Investment in land has its unique, irresistible charms. On the one hand, there is a limited supply of it, so one can rest assured its prices can only go up. On the other, ask anyone who bought a plot shortly before the 1997 financial crisis and you'll know how it can also become a sticky mess.
People check out foreclosed property listings at a recent property fair in Bangkok. WEERAWONG WONGPREEDEE
But this asset class never goes out of fashion, all the more so when the economy is on an upward trend and especially after safeguards have been put in place following the bitter lessons of 1997.
Even a former banker, Piya Sosothikul, who once told his customers to think twice before investing in land, seems to have changed his mind.
The former executive vice-president of Bangkok Bank used to warn his customers wanting to invest in land for either short- or long-term capital gains to be very, very cautious. He explained to them that land is highly illiquid and generates no income along the way even though prices may not fluctuate as much as those of equities.
"However, it's not a bad idea to have some land plots as part of one's long-term investment portfolio, especially if he or she still has cash surplus after investing in most commonly known assets such as deposits, bonds, equities, mutual funds _ including LTFs [long-term equity funds] and RMFs [retirement mutual funds] _ or gold," said Mr Piya, who left the financial world to help run his family's business, the Seacon Group, a major player in the construction, shopping mall and real estate sectors.
Land is considered a tangible asset whose value typically increases over time. Despite this, people have different stories to tell about their experiences involving this type of investment.
Those who are fortunate to have purchased or inherited a piece of land in Bangkok's prime areas or beach-front plots may vouch for this investment class. This is understandable, as land prices in these areas have risen much faster than those of other types of assets.
But some speculative buyers who have bought large pieces of farmland in the hopes of reaping huge gains will tell you they have been stuck with them with no prospects to divest perhaps for 20 or 30 years.
"For personal investment, I believe there are a few rules of thumb that everyone should bear in mind before jumping on the bandwagon. First, the money should never come from one's business or his or her family savings. Nor should it substitute long-term lower-risk investment assets such as bonds or mutual funds, which are much easier to sell. My own estimate is that land investments should not make up more than 20% of your long-term investment portfolio," said Mr Piya.
"You should also know the area you're interested in well enough to identify the pros and cons of each plot as soon as it comes onto the market. Make sure you know the exact location or whether it's in a good neighbourhood. Is the traffic congested during rush hours? How about its environment? Is it close to an empty plot filled with garbage? Most importantly, if you're familiar with the area, you can set an appropriate target price for negotiations. The area of focus can be very specific such as odd-numbered sois from Sukhumvit 23-55 or land plots of sizes less than 150 square wah. These can help you set your budget more precisely."
Also, make sure you set aside some cash to make a deposit of about 20% of the price and be ready to settle the balance within two or three months.
Mr Piya and his family at his own business, the Renaissance Phuket Resort & Spa.
"Good deals usually don't last very long in the market, although they come along once in a while for various reasons. Sellers may need funds urgently, the plots may be mortgaged and foreclosed on by non-financial institution lenders or family members may have a dispute over them," said Mr Piya.
"If you know the potential and the value of a plot well enough, you can close the sale at a price that both you and the seller are satisfied with, especially if it is possible to move quickly by offering to deposit 10% in cash immediately and transfer within two months. Most experienced land buyers typically can decide whether a plot is a good investment within minutes after seeing it."
But Mr Piya warned it requires some time to make an offer or negotiate for the best price in order to conduct due diligence on the legality of the land and its ownership.
With insight, people can buy land knowing full well how it should be developed or who interested buyers will be in the future. In other words, they go in with their eyes open about its potential market value.
Unlike other products or services, the motto "The customer is king" may not apply to land deals. Often, investors will be more successful if they treat the seller as a king. Many sellers want to deal only with buyers they like. A better strategy is to be courteous, humble and patient. You will be king only once you have bought the land at an appropriate price.
After you have bought a plot, you should resist your maverick instinct of flipping it or selling the asset shortly after the purchase.
He said an investor must be prepared to hold the land free of financial constraints from 5-10 years. If possible, for undeveloped land you should not borrow to buy it, whereas for residential property such as land with a house that can potentially generate some rental yields, the investor may seek a little leverage with long-term financing provided he is confident of his future ability to repay the loan.
My Piya suggested that to obtain information on what is on the market, investors should let real estate agents in the area propose plots of various sizes, even if some of them may be over their budgets, as they can get important market price information.
Interestingly, nice plots can be discovered on the internet, posted directly by the seller or people in the area such as street vendors, motorcycle taxi drivers or hair salon owners among whom a great deal of news or gossip is swapped.
"Generally, you can tell a plot may not be a great deal after all if there are 10 real estate agents involved, especially if its up for sale for more than six months and there are sale signs all over the place. These are the telltale signs of overpricing," he said.
His suggestion for new buyers is to focus on residential properties in medium- and high-density areas, most likely suburban Bangkok.
"I personally wouldn't make a career out of buying and selling land, but for those with surplus cash, I would recommend that land be added as a long-term investment in their asset mix. Sometimes, it can turn out to be a very short-term investment if one has good market information and a savvy purchasing strategy," said Mr Piya.
"My final piece of advice: be patient. If it doesn't feel right, then perhaps it isn't, and you should back out right away. Sometimes, you have to wait more than a year to get your dream plot, but it will be worth the wait."
About the author
- Writer: Darana Chudasri
Position: Business Reporter