Trending up: Robust demand is seen in residential and retail segments, while focus turns toward industrial land

The domestic real estate market is currently marked by strong and resilient demand for condominiums in Bangkok and the spread of modern retail outlets such as hypermarkets, malls and big-box stores. However, during 2012, one of the most closely watched segments will be industrial land, as responses to the flooding in 2011 by manufacturers will indicate whether they remain comfortable operating from zones that could flood again in the future.

PROPERTY PRICES: In 2011 price growth was subdued, in line with a regional trend brought on by global economic conditions but also thanks to measures by the government, which has been conscious of avoiding a bubble developing, particularly in the market for downtown condominiums. The government has removed from the equation several factors that were pushing up prices in recent years, including tax incentives that were not renewed in 2010. It added in January 2011 a cap on the maximum mortgage size at 90% of a property’s value.

Nearing the close of the first quarter of 2012, it appeared that a recovery from the flooding was happening faster than expected. Developers including Sansiri, Asian Property Development and LPN Development had reported presales of units exceeding first quarter targets, particularly in residential property. Sansiri, for example, had forecast BT32bn ($1bn) in presales for 2012, but saw BT10bn ($319m) in the first two months of the year, and president Srettha Thavisin told local media in mid-March that the company may increase its target for the year. These results are consistent with other impacted sectors of the Thai economy, such as manufacturing. Signs of recovery had been expected by the latter half of the year, but materialised in its early months instead.

SIZE & SCOPE: The real estate story in Thailand in 2011 was more of a national and regional one than one focused on Bangkok, thanks to the uncertainty over industrial land brought on by the floods. In previous years the focus was mostly on the capital city, where a condo boom had been in the making. A handful of tourist destinations, including Phuket, Ko Samui, Hua Hin and Pattaya are also on the radar.

Within Bangkok, the expansion of mass transit lines, in particular that of the Bangkok Mass Transit System (BTS), or BTS Skytrain, will be a regular and ongoing effort at providing a steady stream of new locations attractive for development. Key areas of the city include the central business district (CBD) located around the downtown Lumpini Park, and the corridors of Sathorn Road, Silom Road and Sukhumvit Road. Waterfront properties along the Chao Phraya River are also considered prime spots. There is plenty of room for infill development in Bangkok, but suburban spots are growing as well.

FOREIGN OWNERSHIP: Non-Thais can buy condominiums, but foreign ownership in a condo project cannot exceed 49% of the total area of all units in the building. Leasehold purchases are also available for condos and other types of homes such as villas, although the maximum registered lease term is 30 years.

Foreign individuals and companies generally cannot own land in Thailand, but there are some exceptions. Notably, businesses can hold land ownership in industrial estates that have been set up by the Industrial Estate Authority of Thailand. This land can be used by foreign-owned companies for business operations or for residential purposes such as providing homes to management and employees. Outside these industrial estates, permission from the Board of Investment (BOI), an organisation charged with attracting industry to Thailand, can be secured for the purchase of land.

Foreigners have also used nominees to own land, a process that drew criticism from government ombudsman Siracha Charoenpanij, who said in March 2012 that one-third of Thailand is foreign-owned via using nominees where needed. The claim was disputed in local media, but highlighted a possible solution of extending leasehold terms from 30 years to 99 years for foreigners. Another solution, said Robert Collins, the CEO of Savills Thailand, a global agent and property manager, would be to open up only some areas. “There’s a fear that if foreigners could buy without restrictions it would cause inflation,’’ Collins told OBG. “The Dubai model of opening up certain zones would be a useful solution.’’ These restrictions fit within an economy-wide theme in Thailand. The 1997-98 Asian financial crisis was caused in part by foreign investors speculating on the baht, and Thailand suffered from capital flight. The country’s financial leadership remains resolved to avoid a second occurrence, and has therefore kept a lid on speculation in the economy by foreigners, as well as trying to keep hot money out of the economy in general.

LAND TAX: Land is taxed based on the revenue it generates, which has created a situation in which unimproved land is a store of value because it can be both unused and untaxed. As an incentive to get land owners to make improvements, the government has been considering a reform that would tax land by category, regardless of what is on it.

This idea has been under consideration for years without actual implementation, and the most recent version of it, a bill called the Land and Building Tax Act, was awaiting cabinet approval in early 2011 and was still a possibility as of early 2012, a Ministry of Finance official told OBG. The act proposes taxing agricultural land at 0.05% of its value, residences at 0.1%, and commercial land at 0.5%. A study by Chicago-based property broker Jones Lang LaSalle found that it would generate revenue of between BT60bn ($1.9bn) and BT70bn ($2.2bn) annually.

The Crown Property Bureau (CPB), which is an ownership vehicle for the assets of the Thai royal family, has an important influence in the Thai real estate sector. It owns large areas of the CBD, as well as plots throughout the country. About 93% of its land is not commercially exploited, and the agency has in its mandate a public-service component. Urban poor in Bangkok have been allowed to settle and build houses on some of its land, for example.

Land purchases from the CPB’s holdings are not possible, but developing a project on its properties can happen on a leasehold basis. Leases are granted for 30 years, after which ownership of the land and structures on it revert to the CPB. Leases can be renewed, but there is no contractual obligation or guarantee that one will be granted.

Among private developers, the two largest are Pruksa Real Estate and Land & Houses. Pruksa has developed a niche in low-cost housing, often using pre-fabricated components shipped to its sites. Some of the highest-profile developers are smaller in scope and sales but focused on luxury condominiums, such as Raimon Land, as developer branding takes on increased importance for these types of properties.

INDUSTRIAL ESTATES: For industrial projects, the country is separated into three zones, with the first being Bangkok and its environs. Surrounding provinces make up zone 2, with the rest of the country as zone 3. The distinctions are used by the BOI, which offers more tax breaks and other incentives for projects in the latter two zones with the aim of reducing crowding in the capital.

Bangkok is situated just to the north of the upper reaches of the Gulf of Thailand, and in the provinces surrounding it are the industrial estates crucial to the country’s overall economic success. Provinces such as Ayutthya and Pathumthani to the north enjoy proximity to the city, but lie in the flood plain of the Chao Phraya River. Located to the east along the seaboard are Rayong and Chonburi, provinces outside the flood plain. Thailand’s main container port is in Laem Chabang, a small city in Chonburi.

PLENTY OF CHOICE: Industrial land sales were strong in 2011 when 921 ha were sold despite the floods, the highest since at least 1999, according to the Thai operations of global real estate firm CBRE. Sales of serviced plots, which include the estates, rose on the year and in the fourth quarter, when the waters were highest. The majority of planned new supply reflects the geographical risk in Thailand, as some 72% is planned in the southern area of the Eastern seaboard, according to research from the global real estate company Colliers International.

Land values are highest in Bangkok, lower in the provinces ringing it, and lower still in the remote areas beyond, but the decision on where to locate has historically been based mainly on logistics and supply chains. The facilities that have populated the estates tend to be grouped by industry – suppliers of auto parts near the auto manufacturers, for example.

NOT SWEPT AWAY: There has been concern that the 2011 floods would prompt an exodus of manufacturers from vulnerable estates in the floodplain, either to the Eastern seaboard or out of Thailand. Staying in the floodplain, after all, required companies to commit funds toward rebuilding their facilities, as well as put up with increased insurance costs until such time as the risk from floods dissipates. Such migration happened to a limited extent: the Japanese electronics maker Canon moved some of its production to Vietnam, and auto parts maker AAPICO Hitech moved from Ayutthaya Province south-east to zones in Rayong and Chonburi.

This had minimal effect on pricing, as late 2011 data from Colliers showed that prices had risen by BT312.5 ($1.59) per sq metre in those eastern provinces. At the same time, the supply chain efficiencies generated by clustering interdependent firms gives Thailand a powerful incumbent advantage. Western Digital, for example, told journalists that all of the partners involved in manufacturing components for its hard drives were located within a 25-km radius of its facility.

The country’s susceptibility to floods would likely encourage single, loosely connected firms to move abroad, but uprooting an entire industry imposes vast logistical costs. Indeed, the disruption may have been rather short-lived: Production levels were already reaching pre-flood levels by the second quarter of 2012, with multiple forecasts of a return to normal by the third quarter across all industries.

ADDRESSING RISK: The Thai government has moved to eliminate the perceived risks associated with its policies. In February 2012 the government approved a BT4.8bn ($153.1m) project by the Ministry of Industry to construct floodwalls around six industrial estates in the floodplain. The floodwalls set for construction will surround Rojana Industrial Estate (77.6 km), Bang Pa In Industrial Estate (11 km), Navanakorn Industrial estate (18 km), Hi-tech Industrial Estate (13 km), Saharattana Nakorn Industrial Estate (13 km) and Bang Kradi Industrial Estate (8.4 km).

Meanwhile, Prime Minister Yingluck Shinawatra toured some of Thailand’s key foreign investment partners, such as Japan and South Korea, in March 2012, pronouncing the country as committed to making sure that flooding will not disrupt manufacturing again. The Thai government has formulated a long-term water management strategy heavy on infrastructural implements such as dykes and gates. To this end, the cabinet approved a budget of BT24.6bn ($784.7m) in March 2012 that would cover 246 flood management projects across the nation.

OFFICE SEGMENT: Office space in Bangkok is among the cheapest in the region, at about $220 per sq metre in the CBD for grade-A space, according to research from Jones Lang LaSalle. That is lower than in other large regional cities such as Ho Chi Minh City, Jakarta and Kuala Lumpur. The cost is a quarter of that in Singapore and one-tenth the cost of a similar space in Hong Kong. No new buildings are expected until 2013 in the CBD, which is loosely clustered around Lumphini Park.

This segment of the real estate market has been characterised by lower demand since the 2006 coup that ousted the government of Thaksin Shinawatra, and the several political and economic shocks that have followed, such as the global financial crisis, the political violence of May 2010, and most recently the flooding. With office demand crimped, developers have found higher margins available building condos and have been riding that wave in recent years.

However, the supply-demand cycle looks set to return to one of rising rates as the existing stock of grade-A space in Bangkok’s core fills up. There is about 8.12m sq metres of grade-A office space, according to CBRE. The occupancy rate in 2011 ticked up to 85.9% from 85.6%, and rose further to 86.1% in the first quarter of 2012.

Take-up for the year had been showing signs of reaching levels last seen in 2006 – net absorption was projected at above 200,000 sq metres in 2011 before the flooding derailed that pace, according to research from Jones Lang LaSalle. Still, CBRE reported that first-quarter 2012 showed a strong rebound, with a net take-up of 35,570 sq metres against just 8298 for the whole of 2011.

As Bangkok’s suburbs develop and its core fills up, talk of a secondary business district has emerged. The prime locations, along Silom and Sathorn Roads, are close to full. One possible location is the Khlong Toei Area near Rama IV Road, south-east of the city centre and close to existing mass transit. The office segment could also develop along with the mass transit system, with towers rising near the new lines.

Bangkok would be well suited to a market in which grade-A space is sprinkled throughout the city instead of clustered because demand is not driven by one particular industry, which is a role that banks and other financial firms often play. Demand in Bangkok comes from a variety of sectors, in part because the offerings are inexpensive and the transit links are convenient. That means less need for companies to be in proximity to each other.

RESIDENTIAL: The flooding that took place in autumn 2011 combined with a more subdued global economy that year has taken some of the attention off residential real estate, as well as removed concerns of an asset bubble in development. Prices for downtown condominiums had been rising in previous years, triggering talk of inflated rates in late 2010. While that seems no longer a possibility, the flooding will help near-term performance because condos offer the chance to own property that will not be exposed if the waters rise again in Bangkok.

The condominium surge had unfolded slowly over the past decade, heralding a cultural shift for Thais – condos went from less than a quarter of housing stock in 2005 to more than half in 2010, according to data from the Real Estate Information Centre. The traditional preference is for a detached home on owned land, often built using a small-time contractor. Condominiums had historically been used as an investment – somewhere to park money rather than a place to live. However, with the growth of Bangkok, the economic development of the country, and the increased opportunities in the capital city, more Thais are open to living in a high-rise.

CONDOMINIUM TRENDS: The development of the rapid transit system has helped solidify a long-term plan for the city by creating corridors of desirable land on which condos are an ideal fit, and that is a narrative set to continue for several decades as new lines are established. Condominium buildings are increasingly populated by end-users instead of owned by speculators but not necessarily inhabited, and developers have been buying land for their land banks according to these trends, said James Pitchon, the executive director of CB Richard Ellis Thailand, the local arm of the global real estate consultancy.

Mid-priced condominiums generally sell for between BT1.5m ($47,850) and BT3m ($95,700). More affordable options have arrived in recent years at price points of BT1m ($31,900) or less, for which builders get a tax exemption on their profits. In 2011 BT700,000 ($22,330) could fetch a unit of no more than 35 sq metres and sometimes less than 30, and likely a kilometre or more away from a metro line.

Condo prices in 2011 rose about 3.6%, according to Jones Lang LaSalle. As prices have an ultimate ceiling – boosting them too much will crimp demand, and the maximum mortgage size is BT5m ($159,500) – developers are now turning to costs as a solution to preserving profit margins in a tighter market. That means smaller units – down to 28 sq metres for the most basic of studios – as well as an increasing reliance on pre-cast components where possible, often in low-rise buildings. Pruksa Real Estate has been the leader in this market, but others are adapting the method as well. Their usage cuts down on labour costs and turnaround time. “It typically takes 6-8 months to build a normal house,’’ Apichart Chutrakul, the CEO of Sansiri, told OBG. “It can take as little as 2 months to build a precast housing unit.’’ MARKET FACTORS: One factor that may ease margin pressure by pushing up prices is a plan to increase the minimum wage across all Thai provinces. The rate was boosted 35% in Bangkok and six other provinces as of April 1, 2012 to BT300 ($9.60) per day. In other provinces, where it is either about BT220 ($7) or BT160 ($5.10), the plan is to boost pay to BT300 ($9.60) by 2013. According to a survey in local media, developers are expecting an increase of around 5% to 7% in home prices as a direct impact.

Despite the popularity of condos, however, there is only a tiny secondary market. The local culture features a strong preference for living in a dwelling that has not been inhabited before, and that means the value of condos tends to decline sharply over time. When Thais buy condos in order to speculate, what they are really doing is betting that between the announcement of a new building and several rounds of sales, prices will appreciate. This means that to a great extent speculative profits come before the building goes up, and not after it.

Thais who buy condos have typically been wealthy people looking for a hard asset to hold, and perhaps to pass along to children later. Though the trend is changing, low occupancy rates have in many buildings translated into little incentive for developers to care for the common areas of buildings. Uninhabited condos are generally considered to have resale value for about seven years before the buildings seem drab and dated according to local tastes. The disincentive to careful long-term asset management is also caused by the desire to keep maintenance fees low, said Robert Collins of Savills. Fees are typically between BT40-50 ($1.30-1.60) per sq metre per month, and should be about triple that, he said.

OPEN QUESTIONS: Thailand is not the only country with a robust primary market and an irrelevant secondary one; nearby countries such as Singapore are also marked by the same cultural preferences. Being further along in its economic development, Singapore’s consumers have shown an ability to adapt to the idea of buying a condo on the secondary market and living in a space inhabited before. Similar development in Thailand’s economy could narrow the gap between local preferences and the global norms within the condo segment.

The rest of the residential market is uncertain, as flooding has delayed the plans of several developers. Pruksa Real Estate, for example, a leader in the low- to middle-income segments, delayed 29 new projects in November 2011, in part because building was not feasible and also on concerns that consumers’ appetites might change.

The market for townhouses in planned developments has been a small but growing one, generally considered an option for Thais looking for more space than a condo can offer. By March 2012 developers and others were reporting a recovery in demand, with companies including Sansiri, Asian Property Development and SC Asset Corporation reporting sales figures exceeding their targets for the first quarter. However, for townhouses and detached homes they are likely to be more selective on locations due to flooding concerns, Pruksa Real Estate CFO and chief risk officer Edward Cooper said.

RETAIL SPACE: Two developers have traditionally dominated the malls segment – Mall Group and Central Pattana. However, a challenger, Siam Future Development, is the developer behind the 2012 arrival of Ikea, which will be the anchor at Siam Future’s Mega Bangna mall in Bangkok’s eastern suburbs. Often big-box retailers serve as their own developers in Thailand, with Tesco Lotus, the Thai chain owned by the UK’s Tesco, an example of this model.

Developers have also found success with community malls – smaller shops providing day-to-day staples, with anchor tenants including supermarkets or pharmacies. These are often infill developments and target a small range of locals. Mall shopping is increasingly popular outside Bangkok, and new facilities are opening or expanding in places such as Chiang Rai, Udon Thani and Surat Thani.

Other segments of the real estate market developing beyond Bangkok are in large part focused on holiday destinations. Waterfront areas such as Phuket, Hua Hin and Pattaya are developing markets for holiday homes, hotels and other rental properties, and are starting to show some market differentiation as they develop. Phuket remains a luxury destination, and Koh Samui is aimed at the Thai middle class. Hua Hin is popular with European tourists.

The next step is development outside Bangkok and outside the tourism sector. It is highly possible that 2012 could be the year this segment started to develop in earnest, thanks to the minimum wage increase. “Developers are testing the waters in markets like Hua Hin and Phuket for instance, and if that goes well they could expand further to places like Chiang Mai and Udon Thani,’’ Apichart Chutrakul, the CEO of the developer Sansiri, told OBG.

OUTLOOK: Demand has proved resilient in the residential and retail markets, as buyers have overlooked the turbulence of previous years. While that trend looks set to continue, and with the office segment stable until new supply becomes available in 2012, in 2012 eyes will likely be on industrial land, and the question remains of whether foreign demand for serviced plots in industrial zones will decrease or shift to areas outside the ones flooded in 2011.