Look to Isan for opportunities in real estate

Major developers parading ideas to build residential projects in provincial markets have been in the spotlight recently. What are the key driving factors and where are the next up-and-coming opportunities for the real estate business?

The Bangkok Metropolitan Region (BMR) has been the prime market for major residential developers for more than three decades given its hefty market size and continued demand growth. The attractiveness of the BMR lies in the fact that it accounts for 17% of the country's total population, 44% of gross domestic product, and an average monthly household income of approximately 42,000 baht, almost double the average income nationwide.

With such attractions, why are so many prominent real estate developers now looking toward provincial areas? Two obvious reasons are the likelihood of a weakening BMR market and a strengthening of regional development.

Firstly, it appears that the BMR market is nearing saturation. For more than three decades, the BMR has urbanised at a rapid rate, carrying the real estate market up along with it. Around 80,000-100,000 residential units are sold each year. However, recent signals suggest there has been a slowing down in the BMR market, where the absorption rate of new housing units has been flat at 35-40% and inventory levels are surging.

Moreover, housing prices are rising at a higher rate than average income growth, dragging down affordability. Although many developers have introduced smaller-sized units keeping prices down in some instances, how much smaller can room sizes become? Some are already as small as 20-30 square metres.

It is undeniable that high demand continues in some more attractive locations such as along the planned skytrain routes, however, competition in the market is becoming more intense.

Secondly, there are new opportunities outside the BMR owing to regional development. In the past, the process of decentralisation by promoting new economic zones increased only gradually. But from now on, decentralisation will speed up on both push and pull factors.

The 2011 floods could potentially be a big push. The floods were the most recent display of the slow but incessant sinking of the BMR region, which is slipping toward sea level at a rate of 10 centimetres a year.

The floods and the widespread damage that came with them caused many investors to lose confidence in the long term viability of their operations in the BMR. Some have been seeking opportunities to relocate or expand their operations to better manage supply chain risks in the medium term.

While the industrial zone along the Eastern Seaboard is the first option that came to investors' minds, plots of land in this area are in short supply and often require potential tenants to endure long waiting lists. With this in mind, where does the innovative investor turn to when trying to escape the crowds in the BMR and the Eastern Seaboard?

Isan, or the northeastern region, is the most logical contender for the title of the next industrial hub. The cabinet has approved in principle the establishment of a special border economic zone and a green industrial estate there. Thanks to the decade-long effort by the countries of the Greater Mekong Sub-region, the development of transport and logistics links under the East-West economic corridor will turn the landlocked region into a land-linked logistics hub for trade flows with neighbouring countries.

Furthermore, there are large labour forces from local and neighbouring countries to supply production activity in the region.

What will happen after everything goes according to the plan? I can imagine a big change in the socio-economic landscape in the region similar to that of the Eastern Seaboard. The development will create a new growth node and production-based cities. And it will create border nodes, or trading areas, leading to more balance between urban and rural provinces.

The prime provinces of the region _ Khon Kaen, Udon Thani, Mukdahan, Maha Sarakham, and Nakhon Ratchasima _ have the potential to be a new industrial zone.

Accompanying Isan's industrialisation will be a process of land development and labour mobilisation. This process could boost local purchasing power and bring about very tangible economic activity, which will eventually increase urbanisation and modernisation in the region. By way of its large population base and rapidly rising incomes, Isan is undoubtedly becoming a great opportunity for real estate developers.

From this month into the foreseeable future, I am quite sure we will see more and more real estate projects popping up in this region.

However, real estate players should ponder the risks of expanding into new territory. There will be stiff competition from knowledgeable local developers who are familiar with the market and have closer ties to local authorities.

Local competitors may have better insights regarding new road development routes and chances to lock in cheaper land bank. Also, there is a serious risk of price speculation on local land plots that could contribute to an increased cost of investment.

Current land prices in some provinces such as Udon Thani and Ubon Ratchathani are set to double in the coming year according to a recent survey by the Real Estate Information Centre.

The development of Isan is not a question of if, but when. The changes depend not only on investors seizing opportunities in the market but also on the speed of infrastructure development and integrated planning of land-use areas, logistics and cross-border coordination.


Dr Sutapa Amornvivat is chief economist and executive vice-president at the Economic Intelligence Centre, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT. Email: eic@scb.co.th EIC Online: www.scbeic.com

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Writer: Sutapa Amornvivat