The coming oversupply in smaller condos means that the multi-bedroom segment should be a hot market in the future
The Bangkok condominium market is going through a very big shift as just about every developer is now building one-bedroom units rather than larger ones, and this huge influx of small dwellings is cause for concern, says James Pitchon, managing director of CB Richard Ellis.
Very few new two- to three-bedroom units are being offered in key central locations, though developers are selling off some unsold inventory completed in the last year.
“I think prices in the two- and three-bedroom unit market are about as low as they can get,” said Mr Pitchon. “There isn’t a massive oversupply, there is some unsold inventory and developers have not raised prices on these units and in some cases they’re making special offers in terms of rental guarantees or furniture packages.”
Mr Pitchon is worried about the supply of one-bedroom units in the pipeline because some investors may have unrealistic expectations about what they might achieve in rentals, particularly for units outside the most popular expatriate locations.
Industry professionals generally put the maximum rent most Thais can afford at 12,000 baht a month. Anything above that would prompt those with the financial means to buy a home instead of rent.
“We do have some concerns that the volume of new supply in the one-bedroom sector may make resales by speculators to end-users harder,” he said.
At the same time the two- and three-bedroom market seems to be moving in a completely different cycle in terms of supply and demand.
“So if people are looking to buy to generate rental income, we suggest that they look at the two- and three-bedroom market because a large number of expatriates are renting these.”
Mr Pitchon said the number of expatriates in the capital has been fairly stable despite the upheavals in April and May, with very little contraction in the number of work permits, the main gauge used for the expat population. “So it’s flat and as the economy expands we expect that there could be growth in expatriate numbers.”
He also observed that the land price component of condominium development is now equal to or greater than the construction cost for the first time. “So what this means is that any further increase in land prices will have a greater impact on the total sale price.”
Land prices are going up because most land owners are private individuals who are under no financial pressure to sell.
“So for the foreseeable future the cost of constructing a new condominium is not going to get any lower because we think construction costs will increase and we only see upward movement in land prices,” said Mr Pitchon.
Those sitting on the fence waiting to see whether prices of larger condominiums will drop will likely be disappointed, because in many cases prices have actually firmed up after some panic sales by foreigners. Most of these occurred after the US economic crisis began in 2008, rather than during the protests this year in Bangkok.
“Those who are saying ‘I want to buy a condominium for rental income’, should look at two- and three-bedrooms simply because the volume of supply in one-bedrooms in all locations will have a downward pressure on rents.”
The small number of two- and three-bedroom projects also means there is scarcely any speculation in this segment at the moment.
Despite the big surge in one-bedroom units, Mr Pitchon does not see an overall property boom. For one thing, very few office buildings and only a limited number of retail centres are being built. Most of the focus is on condominiums, hotels and serviced apartments.
“So there is not an overall property bubble where everything is going up. All the activity is really focused on one side, so I think the authorities will be looking quite carefully at the growth in the number of one-bedroom units, especially now that we are seeing low down payments,” said Mr Pitchon.
“As yet we have not seen significant expansion of property credit, either to developers or to individuals through mortgages,” he added.
It is also clear that Thais now dominate the condominium market, with far fewer foreign purchasers since the US meltdown in late 2008.
Thais are buying for a mixture of reasons; some because they need a residence, some to rent the property out and some for speculation.
Among the factors Mr Pitchon says are driving money into the property market are low bank interest rates and the view held by the majority of Thais that the stock market is highly volatile.
“There are only about 160,000 active stock market trading accounts, and that shows the small number of investors,” he said.
“And the fixed-income market is very limited, usually either through a bond fund or through life assurance, so there are very few avenues for people’s money.”
Not only are Thai individuals sitting tight with money in the bank, businesses too are quite cautious because memories of the 1997 crash still linger.
“Thai family-owned business have not over-expanded and have been careful about the level of debt they have taken on and are sitting on several years of accumulated profits.
“Generally individuals, sort of middle class and above, have been reasonably cautious. So money earning no return is burning a hole in people’s pockets, and they are looking at going into property.
“Now in Thailand the only avenue is the condominium market. Why? Because there is no real rental market for townhouses and houses, apart for those in the central area, that might appeal to expatriate tenants.”
Property developers are preparing strong campaigns to push homebuyers to commit before the current property tax incentives end on March 26.
Developers have responded to comments from Finance Minister Korn Chatikavanij yesterday that incentive measures must be reviewed.
“People wanting to buy a house during this time should not wait until the last day. They should make a decision right away. There is no need to explain what I mean,” he told a seminar.
In Mr Korn’s view, these measures were introduced during economic crisis so they should be reviewed now that the country has emerged to a recovery stage to maintain discipline and create fairness for other industries that received no tax benefits.
The incentives have reduced the transfer fee to 2% of the appraisal price and cut the mortgage fee from 1% down to 0.01%, while the special business tax is down from 3% to only 0.1%.
Issara Boonyoung, managing director of property developer Kanda Group, said the company would extend its promotions for the House & Condo Fair until the end of March if the incentives were not to be extended.
“If the government does not extend the incentives, we need to revise construction costs and housing prices in the second quarter,” he said.
Currently, the company has 200 pre-built houses worth 400 million baht from seven projects ready to be transferred by March 26.
Kanda plans to offer big discounts of up to 1.5 million baht a unit - along with free furniture and home appliances as well as a waiver of transfer fees - to customers committing at the fair, held from Feb 18-21 at Queen Sirikit National Convention Center.
Kessara Thanyalakpark, director of the listed developer Sena Development Plc, said the company would use attractive promotions although it would require an investment in marketing.
“It will be worth spending more on marketing to sell the units and transfer them before the incentives expire,” she said. “We can save 4.3% if the units can be sold within that period.”
In her view, the government should extend the incentives as they could create a multiplier effect for other sectors. The company has 70 units worth between 200 million and 300 million baht to transfer by March 26.
“If there is no extension, we will rush construction,” she added.
Sena this year plans to launch seven projects worth a total of 4 billion baht. It targets 1.7 billion baht in presales and 1.5 billion in revenue this year.
The company will spend 700 million baht to buy new plots of land, including one of 100 rai for developing low-rise units over four years.
“Though other developers are tending to scale down project size, we see an opportunity in this plot as we are familiar with the location,” she said.
Buying many plots during an upward trend in interest and inflation will be beneficial in the long run as land always appreciates in price, she added.
SENA shares closed yesterday at 1.88 baht, up one satang, in trade worth 1.2 million baht.
Property developers are confident the government will continue tax incentives for the real estate industry that were set to expire in late March.
The Finance Ministry is likely to seek cabinet approval soon for an extension, said Atip Bijanonda, president of Thai Condominium Association.
Speaking at a seminar organised by three real estate associations yesterday, Mr Atip said the extension would improve the overall economy though the government may only extend incentives that benefit homebuyers, such as mortgage and transfer fee reductions.
The Finance Ministry considers that the special business tax incentive only benefited developers, he said.
But Issara Boonyoung, president of the Housing Business Association, said the government should extend the whole package of incentives as developers are likely to pass costs to home buyers if they do not benefit from a reduction in the special business tax.
Kiat Sittheeamorn, president of the Thailand Trade Representative Office (TTR), said the government should consider extending the tax incentives for the property industry, as the sector contributes to other businesses and creates a multiplier effect.
The market value of real estate is about 900 billion baht each year - about 10% of gross domestic product - and it creates 3-4 million jobs a year from all related industries, he said.
The issue of extending incentives has been discussed for a while. Both developers and consumers have sought an extension while the government expects the measure to cause it to lose revenue. It is already clear that there will be no extension of a 300,000-baht deduction from taxable income for home-buyers, which ended last year.
But some large developers oppose an extension of the special business tax break, as it would reduce their competitive advantage over smaller developers.
Mr Kiat said the government should also support overseas investment by Thai developers. Currently, the industry’s foreign investment totals about 20 billion baht, a much lower figure than for other industries, partly due to problems related to the cost of funding.
Libya has demand for about 100,000 residential units so some Thai contractors have entered the market but they failed to secure business due to difficulties over bank guarantees.
In the near future, TTR will lead members of three property associations to seek investment opportunities in Bahrain, where there is demand for about 45,000 residential units at an average price of about 5 million baht each. Bahrain also plans to develop two new boutique hotels, projects for which Thai companies may bid.
The TTR will join with foreign chambers of commerce and the Lands Department on expanding the foreign ownership quota in condominium projects from the current 49% of all usable spaces for all developments nationwide. Upon conclusion a proposal will be submitted to the Interior Ministry.
TTR will also seek an amendment of the Lands Department’s regulations to enable a provision in the first leasehold agreement for two automatic extensions of 30 years each.
Mr Issara said the issue of environmental impact assessment (EIA) is still a challenge for property development this year. “The Office of Natural Resources and Environment Policy and Planning requires residential projects to conduct health impact assessment, in additional to the EIA, like what is required by other industries,” he said.
Mr Atip wants to see construction start quickly on the first three mass transit routes: Purple, Blue and Green.
