Condo investors eye capital gains rather than yields

Condo investors eye capital gains rather than yields

The Bangkok condominium market has witnessed lower rental yields in recent years as prices have increased faster than rentals but luxury condos in prime locations continue to attract both Thai and foreign buyers expecting capital gains in the long term, according to international property consultant JLL.

High-end condos in Bangkok are now offering rental yields averaging 3% a year, half that five years ago. While the selling prices have grown by more than 30% over the past five years, rentals have risen by only 10%, leading to yield compression. 

Generally, a yield is the actual rental expressed as a percentage of the capital value. For example, a brand-new 150-square-metre luxury condominium priced at 30 million baht (200,000 baht per square metre) with the annual rent at 1.2 million baht (100,000 baht per month) would yield 4% a year.

However, even if the unit was purchased by cash, with no borrowing cost, such a yield calculation could be misleading as there may be other expenses that should be deducted from the annual rent such as the initial investment outlay such as  for fit-out or furnishing, unit maintenance costs and common area management (CAM) fee. 

For instance, the typical CAM fee for luxury condominiums is approximately 840 baht per sq m per year. If the CAM fee were the only expense to add up (annual rent of 1.2 million baht minus the annual CAM fee of 126,000 baht), net yield on the condo unit would be 3% a year, provided that the property is continually rented.  

A similar trend has been witnessed in older luxury condominiums. For example, 150-sq-m units in well-managed 10-year-old developments are now trading at 22.5 million baht (150,000 baht per sq m), fetching monthly rents at 80,000 baht and yielding a net 3%. However, there are cases where investors can acquire used units at lower prices and consequently enjoy higher yields.

"The 3% yield does not sound attractive but many people have continued to buy luxury condominiums in Bangkok as an investment, particularly in prime locations", says Bunthoon Damrongrak, head of residential property, at JLL.

"A lot of buyers of luxury condos whom we have recently represented were Thais buying for their own use and as an investment. Those who purchased as an investment focus more on a potential capital appreciation in the long term than rental yields," says Bunthoon.  

"Investors have become better informed than in the past. They are aware that prime sites or land plots that are suitable for luxury condominium development have become increasingly scarce and expect future condo projects to offer higher prices as development costs, particularly the cost of land, will continue to rise," he adds.

Demand for luxury condos in Bangkok comes not only from Thais but also overseas investors, lured by relatively more affordable investment opportunities. Most of the foreign buyers in the Bangkok luxury condo market are from Asia, particularly Singapore and Hong Kong.

"Excluding the ultra-luxury segment, luxury condo prices in Bangkok have remained very competitive. Products of similar quality in Bangkok are twice cheaper than in Singapore and five times cheaper than in Hong Kong.  In addition, though the rental yields in Bangkok are generally low, they remain competitive, compared to many more mature markets such as Singapore, where yields are less than 2%," says Mr Bunthoon.

"When it comes to property investment decision-making, rental yields are an important factor to consider but not everything.  Long-term capital appreciation is among a few other factors of no less importance," he concludes.

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