The apartment business is at risk as growing numbers of Thais move away from renting and instead want to buy condominium units, according to a new study released Tuesday by TMB Analytics.
The think tank, basing its study on statistics from the Bank of Thailand, found that the real estate industry is at high risk at present, as the proportion of non-performing loans (NPL) to total outstanding loans ratio at the end of 2012 was 5.4%.
Only the construction industry has a higher ratio than the apartment rental industry, which is about twice the national average for NPLs,
Condominium in Bangkok. (Photo by Thanarak Khoonton)
The current stable interest rates have attracted investment into the real estate sector by both developers and buyers, so the credit extension for this industry rose by 10% in 2012.
Around 13% of this loan extension was to the condominium segment while another 12% went to the operators of rental apartments, including serviced apartments.
TMB Analytics found that the quality of condominium loans was higher than other segments, as borrowers serviced their debt at above-average rates. But loan servicing in the rental apartment field is lower than the industry's average, signalling the risk in this industry.
The rental apartment sector also had overdue debts not yet counted as NPLs at two times the rate of the NPLs of the overall real estate sector. These overdue debts, mainly by small operators, may become bad debts in the near future. Though the borrowers may have the intention of servicing their debts, punctual payment could prove difficult because of lack of liquidity cause by business slowdowns.
The research house noted that one factor boosting risks in the rental apartment business was the attractiveness of owning a condominium unit, where monthly payments may actually be lower than renting similar units. Condominiums seem to serve the lifestyle of Gen-Y better than rentals, as condominium developers usually provide common facilities such as swimming pool and fitness centre. Owning a condominium unit also brings more freedom on room decoration.
TMB Analytics added that though the rental apartment business has not yet been swamped by NPLs, the continuous expansion of supply may eventually overwhelm the market.
Business operators should closely monitor changes in the economy such as interest trends and consumer behaviour, which could shift, and be ready to make quick revisions in business strategy to match the changes.