise,” said Mr Samma. “Unit prices of condominiums cannot be raised to a level where buyers cannot afford them.”

Around 18,000 units were sized smaller than 26 sq m and 11,000 units were sized between 26-30 sq m.

James Pitchon, executive director and head of research and consulting at property consultant CBRE Thailand, said the condominium market is now driven mainly by end-user demand.

End users have a maximum lump sum price that they can afford. Developers can respond by making units smaller but there is a limit to how small a unit can be before buyers reject it as not being suitable.   

The smallest units so far have been 20 square metres with the entry level price at below one million baht in non-prime locations or right next the BTS or MRT stations where the price per sq m is above 100,000 baht per sq m. But the total price has been kept below 2.5 million baht. Developers are trying to balance affordability with usability.

Overseas & Asean Economic Community

Currently, there are at least four residential property developers going overseas including Land & Houses in Los Angeles, Pruksa Real Estate in India, the Maldives and Vietnam, Sansiri in London and Property Perfect in Hokkaido.

“The domestic market growth will not grow any further. Developers need to go overseas or to the provinces,” says Mayta Chanchamcharat, a director and chief business officer of Pruksa Real Estate Plc.

Its strategy is to expand more projects in existing markets like India as demand for affordable housing is very large. It is eyeing existing cities like Bangalore, Mumbai and Chennai.

“India needs houses priced at about two million baht a unit as most local developers tap the middle-to higher-end market which generates higher margins,” he says.

It is studying Indonesia as a fourth country to invest in next year, eyeing Jakarta as it is a large city with a high population. Indonesia’s economic growth is also trending well.

Thai Condominium Association president Thamrong Panyasakulwong suggests medium-to small-sized developers have to adjust when the Asean Economic Community begins in 2015. Otherwise they will be swamped by the surge of big investors.

“Even today they [medium-to small-sized developers] have limited space to stand in the industry which is now dominated by large developers. They may seek overseas partners to increase their potential.”

Bangkok offices will benefit from AEC

In the upcoming AEC, more foreign companies may choose Bangkok as a hub for business operations as Thailand offers the most convenient location in the centre of the region.

Suphin Mechuchep, managing director of property consultant Jones Lang LaSalle in Thailand says this will consequently translate into demand for office space in Bangkok.

“More companies from both Asean and other countries are looking to set up business operations in this new economic community and will choose Bangkok as a hub,” she says.

This is largely because Thailand is located in the centre of the region and is a gateway to emerging markets like Myanmar and Indochina.

She adds that aside from the central location which is a big advantage, Bangkok also has a lot to offer foreign companies looking to use it as a hub for doing business in Asean.

Infrastructure is seen continuing to improve. Skilled labour is available. And the cost of living and doing business in Thailand remains relatively low, compared to more established economies like Singapore and Malaysia, or emerging markets like Myanmar, Cambodia and Vietnam where the office markets are under-supplied.

The Thai government has recently launched a package of tax incentives in an effort to attract foreign companies to establish their regional operating headquarters in Thailand and claims it is the most attractive incentive package available in Asean.

While this represents a step forward to prepare Thailand to reap the benefits from the formation of the AEC, the Bangkok office market will also benefit from an increase in demand that will follow.

During the first half of 2012, the total office supply in Bangkok increased slightly from 8.12 to 8.16 million sq m.

Net absorption in the first half of the year stood at over 132,000 sq m, increasing by 39% year-on-year and reflecting the positive expectations for the Thai economy.

Office rents appear to have finally bottomed out and have started rising for the first time since entering a period of decline over five years ago. Limited supply is expected over the short-to-medium term.

Average gross rents across Bangkok increased slightly by 3% year-on-year from 396 to 407 baht per sq m a month in the first half of 2012.

A shortage of new office supply over the short-to-medium term should result in a tighter office market and gradually rising rents.

Currently, the total stock of retail supply in Bangkok stands at 6.7 million sq m. Of this, only 8.1% is vacant. The low vacancy rate has resulted from robust leasing demand from both additional store branches and newcomers remained robust in the first half of 2012.

Resort markets

Phuket continues to demonstrate its strength as Southeast Asia’s leading resort market, reflected by the record number of tourist arrivals, says David Simister, chairman of the property services firm CBRE Thailand.

In the second quarter of 2012, international airport arrivals were up 14.7% year-on-year. Phuket now shows it can draw in year-round tourism although December and January are still the peak times.

Bali is the most well-known alternative destination and attracts a similar profile of tourists, but it is not as well connected and international. Meanwhile, Phuket remains the pinnacle of the market for both hotels, properties for sale and recreation.

Growing tourist numbers means there is a greater potential for new sources of resort property buyers and the range of new buyers from destinations such as China, India and Russia bear this out.

Phuket’s residential market today is predominantly an end-user market with foreign buyers purchasing apartments, condominiums and leasehold villas on a cash basis.

Buyers’ profiles are shifting as seen through enquiries. CBRE tracks the shift and sees the growing importance of Asian buyers.

The value of well-located and well-managed properties continues to appreciate and re-sale transactions often put significant profits into the sellers’ hands.

“Through our experience in currently managing over 20 high-end residential developments in Phuket, we recognise the importance of quality management which is reflected in the increasing value and appeal of properties in the long-term,’ says Mr Simister.

Another testament of the island’s strength is the number of hotels changing hands.

Earlier in 2012, Movenpick Resort & Spa in Karon sold to a Malaysian Group and Evason Phuket in Rawai to L.C. Development, a Singaporean developer.

The most recent transactions were the sale of Laguna Beach Resort to Hawaii-based hospitality group Outrigger and Bundarika Villas & Suites in Layan to Minor Group.

On the development side, there have been limited new launches as prime sites in coastal locations are scarce. Projects on prime west coast locations will continue to do well and remain the key areas sought after by resort property buyers.

According to the CBRE Phuket Property quarterly report, the market shows a healthy level of demand whereby up to 74.4% and 75% of the condominium and villa supply is sold.

HUA HIN-CHA-AM BLOOM

Condominium units priced lower than four million baht are very popular in Hua Hin and Cha-am while unit prices of more than five million baht take time to sell, according to property consultant Colliers International Thailand.

Surachet Kongcheep, senior manager of its research department, says most condominium projects launched in 2011-2012 focused more on unit prices below three million baht or not more than five million baht.

Unit price and size are very similar to the condominium market in Bangkok with sizes starting from 26 sq m and not larger than 35 sq m. The price per sq m is still similar to the previous year but unit sizes are smaller.

Some Thais prefer to buy houses or villas in Hua Hin’s inland area, although it is far from the beach, as prices are lower than beachfront condominium units.

He says there will be around 2,500 new condominium units being launched in Hua Hin and Cha-am in the second half of the year.

In the first half of 2012, the Cha-am and Hua Hin condominium market showed good signs of growing, continuing from last year. Total supply of condominium units was approximately 7,980, around 47% of which were in the Hua Hin coastal area.

Many developers focused more on Cha-am in 2011 and 2012. Some huge projects were launched there, so in the next few years, Cha-am will represent the biggest share of the condominium market.

In addition, limited land availability in Hua Hin was the major obstacle to condominium development. Most luxury condominium projects were located in Hua Hin due to land prices being higher than other locations, making it unsuitable for the mass market.

The total number of newly launched units in the first half of 2012 was approximately 3,060. Cha-am was still the most popular in the condominium market, continuing on from last year.

This was due to 1,422 units being launched in Cha-am during the first half of 2012, or around 46% of the total launched, with one big project having more than 1,000 units.

“Most large-scale condominium projects launched in the past one to two years were located in Cha-am due to availability of land and land prices remaining lower than other areas,” Mr Surachet said.