Riding high: Condominium market thrives on mass transit routes

Several factors have converged to create a high demand for condominiums in Bangkok that remains strong despite Thailand’s periodic habit of threatening its own economy through political unrest. It has become a rule of thumb that, wherever the mass transit lines are expanding, condominium developers are alongside the new routes. Avoiding Bangkok’s notorious traffic jams has become a key issue in the sale of housing close to either the mass rapid transit (MRT) underground routes or the overground BTS Skytrain. The rise of the middle class maintains the affordability of purchasing property and even if high demand and rising costs threaten to push up condo prices, the developers have a “cure”. To maintain the selling price and keep entry level units within affordable limits, some developers reduce the size of the units, with the smallest dropping to perhaps 22 sq metres (sqm). Simon Landy, executive chairman of real estate consultants Colliers International Bangkok, told OBG, “The condominium market is very dynamic with a lot of new supply over the past few years. Allied to the propensity for young people to leave home and live on their own, especially near a BTS line, and the growth of the BTS itself, there is a consolidation of the market around BTS stations among a handful of developers who are buying up all the land.”

Condos

In a report issued in early 2014, another global real estate consultant, CBRE, said most condominiums were being built in the midtown-suburban area and mainly consisted of one-bedroom units.

“Projects with the highest value are in downtown areas like Lumphini, where there is limited new supply,” James Pitchon, executive director of CBRE in Thailand, told OBG. “In midtown-suburban areas everyone is building a similar product, one-bedroom units of 22 sqm to 50 sqm.” The report said almost 13,000 new condominium units had been completed in the two areas in the fourth quarter of 2013, with less than 10% of them in the upmarket downtown area.

Most of the launches were also in the “affordable” midtown category, although one downtown luxury project, the 192-unit Diplomat Sathorn by the KPN Group, had seen more than 90% sold at an average price of BT230,000 ($7521) per sqm, “higher than other projects in the immediate area”.

A similar report for the fourth quarter of 2013 by Colliers International said 34,550 new condominium units had been completed and registered at the Department of Lands in 2013, adding that some condominium projects had postponed completion to 2014 due to labour shortages. It said the average price for new units in 2013 increased by around 20-40% over 2012 levels for various reasons, including a rise in the cost of construction materials and higher land prices as well as the dearth of labour.

As Colliers explained, the rush into mass transit route territory followed a government announcement in 2006 for MRT extensions, starting with the construction of the Purple and Blue Lines. Not only was there an increase in the number of condominiums being built, but the cost of buying them shot up too.

“The average price dramatically increased from approximately BT53,000 ($1733) per sqm in 2011 to nearly BT65,000 ($2126) per sqm in 2013, about 23% higher,” according to Colliers.

Dan Tantisunthom, head of research in Bangkok for global real estate firm Jones Lang LaSalle (JLL), told OBG, “As recently as eight years ago 80% of the supply was detached houses on land. Now it is the other way round and the major reason is the ease of getting to work.”

Buyers

According to companies in Bangkok, buyers fall into four main categories: end-users, investors, speculators and “storers of wealth”. Landy told OBG, “There are people who buy as a storage of wealth, a safer home for their cash than a bank or the stock exchange, not to flip or rent.” Since these units remain empty it might appear as though there is “technically an oversupply”, said Landy. “However, this is the demand,” he added. “It is impossible to say how big this storage segment is, but I would estimate at perhaps 20-25%.”

Speculators

Another category of buyer that is a key part of the real estate market in Thailand, especially in Bangkok, is the speculator. While measures have been taken in some parts of the world, like Dubai, to try to squeeze out speculators and minimise their role – and the risk of creating a bubble – Thai developers see them as part of the everyday functioning of the market. “At the beginning of a project, it is possible to see entire developments sold out in one day,” Landy told OBG. “End-users do not make a buy decision in one day, but there is no problem as long as there is a buyer at the end of the day.” In some cases, a developer may have two sales teams. The first is employed to sell all the units, mostly off-plan. The speculators are seen as beneficial because their deposits help with cash flow in the early stages. The second sales team is employed to help the speculator sell on the property. “It is an after-sales service and encourages people to keep buying from you as a developer,” said Landy.

Assuming property values rise, the speculator pockets the difference between the deposit price paid and the level at which it is sold on. There is no tax payable on the profit provided that the resale takes place before the unit is completed. In any case, as Landy pointed out, there is a more fundamental issue keeping a bubble at bay. “The shortage of labour in the construction industry is one of the reasons working against a property bubble because it is slowing down the cycle,” he told OBG. Besides, discouraging the developers from building provides better anti-bubble protection, said CBRE’s Pitchon. “The model of the condo market relies on speculation,” he said. “If you want to slow the housing market, cutting off funding to developers is more effective than tightening up on mortgages.”

Loans

Chatchai Payuhanaveechai, executive vice-president at Kasikornbank, told local press that the property market “remains secure without any sign of a bubble or oversupply”. Speaking in May 2013, he said the 102,000 housing units built in the previous year was a 19% increase year-on-year, while the 107,000 units sold in the same period represented a 30% rise. The overall number of unsold units dropped by 4%.

Another encouraging sign was the level of non-performing loans (NPLs) on houses sold for less than BT5m ($163,500). The rate for 2012, the latest figures available when Chatchai was speaking, fell by around 4% over the previous year. Homes of that value are typically financed with 30% cash and 70% loan. The ratio for houses worth more than BT5m ($163,500) is 50% for both.

Land Prices 

Chatchai said higher house prices were caused by extra labour costs and rising land prices. According to Landy, condominiums were the only viable option for development. He told OBG there had been a number of land sales at about BT1.5m ($49,050) for a wah (4 sqm), almost all of them for condominiums. “Some of the plots of land in previous years may have been suitable for offices, but as office rents have not really moved for a while no one could afford to buy and build offices,” he said. “The only return at these prices is in condominiums. They could support retail, but not all the available plots are suitable for retail, so condos are the only way” (see analysis). JLL’s Tantisunthom told OBG, “There are instances where land prices have doubled within a couple of years and some places where prices have not moved at all.”

Solutions

One way of trying to keep sales prices in check as construction costs and land prices mount is to use labour saving building techniques. According to Edward Cooper, director and senior executive vice-president of Pruksa Real Estate, a condominium and housing developer, using prefabricated pieces provides a partial cure to the labour shortage. “They are less labour intensive, cuts costs and also make it easier to keep an eye on quality,” he told OBG. The firm’s average unit selling price of around BT2m ($65,400) targets the mass market. Pruksa built five factories to manufacture prefabricated sections.

Finance

Even though no alarm bells have been ringing about real estate-related NPLs, there have been concerns about the overall level of indebtedness and the prospect of a rise in interest rates. Charl Kengchon, managing director of Kasikorn Research (KR esearch) Centre, had warned in March 2013 that individual mortgages as a proportion of GDP in 2012 were 20% compared to 16.8% during the 1997-98 financial crisis.

However, the current level of mortgage lending has been driven by government schemes and lower interest rates. In 1997, the mortgage rates were driven by the financial markets. KR esearch estimates that the proportion of individual mortgages to GDP will rise to 22% by 2015 and overall household debt to GDP could move from 24% to 30%. The banks are taking notice. Four months later the United Overseas Bank (Thai) lowered its loan-to-value (LTV) ratio from 90% to 80% for residential real estate costing more than BT10m ($327,000), the Bangkok Post reported. Kasikornbank tightened rates from 90-95% to 75-80% for third-home borrowing and TMB Bank cut LTV rates from 90-95% to 70% for second mortgages and holiday homes.

Luxury 

A section of the market almost immune to LTV variations is the top end. Johnson Tan, the CEO of local real estate developer Raimon Land, told OBG that as levels of disposable income rise, there is a growing demand for loft-style developments in the city which are geared towards young professionals rather than more established older couples. “The premium residential property sector in Bangkok is now focused on exclusive locations. While these are in short supply, particularly around Lumphini Park or along the Chao Phraya, their long-term value is huge,” Tan told OBG. The Bangkok Post reported in February 2013 the sale of a BT480m ($15.7m) 1500-sqm penthouse to a retired Indian property investor based in Dubai. Sorapoj Techakraisri, chief executive of the luxury property developer Pace Development, told the paper, “Foreign buyers’ confidence is growing stronger.” Pace has targeted Dubai and Abu Dhabi as well as Hong Kong for buyers. “When a solution to the political issues is found, I expect pricing for new condo launches at the very top end of the market to start at more than BT300,000 ($9810) per sqm,” CBRE’s Pitchon said.

Chiang Mai

Alongside the tremendous growth in Bangkok condominiums as a way of entering an otherwise high price housing market, there is increased interest in provincial cities, such as Chiang Mai. Thailand’s second city, 700 km north-west of Bangkok, is becoming the first choice for many local buyers, according to Ed Schroeder of property agents Century21 Lanna. International buyers have long favoured Chiang Mai for business and, more recently, retirement because of its milder tropical climate, low cost of living, good roads and green spaces. Property prices are less than half those of Bangkok or Phuket. Chiang Mai specialists Elite Property is marketing a three-bedroom, two-storey 310-sqm house with an extensive garden for BT8.9m ($291,030). Up to 40,000 expatriates, mainly Americans, Europeans and Australians, live in Chiang Mai, joined by increasing numbers of Japanese and Korean retirees.

North-East

Property developers have been drawn to the northern region on the other side of the country, in the area of Udon Thani, by the region’s increasing prosperity. In the space of 12 months condo projects involving 3200 units have been announced. First in was CP Land, followed by Asian Property Development, which launched Aspire Udonthani. Of the 413 units, which totalled BT705m ($23.05m) in value, 70% were reported to have been sold in just one week. Condo market leader LPN Development and Sansiri will each launch a project with more than 2400 units in total. Research by Kiatnakin Bank showed that income per household in Udon Thani has been growing by roughly 11% a year, reaching BT22,017 ($720) in 2011. The recent prosperity has been boosted by the government’s scheme to guarantee purchase of rice crops at prices above those on the world markets. Colliers’ Landy told OBG, “Many of the top developers are now looking at the north-east and north partly because there is a limit to the condo market in Bangkok. They are focusing on Udon Thani, Chiang Mai and Chiang Rai, as well as Pattaya and Phuket in the south.”

Foreign-Ownership

Not solely in reaction to Chinese interest – Russians are also taking a closer look at Thai property – there is a growing call for the Thai government to tighten foreign ownership, according to a survey conducted by DDP roperty.com, a subsidiary of PropertyGuru Group. Thais are concerned about the risk of getting priced out of their own real estate market because of the influx of wealthy foreigners. The areas most affected are private apartments and condominiums. Out of 1503 respondents to the survey almost two-thirds are against any relaxation of restrictions on foreign ownership. JLL’s Tantisunthom told OBG that most of the residential sales are to Thais. “In any case it is not easy for foreigners to get a mortgage,” he added. Andrew Batt, international group editor of PropertyGuru.com, told OBG, “Financing in Thailand to buy property as a foreigner is very difficult, with loans of perhaps only 50-60% of the value, not bought off-plan and 10 years maximum to repay.”

In addition, the advent of the AEC at the beginning of 2016 may have a profound effect on the market as well. “In 10-15 years there could be luxury villas on the beach in Myanmar two hours from Bangkok that will be far cheaper than those at Phuket,” Batt added.

Outlook

It is a safe bet that high-end and high-price developments in the downtown areas of Bangkok will be minimal, due to the shortage of land. Although small condominium units along transit routes will continue to be built as long as there are extension plans for the BTS and the MRT system, overall economic growth (which is down) and political uncertainty (which is up) could affect the rate at which they are constructed.