Samui Property Market

Market Analysis By Rodney Waller, Marketing Director, Lynx Developments
23rd October 2007

The high volume of transactions and the surge in Samui property values during the 3-4 years immediately prior to 2006 led to Koh Samui being referred to as among the best resort investment locations in the world. The military coup that toppled Thaksin from power that September brought this trend to a grinding halt, paralyzing transactions and flattening real estate prices. The Koh Samui villa market has certainly been taking a bit of a breather since the coup. The property market has pretty much been in a state of limbo since soldiers took over the running of the government - investors, individuals and corporate alike don't take too kindly to military governments, or the uncertainty caused by their ill-informed decisions.

But all this is history. It is more important to make sense of all that has happened in the market and to understand where the market is heading. And more importantly for investors, to question whether these recent events have created a buying opportunity.

To understand the Samui property market, it is necessary to separate the collective market into its various segments and then explore the motivations, investment criteria and decision making processes characteristic of each segment. It is useful, in general, to consider three different types of buyer: the lifestyle owner - those looking for a holiday or retirement home; the more sophisticated property investor; and those in the middle who buy for enjoyment but only if it makes financial sense. It is also useful to look at the various real estate price levels within the market: the lower end of the market, for example, purchases under THB 8M (US$250,000), the middle market from 8M to 25M (US$250,000 - 750,000), and the luxury end of the market at 25M (US$750,000) and above. In addition, the market cannot be understood without reference to the Thai laws relating to property ownership and their impact on these respective market segments.

The market for lifestyle buyers has certainly thinned out since the coup but transactions are still going through. Sales are predominantly the result of a holiday spent in Thailand, which led to a lifestyle decision to purchase a property. Such purchase decisions are largely based on affordability, finding properties that a buyer likes sufficiently to part with his money, and involves little research into market conditions or economic indicators.

For sophisticated investors, at any price level, the decision making process is quite different. Investors make it their responsibility to know what is going on in the market, particularly in relation to significant economic and political events (such as the odd military coup). They read investment reports, watch the signs, crunch the numbers, and assess the risks and rewards. And the general consensus of investors, particularly after recent political events, has been to stay out of the market; take a 'wait and see' approach. Wait to see if there is an election in December as promised and see what happens after the election. Wait to see what happens in relation to the proposed amendments to the FBA that seek to limit foreign ownership and control of Thai companies. And as investors, why would they sink their unleveraged cash into Thailand when neighbouring countries are flinging open their doors and wailing like sirens about investor-friendly ownership rules and financing options. Naturally, Thailand's neighbours are attracting investors like magnets and posting impressive gains in property prices, while over the past year Thailand's magnetic investment poles seem to have gone in reverse.

For instance, Malaysia has just scrapped the 30% Real Property Gains Tax (RPGT) in relation to the 5 year holding period for foreigners and 80% LTV financing is readily available. Then there is Singapore's strong GDP growth rate recording record residential property prices from early 2006 to date. While Vietnam now allows resident foreigners to buy (for their own occupation) and sell houses and use property as collateral for bank loans. In Asia, Thailand has become like the centre of a hurricane - surrounded by a whirlwind of exceptional opportunities while lying dormant in the centre.

If we look into the median investor segment, the 'lifestyle-investor,' - those that would buy a property for enjoyment but only if it makes a reasonable degree of investment sense - has read enough into the environment to keep their purchase decisions on hold. At least until after the election, just to make sure the powers that be don't steer the country back to the dark ages.

On aggregate, property transactions have slowed significantly for Thailand 'lifestyle' properties (and ground completely to a halt for developers flogging properties with nothing special to shout about), pending positive news or sufficient incentive to buy.

In relation to Thai laws affecting property ownership, what impact have the proposed 'changes' to the law relating to property investment had on the market? For decades Thai law has contained no provisions (with one or two exceptions) for foreigners to own land in Thailand. Indeed, the attitude that foreigners have no right to own land is buried deep in the Thai official consciousness. In relation to the Foreign Business Act (FBA), it is not a new law. The FBA is the successor of the "Alien Business Law" (ABL) of 1972 that aimed to limit foreign participation in some business activities either because they were sensitive sectors for Thailand (such as national security or resources) or because Thai companies were not competitive in those sectors. So there is nothing new here.

What has changed is that the Thai companies that foreigners have been using to circumvent the rules have been thrown into a largely unwanted spotlight because the FBA has been embroiled in the political spectrum and associated with the ousting of Thaksin. The (grey) rules about foreign ownership are the same but the legal structures used to circumvent them have been dragged out of the closet and aired in front of the world, and it's too late to throw them back in before anyone notices. Not to mention that they were wheeled out to satisfy a political motive before their affect on the real-world economy could be properly assessed. Since the law itself has not changed, it is clearly the uncertainty that has dampened the market, deftly assisted by a military government that has been unable to switch off the spotlight through a once-and-for-all clarification of the existing law. Uncertainty affects markets just as much as unfavourable rules.

The effect on the property market where the accepted way of doing things was for foreigners to use Thai companies to own and control assets has been like a game of musical statues where the music stopped and everybody has frozen still, afraid to move because they are not sure what to do anymore. It was all ok before the coup. As a foreigner, we could get ourselves kitted out with a fully functioning Thai company, and feel confidently in control of our own destiny, so long as the government turned a blind eye to it. Now it is not politically correct to own one, and if some of the proposed amendments to the FBA managed to get through the legislature, it would not be as easy to control either.

In the absence of using a Thai company to purchase property in Thailand, there has been a shift of investment toward developments with condominium status. Where the property does not fit the 'condominium' criteria, we are left with ownership through leasehold. Let's take a look at the commonly accepted '30+30+30' year leasehold structure. If Thai law stipulates that the maximum leasehold period is 30 years, the 30 year lease is just what it says on the box: a 30 year lease. With two contractual bonus renewals. For the apartment and villa market in the under 8M (US$250,000) range, the effect of leasehold being the sole means of ownership has not been as pronounced (the military coup has been more of a worry). At the other end of the scale, at the top end of the market, the thought of shelling out a million dollars for a thirty year lease under a military coup has caused investors to do a reality check; at least long enough for them to decide to keep their money in their pockets. With most foreign buyers in the mindset of freehold ownership back home, who would want to part with THB 30M (US$1M) for a villa when use is only guaranteed for 30 years - this is not London. The exceptions over the past year have been condominiums and branded resort properties (and transactions involving money with vague origins). The middle of the market has similarly suffered.

The impact on exchange rates on the Thai property market over the same time period must also be considered. The Thai Baht has appreciated 15%, from Bt 37 to 31.5 YoY to 25th October and thus translates as a hefty increase for those buying in US dollar-denominated currencies such as Hong Kong, a primary market for property in Koh Samui.

This all helps to answer the question of where the market is now: stagnant. Waiting. On-hold. The uncertainty in the market following the coup has resulted in fewer buyers on the ground, while developers are cutting prices to move current stock and repair their cash flow.

So where is the market heading? The answer to this question depends largely on a change of political leadership, resolution of the FBA issue, and the availability of purchaser financing for Thai properties.

With elections approaching in December, an elected government should bring a higher degree of stability to Thailand and improve investor sentiment. There were only ever three likely scenarios: Thailand goes back to the protectionist dark ages (unlikely). Or the market languishes in Thaksin paranoia, whereby investors stay away and existing cash buyers, in a similar fashion to poorly picked stocks, revise their investment hopes to become those types reluctantly labelled as "long term". Or stability returns, practical solutions are found to the current issues, TV images of political protests fade from investors' minds and buyers return in force. Thailand's attractions and beauty will again outweigh the risks. The present military government has already shot the country once in the foot; a newly elected government is not likely to cut the leg off to spite the rest of the body.

In relation to the FBA, it is highly improbable that any legal changes will be made before the election due to the sheer volume of election legislation tying up the legislative institutions. After the election, the FBA hot potato will atrophy, cool off and fade into the background where it was before the coup and no politician wants to put it back on the agenda. Or it will be picked up again immediately after the election by a brave politician, the laws relating to foreign ownership ultimately clarified and the uncertainty finally laid to rest. Both will be an improvement on the threat of unknown changes and sanctions hanging over the market.

With regard to purchaser financing, particularly for Samui where there are only a few condominium projects, there is a distinct absence of funds for leveraging investments, meaning wealthy individuals have dug deep in their pockets and used cash to become property owners. In light of this, the Koh Samui property market is certainly not a bubble about to burst; the absence of new purchasers in the market has simply generated a liquidity problem for existing owners, caused the market to go flat and created hardship for the developers that rely on sales to proceed with construction.

If the new elected government replaces the nationalistic, military-minded 'politicians' with professional politicians familiar with the requirements of a properly functioning economy in a globally competitive market, it should provide a firm foundation for the market to rise. With the political sensitivities involved, one not entirely inconceivable solution to the problem of foreign ownership of Thai property would be for the maximum leasehold period permitted under Thai law to be increased from the current 30 years to perhaps 60 or even 90 years. This would be a face-saving solution in that foreigners would still not "own" land in a physical sense but would have the legal ability to enjoy it for a much longer period due to the fact that leases (as opposed to lease renewals) are registerable and legally enforceable rights. This would be much more attractive for investors and a viable response to Thailand's Asian neighbours that are more open to investment. Longer-term leases would certainly be a persuasive argument for purchaser financing.

Whether or not longer leases become a reality in Thailand, political certainty in the market would certainly encourage the wider availability of purchaser financing, building on the restrictive offerings of Bangkok Bank and UOB in Singapore. A number of global financial institutions are waiting in the wings to offer financial packages for investors in Thai property given the right conditions. With the availability of financing at reasonable rates, luxury resort properties in Thailand would no longer be the exclusive preserve of high net worth individuals and the market would open up to an entirely different type of buyer, which would significantly lift the market property prices.

The final question to be answered is whether current Samui property values represent a buying opportunity. One thing is certain at the moment: with the absence of a steady flow of transactions since the coup, which has placed a severe strain on cash flow, developers are slashing prices and are highly receptive to negotiation. As always, investors must decide whether the discounted prices adequately compensate for the risk, or have indeed fallen below their reasonable or 'actual' values.

At times of major political uncertainty it is often hard to see the forest for the trees. However, seasoned investors should be able to see the bigger picture, put circumstances into perspective and use their common sense. With today's technology giving people greater flexibility about where they choose to live and work, we are witnessing a general migration to the sun and sand. After a long growth cycle in the traditionally popular property investment markets of the US and Europe, it is clear that the investment havens such as Miami, Florida and Spain have reached the top of their cycles and real estate prices have either stagnated or are already heading downwards. The smart money is either waiting to pounce on distressed assets in the traditional markets or moving to Asia, which is expected to account for much of global growth and affluence over the coming decade.

Due to its beautiful beaches, warm climate and friendly people, Thailand remains one of Asia's top tourist destinations. There will always be demand for vacation homes and retirement residences in places like Phuket and Samui. Current political uncertainty has put the market on hold and created pent-up demand; lifestyle buyers and investors are waiting for the resolution of the uncertainty before committing capital. As soon as Thailand sorts its act out, it should witness a large capital inflow and over the next 3-5 years we could witness exceptional increases in land and property prices.

While the Phuket property market is highly developed and mature, Samui is its fast developing, up-and-coming rival. With stunning beaches, top quality resorts and restaurants, and because it still retains much of its charm, Samui is earning a reputation as a boutique style island and international tourist destination with excellent investment growth potential. Property prices in Samui lag behind those of Phuket and therefore present value for money.

For Samui, with new international and domestic terminals under construction at the new airport and pending city status - which should funnel through into significant upgrades to roads and infrastructure - there should be greater optimism and anticipation of future real estate price rises. With Bangkok Airways the leading boutique airline in Asia for well-heeled travellers, together with an increase in the frequency of established air routes to Samui and new direct flights from Hong Kong, Singapore and Penang, there is a clear upward trend. There is also exponential growth in fine dining restaurants and an influx of international branded resort properties such as Four Seasons, Conrad and W Residences. For high-end brand names to be committing to Samui at this time is a clear indication of confidence in the future growth of the island. And with developers lowering prices to make their projects more attractive to assist cash flow, the early investors who have read the signs are already sniffing around for deals. They understand that money is made when they buy, not when they sell. For investors who understand the issues and believe the future is more positive than is reflected in current pricing, buying in depressed markets is an opportunity to take a position and lock in prices before the market changes to reflect the positive sentiment.

Speaking as a developer, we have already ridden out the worst of the storm and are positioning ourselves for an expected upturn in the second half of 2008. We have found that the key to success in Thailand is to conduct proper due diligence, design properties that people want to buy, build to the highest standards, place great emphasis on professional project management, package the investment to reflect the lifestyle and eliminate the risks for buyers. To take our latest project - "Amara Golf Village" - as an example, we provide a 10 year structural guarantee, build only on land with 'Chanote' title (the highest and most secure title in Thailand) and even go to the lengths of arranging title insurance for owners, in partnership with one of the leading global providers of title insurance. In addition, each luxury villa comes with a full furniture and details package (even down to the chilled wine in the fridge) and we arrange for owners to become exclusive lifetime members of Thailand Elite, which includes complimentary green fees for golf at Thailand's top golf courses, complimentary spa treatments at more than 60 of Thailand's top spas, VIP expedited immigration and passport control and a renewable 5 year multiple-entry visa for Thailand so you can come and go when you want and stay for as long as you like. In a buyer's market, we can't rely on Thailand's beauty alone to sell our properties!

 

Post Election Analysis of the Koh Samui Resort Investment Market

By Rodney Waller, Marketing Director, Lynx Developments
2nd January 2008

It is common knowledge that the resort real estate market in Thailand has been taking a breather since the coup in September 2006. From an investment viewpoint, it is interesting to determine whether recent events have created a buying opportunity.

Now that a democratic election has taken place as promised, the first hurdle has been overcome. While the result was less than ideal from the perspective of the international community, the transition from a military government back to legitimately elected government will assist the Kingdom's international image. It is the first step toward improved investment sentiment, although investors are now waiting to see whether the newly elected leader is able to form a government, and more importantly, the direction and policies of the new government. Property investors are waiting for positive signals before they return with confidence. The issue of the proposed amendments to the Foreign Business Act (FBA) that sought to limit foreign ownership and control of Thai companies is still in the back of investors' minds. The issue was not addressed before the election; the main questions for international investment is whether the issue will be raised again after the elections, whether there will be clarification of the rules or whether the issue will be swept under back the carpet where is started.

At the top end of the property market, uncertainty about freehold ownership through Thai companies and the reality of the leasehold ownership structure has restrained demand. With most foreign buyers in the mindset of freehold ownership back home, who would want to part with 30M Baht (US$1M) for a villa when use is only guaranteed for 30 years - this is not London! The exceptions over the past year have mainly been condominium properties, branded resorts and properties that have been well packaged and competitively priced. The middle of the real estate market has similarly suffered. For the apartment and villa market in the under 8M (US$250,000) range, the effect of leasehold being the sole means of ownership has not been as pronounced.

In short, why would investors sink their un-leveraged cash into Thailand while neighboring countries are flinging open their doors with investor-friendly ownership rules and various alternatives for mortgage financing?

Thailand's neighbors are attracting investors like magnets and posting impressive gains in property values. For instance, Malaysia has recently scrapped the 30% Real Property Gains Tax (RPGT) in relation to the 5 year holding period for foreigners and 80% LTV financing is readily available. Singapore has boasted strong GDP growth and is recording record residential property prices from early 2006 to date. Vietnam now allows resident foreigners to buy (for their own occupation) and sell houses, using property as collateral for bank loans.

This all helps to answer the question of where the Koh Samui property market is now. On aggregate, property transactions have slowed significantly for Thailand's resort or lifestyle real estate market pending positive news. Developers are pricing aggressively to attract customers. Investors are waiting in the wings.

A democratically elected government is the first step to putting Thailand back on investors' radar, yet restrictive rules on foreign ownership, which are out of line with neighbouring economies, have placed an artificial glass ceiling on the escalation of capital values. The direction and decisions taken by the new government in relation to rules affecting foreign investment, and the speed with which they are taken, will prove to be crucial over the next few months. If the government demonstrates a desire to make policy in line with the needs of an economy in a globally competitive market, and in the absence of any ill-informed decision making, there should be a gradual improvement in investor sentiment over time. This will filter through to transaction volumes and a rise in real estate values. If the new government is able to decisively address the key issues affecting property investors, such as foreign ownership or length of leasehold, positive news would cause an almost overnight surge in property prices. An elected government, combined with investor friendly rules would place Thailand on a more equal footing as its Asian neighbors and remove this glass ceiling hovering over the property market. Thailand's attractions and beauty would again outweigh the risk.

In Thailand, transaction volumes and property prices will continue to be determined by the availability of purchaser financing for Thai properties. There has been much speculation about longer term leasehold periods in Thailand. If the maximum leasehold period were to be extended to 60 or even 90 years, this would stimulate wider availability of purchaser financing. A number of global financial institutions are waiting in the wings to offer financial packages for investors in Thai property given the right conditions. With the availability of financing at reasonable rates, luxury resort properties in Thailand would no longer be the exclusive preserve of high net worth individuals. Instead, the market would open up to an entirely different type of buyer, which would significantly lift the market property prices.

For investors, a difficult year has had at least two positive outcomes. First, the absence of a predictable and steady flow of transactions over the past year has placed a strain on developers' cash flow. In response, developers have been pricing more competitively to attract purchasers. Investors must decide whether the prices have indeed fallen below their 'true' values in the short and medium term. Second, without the volume of anticipated sales, the more poorly funded developers have left the market, leaving the 'cream of the crop' behind.

At times of political uncertainty, it is often hard to see the forest for the trees. After a long growth cycle in the traditionally popular property investment markets of the US and Europe, it is clear that the investment havens such as Miami, Florida and Spain have reached the top of their cycles and prices have either stagnated or are already heading downwards. The smart money is either waiting to pounce on distressed assets in the traditional markets or moving to Asia, which is expected to account for much of global growth and new wealth over the coming decade.

Thailand remains one of Asia's top tourist destinations due to its beautiful beaches, warm climate and friendly people and there will always be demand for vacation homes and retirement property in Samui and Phuket. The recent political uncertainty has not caused a major correction in the market; instead it has created pent-up demand. Lifestyle buyers and investors are waiting to commit capital. If political stability returns to Thailand and investor-friendly policies follow, we should witness a large capital inflow and over the next 3-5 years and exceptional increases in land and property prices.

Samui is earning a reputation as a boutique style island and international tourist destination with excellent investment growth potential. For Samui, there should be greater optimism and the anticipation of future price rises. "City" status for the island is pending and Samui is being allocated greater tax revenues from the provincial government, which should funnel through into significant upgrades to roads and infrastructure. Zoning laws are now strictly enforced. The recent introduction of direct flights from Hong Kong, Singapore and Penang shows a clear upward trend. The recent approval of an Environmental Impact Assessment (EIA) has allowed Bangkok Airways - the leading boutique airline in Asia for well-heeled travelers - to increase the frequency of established air routes to Samui and to use larger aircraft, significantly increasing the number of passengers that can be carried daily to Samui. It has also set the stage for Thai Airways International (THAI) to introduce two daily flights between Bangkok and Samui, technically breaking the monopoly that Bangkok Airways has held since 1989.

The new 500 million Baht international and domestic passenger terminal, four times larger than the old one, has just been completed at Samui airport and Bangkok Airways is anticipating an increase of capacity from 800,000 passengers a year to two million.

Samui is also witnessing an exponential growth in fine dining restaurants, the entry of international supermarket chains such as Makro and Big C, complementing the incumbent Tesco-Lotus, and an influx of international branded resort properties such as Four Seasons, Hyatt, Conrad and W Residences. For high-end brand names to be committing to Samui at this time is a clear indication of confidence in the future growth of the island. And with developers pricing aggressively, the early investors who have read the signs are already sniffing around for deals. They understand that money is made when value is locked in as they buy, not when they sell. For investors who understand the issues and believe the future is more positive than is reflected in current pricing, buying properties in the current market could well be an opportunity to take a position and lock in prices before the market changes to reflect the positive sentiment.

Koh Samui Property Market, June 2008

By Rodney Waller, Business Development Director, Lynx Developments.

If you had invested in prime real estate in Macau (the Special Administrative Region of China, one hour from Hong Kong, which is surpassing Las Vegas in casino revenue) in 2003, the chances are that you would have doubled or trebled your investment within the space of a few years.

If you had invested in quality property in a prime location in Hong Kong in 2003, during SARS, you would have reaped similar capital returns over the same time period. If your investment had been leveraged with mortgage financing, you would have commonly witnessed cash on cash returns exceeding 300%.

The reason for such phenomenal investment returns in real estate is that investors bought into a market at a time when the market was technically depressed and considerably undervalued in relation to future potential. Property investors that made windfall profits during these years were the ones that recognised the buying opportunity and invested at a time when the general consensus was to cautiously hold back.

So what circumstances created such buying opportunities? In both these markets, SARS had caused a collapse in investor confidence that weakened and depressed prices. At the same time, the largely unrecognised upside potential in Macau was the building of "Asia's Las Vegas" within the reach of billions of potential gamblers, while in Hong Kong, demand for prime property simply outstripped supply as money poured in, notably from mainland China.

The reader is probably wondering why we are referring to Hong Kong and Macau when this is a market update for Koh Samui, Thailand. Well, the reason is that we could now be witnessing similar circumstances and a similar buying opportunity in Koh Samui.

Over the past 2 years, no less than a tsunami, a military coup, the imposition of a 30% capital reserve requirement for foreign investment, and proposed changes to the FBA (Foreign Business Act) to limit foreign ownership have cast a shadow over the market and depressed prices. These issues are now largely in the past and the resort property market, particularly in Samui, is bouncing back to life: thankfully, the tsunami did not affect Koh Samui - in fact, visitor numbers increased as tourists moved away from the worst affected areas and Phuket; Thailand has a new government that is relatively new and has yet to prove itself beyond doubt, although the initial signs are showing a government committed to improving the economy, particularly the property sector, which was demonstrated by the substantial cuts to property transaction taxes announced in March 2008; the 30% capital reserve requirement tax has been scrapped, also in March; and the FBA issue seems to have been shelved since the previous government ran out of time before implementing any of the proposed changes.

Looking at the positive issues, there are multiple grounds that would create 'unrecognised upside potential.' Let's start in simple economic terms with supply and demand. Since the scrapping of the capital reserve requirement, property investment funds are moving back into the market and starting to increase their share of Thai property assets in their portfolios - large sums of institutional money is looking for a home in Asia and Thailand in particular. Then we have the influx of world class, internationally recognised resorts - Hyatt, Four Seasons, Conrad, W Hotel, Absolute David Lloyd, Banyan Tree, Intercontinental, Mandarin Oriental, Sheraton, X2 - that have either just opened or are reported to be adding resorts in Samui. The combined effect of buying by investment funds and international resorts looking to build on the island is land prices are being driven higher and higher. A recent article in the Nation mentioned increases of 20-30% per year. Headlines are already beginning to appear, such as "Samui Expected to Pass Phuket as Most Expensive Resort Destination". In addition, Samui has been referred to by one of the leading property investment research companies as among the top 10 resort property investment hot spots in the world for 2008.

At the same time, as zoning laws concerning Samui properties are becoming more restrictive and better implemented, the general result is more restricted development, which means better construction and infrastructure planning and rising prices due to the effect of these restrictions on construction and supply. More specifically, visitors to Koh Samui are already seeing significant upgrades and improvements to roads and infrastructure.

We should also consider the potential impact of bank or mortgage financing for foreigners buying resort properties in Thailand. To date, the vast majority of foreigners buying property in Samui have used cash, due to the unavailability of financing. Imagine if mortgages were unavailable in London! The low and middle end of the market would come to a standstill. Conversely, imagine the effect of the widespread availability of mortgage financing for foreigners investing in Thailand resort property. The number of people that would now potentially be able to enter the resort property market would expand exponentially. Transaction levels and prices would follow. Adding mortgages to a cash market is like adding petrol to a fire.

Mainstream banks and financial institutions briefly entered the Thai market with mortgages for foreigners just prior to the coup, although these offers had excessively restrictive loan criteria or excessive application costs and generally faded away. However, the big names in mortgages are now starting to come back into the market with standard mortgage packages and, once their viability has been tested, we should expect to witness an array of big name institutions offering mortgage financing options in Thailand over the next 6-12 months. As one senior financial official mentioned to me, "investors will be queuing down the street."

In sum, circumstances have conspired to create a buying opportunity. Investing in Samui Villas and condominiums is looking increasingly like a golden buying opportunity. The question for investors is whether they enter the market in time. Money can certainly be made buying quality property in a prime location, especially if it is possible to take advantage of mortgage financing to leverage your investment.