Thailand Property Report - February 06 - Market Focus

Thailand’s condo market comes into its own

Thailand’s residential condominium market has peaked and then diversified in recent years. In 2005, new condominium projects in places like Bangkok, Pattaya and Phuket once again attracted investors from both local and international markets. Roger Ward looks at the condo climate in some of Thailand’s biggest residential destinations.

Despite negative factors such as the impact of the fuel price crisis, the Thai property market boom is expected to continue in 2006. Nevertheless, it could also be a more challenging year for many players in the market as the fuel crisis has clearly affected Thailand’s economic growth, and this is reflected by the slow down in GDP, which is expected to drop to 4.5 per cent this year compared with around 6 per cent two years ago. In such an economic climate, condominiums offer a relatively stable investment opportunity, particularly for foreign purchasers as these units continue to be the only legal way to own property freehold in Thailand. Add to that the growing rental demand in cities like Bangkok and Chiang Mai, plus the strong short stay tourist markets in beachside destinations and you find a healthy condominium market developing in many parts of the country.

Bangkok

In Bangkok, the demand for residential condominiums either for investment or owner occupation continues to be strong, especially in the Central Business District (CBD) and close to BTS and MRT stations. A rise in demand has been seen for all types of residential condominiums over the last twelve months, from small studios to four bedroom units and penthouses, in both grade A and grade B developments.

Robert A. Collins is the Managing Director for Agency & Investment Services at Savills (Thailand) Limited. He believes that despite major expansion there is still enough demand in Bangkok to keep the market buoyant.

"The condominium market overall in Thailand is still a very strong one, even if some of the property press says there’s an oversupply in Bangkok," says Collins. "While there’s been a lot of development, a lot is selling very well, especially in the very high end developments."

Robust expatriate rental demand has boosted what was beginning to look like a saturated market in Bangkok and there are now continuing increases in occupancy levels, especially within existing condominium projects. According to a number of surveys conducted by Bangkok’s leading property agents, among them CB Richard Ellis and Jones Lang La Salle, since 1998 the average vacancy rate has dropped from almost 50 per cent to just 10 per cent, with the total stock of existing condominiums in Bangkok reaching 39,515 units, as of the first quarter of 2005. Surveys also show that 83 new condominium projects, with 14,093 units, were launched during 2003-2005 and are due for completion in 2005-2008 and 63 per cent are located in the CBD’s Sathorn and Sukhumvit areas.

According to Jones Lang La Salle sales rates for some of the newly launched projects have slowed in recent months, although those with carefully targeted markets have sold well. The rapid sale of units in Baan Klang Krung and Lumpini Place, launched earlier this year, provide a good example of this trend. Meanwhile, completed buildings report an average sales rate of almost 100 per cent. The rate of new supply has slowed over the last three years with 5,500 units launched in 2003, 8,100 units in 2004, and 3,600 units in 2005. As sales rates are slowing and a large amount of supply is already available in the market, the number of new units to be launched in 2006 is expected to decline further and selling prices of condominiums are therefore likely to stabilize.

CB Richard Ellis says that the condominium sector in downtown Bangkok has become much more globally focused of late. There has been a significant improvement in the design and quality of properties, enabling Bangkok condominiums to compete with those in other major cities around the world. The company also noted significant changes in the lifestyle of younger Thai generations who have shifted gradually from living in single detached homes to condominiums. This trend, they say, is most noticeable among white collar workers.

Until now, as a result of increased demand, prices for condominiums have been rapidly increasing in Bangkok, appreciating by as much as 20-50 per cent over the past three years. This trend is most clearly demonstrated in the price of Grade A condominium projects in the CBD‘s Sathorn area, which in 2002 cost Bt65,000-70,000 per square metre, and are now Bt85,000 -120,000 per square metre. Despite these increases, in comparison with other countries in the region, the prices for Grade A condominium projects in Bangkok remain attractive. The equivalent properties in Hong Kong, Singapore and Shanghai would cost around Bt800,000, Bt300,000 and Bt100,000 baht per square metre respectively. Meanwhile, with the exception of Shanghai, the average yield in these cities is lower than in Bangkok, which enjoys 4-6 per cent returns. Condominiums in Bangkok offer superior quality in terms of layout, specifications and facilities, which is one of the key attractions for foreign investors from within the region.

Investment profiles suggest that by far the most popular choice in the Bangkok condominium market are two and three bedroom units, the former attracting nearly half of the total number of purchasers. The top five nationalities with regard to foreign investment in the sector are: British, American, Singaporean, French, and buyers from Hong Kong. At present, rental supply is increasing at a slower pace than the number of expatriates, the latter growing at a rate of 10-13 per cent per annum. New condominium units therefore show great potential with sustained return yields of 4-6 per cent and impressive historical capital gains. Acquiring condominium units in prime locations is proving to be an increasingly popular and attractive investment choice for both Thai and foreign investors. Like many, Robert Collins sees a bright future, both in Bangkok and other parts of the country. "I´m very optimistic about the year ahead," he told TPR. "We’re not seeing prices come down yet, and this is true of the whole of Thailand."

Chiang Mai

Condominiums in Chiang Mai not only offer a more economical investment opportunity than Bangkok; they also provide a more relaxed lifestyle choice for residential purchasers. As a result, there is a steady influx of new foreigners to the city who buy or rent condos and keep the market buoyant.

There are three high end condo developments currently under construction in Chiang Mai. Twin Peaks is a luxury development by the Japanese-Thai partnership Siam Zokei and offers five different types of unit between 44 and 90 square meters at Bt50,000 per square meter (furnished). There is also Hillside 5, with extremely luxurious apartments offered on a rental only basis and Sritara, which is developed by Bangkok company Arunawa and located out in the hinterland. These projects are being marketed to both a foreign and mid-market local clientele. High end units of between 35 and 120 square meters sell for just Bt22,000 per square meter in Chiang Mai.

Manus Nararatwanchai, marketing director for the Twin Peaks project, feels things are changing on the Chiang Mai condo market. "In the past, people just went ahead and developed condos in Chiang Mai without really knowing the market," he told TPR last month. "Now the situation is different, we understand exactly what foreigners want in a building, Twin Peaks is both Western and Japanese, not Thai, it’s designed for investment and quality living in the centre of Chiang Mai."

According to Manus, developers are also looking at tourist growth in the city and competing indirectly with the luxury hotels. Many of Chiang Mai’s visitors come back and stay for longer periods, even spending part of their year living there. These are the people Twin Peaks is targeting. The company is even planning to include a travel agency to complement their residential services. "No one else is doing that," he said. "We are not following the trend, we are leading it."

Despite these upscale projects, B grade developments continue to dominate in Chiang Mai with a number of middle market options on offer aimed mainly at students and therefore located close to the university. There is also steady demand for units within existing developments, which continue to increase in value if properly maintained. The fact that many Condo blocks in Chiang Mai remain at least partially empty, often due to repossession can also provide entrepreneurs with abundant and profitable investment opportunities. More companies are now purchasing these excess units and renovating them for resale or lease.

Pattaya

Pattaya, one of Thailand´s most popular holiday destinations for both local and foreign visitors, is less than two hours´ drive from Bangkok and about one hour from the new Suvarnabhumi Airport. The residential condominium market in Pattaya is therefore expected to experience robust activity in the coming year, due to rising demand for residential properties and a general resurgence in the property and tourism sectors.

Since the announced opening of the new Bangkok airport, Pattaya has begun to see the widespread construction of new retail facilities such as shopping centres and a movie complex, international hotel chains, and lifestyle facilities such as golf courses. All of these will benefit Pattaya and broaden its appeal as a convenient leisure home location.

Until now, a lack of new condominium projects launched since 1994 has resulted in a limited supply, particularly in Grade A stock. Most of the businesses in this sector over the past five years have focused on the resale of units in existing projects that are more than 10 years old, and the market only really began to see the emergence of a new supply in late 2004.

A number of new grade A condominium projects are now being actively marketed in Pattaya. These include two Northshore developments by Raimon Land Plc, and Le Royale Beach project, which is being developed by Wise Power Land Co. Ltd. Most new projects are expected to complete construction over the next two years and will cater to a broad market that stretches from middle-end to high-end segments, with selling prices in the region of 60,000 – 75,000 baht per square metre. These are high-rise condominium buildings located along North Pattaya and Jomtien beaches, respectively. In fact, over half the Grade A projects are located in Jomtien, with the ambitious new development known as the ‘The Sails’ paving the way for further growth.

David Gray from East Coast Real Estate believes the outlook remains extremely positive for Pattaya’s condo market. "2006 looks to be a very optimistic year for condos," he told TPR. "There are several new developments that will come on line in March and April. There are also several apartments that are 95% sold already. We’re talking about some very high end projects here, for example, Northshore. Developments like this are doing extremely well, so I’d say the future looks bright, with excellent sales. Our own company recently sold Bt100 million worth of property in just a week."

Demand for condominiums in Pattaya is coming from not only end-users, but also expatriates renting out units. Given the strong demand and limited supply, there are still opportunities for developers to start new projects. However, new projects will need to match increasingly high buyer expectations in terms of location, design, quality and price. Those which meet the exacting standards of their customers will also have to offer a good yield for owners who either sell or rent out their units. "Something that’s interesting," says Gray, "is that locals are buying the condos too. It’s not only people from outside Thailand who are buying because these properties represent very good investments. There are a lot of resales too; an investor who put down 20 per cent and bought a condo for Bt4.5 million was recently able to sell it for 5.7 million, thereby almost doubling his money."

Other International companies like CB Richard Ellis also expect to see developers launching new residential condominium and resort home projects in Pattaya and stronger interest among buyers, both for owner occupation and investment. Pattaya is at the beginning of a new property cycle, they say, and as demand continues to improve the residential market is becoming attractive for both local and foreign investors.

Phuket

The Phuket condominium market has grown considerably over the last two years and now has a total value in the region of US$265 million. As of September 2005 there were 29 new condo projects totaling 1,017 units under development. This included 15 new projects launched after December 2004. The majority of units are priced from Bt5-15 million with rates at around 60,000 per square metre.

In Phuket, 13 out of the 29 projects have sold over half of their units already and seven have already sold over 80 per cent. In fact, in the post-tsunami economy the Phuket condominium market has shown superior resilience when compared to the island’s tourism industry and the outlook in terms of both supply and demand is very strong for the coming year. New infrastructure projects such as the International Airport extension, the Tsunami warning system, new marinas and shopping complexes are also under way in Phuket and these will add to the appeal of what has long been a popular destination for residential development.

Larry Cunningham from Phuket One Real Estate explained why he thinks condominiums are a good option for some investors on the island. "Condos are definitely the preferred investment opportunity for foreigners here," he said. "But the challenge in Phuket is to find something for everyone, what each person needs. Marketing real estate back home is easier. Different nationalities are familiar with different ideas: Australians love condos because they’re freehold. They are familiar with the concept from back home. As regards leasehold, that’s no problem for buyers from Hong Kong or Europe for the same reasons."

Norbert Zuber works with Watson Property Group on Phuket, the developers of the Bel Air Panwa project, which is an 82-unit condominium on Phuket that is selling exceptionally well. He also believes the condo market will continue to grow on the island. "Phuket is an exclusive and prestigious destination, so condos will sell well here," says Zuber. "Bel Air Panwa was launched in May last year in Hong Kong. At New Year we reached a position of 60 per cent sold. At Bel Air many of the investors will be coming in and out of Phuket, so we will naturally look after rentals for them when they are away.

For those buying for financial or lifestyle reasons, and seeking class and exclusivity, there’s no question about it – they will be interested in Phuket."

One of the few factors that may put people off about condo purchases is the tax question. According to Cunningham, The total tax payable on condo purchases around Phuket is around 6 per cent, compared with just 1 per cent for a leasehold property. However, there are signs that this may soon change.

"Many new projects are putting in a clause that says that if the laws in Thailand change – and there are rumours in the corridors of power that they might – then it will be automatically possible to convert the leasehold to freehold. A lot of new projects are putting in this clause. You will find it in Phuket Peninsula and on Kamala beach, The Palms, to name just two examples."

Legal issues are also often a concern for buyers. When purchasing a condo foreigners need to be aware that ownership of the entire building must be 49 per cent non-Thai and 51 per cent Thai. This percentage is calculated on the floor size rather than the number of units sold. TPR asked Araya Akomfoonthorn, a partner in the Property and Environment Dept of Gary Biesty, partner at Johnson Stokes & Master to outline the law.

"The difference between a condominium and say, a serviced apartment, is that there is just one owner for an apartment, but for a condo there’s a title deed for each unit," she explained. "The condominium law is therefore the only Thai property law which states that foreigners can have direct ownership of a property."

In certain cases, with BOI approval, the government once allowed foreigners to buy 100 per cent of a building, but this practice stopped last year. "Now it’s only 49 per cent," Araya confirmed. "However, if you were allowed to buy 100 per cent before the new law came in you can still continue owning that percentage today."

Koh Samui

Koh Samui’s first condominium project is already selling and due for completion in 2007. The development, known as Kirikayan will feature 17 luxury pool villas offering two to four bedrooms and 23 one and two bedroom freehold condominiums including six unique penthouse units with roof terraces and outdoor Jacuzzis. Khun Satid, project manager for the Sunny Ville Company which is developing the development, believes more firms will follow suit around the island.

"It’s difficult to predict the market on Koh Samui at the moment because there is so much development," says Satid. "But I believe condominium projects will prove just as popular here as they are elsewhere in the country because foreigners find it an easy and comfortable way to invest."

Kirikayan is designed like an upmarket resort complete with spa, sauna, private and communal pools. The property is low rise and set in carefully landscaped gardens that preserve the natural vegetation. Eight investors have already bought properties in Kirikayan from countries as diverse as the UK, South Africa, Singapore, and the USA.

"The show house will be ready to view in six months," adds Satid, "and the entire project is due for completion in December 2007. We will not wait to sell the properties before building them. From the first of January we had 150 workers on site and the construction will be professionally supervised at every stage."

Projects like this are in marked contrast to the huge high-rise developments that are proving so popular in Pattaya and Phuket, but on a small island like Samui, Kirikayan may have found an alternative approach to condominium development that will suit the needs of a more boutique oriented clientele.

Whether it is resort style facilities or city dwellings, unless the laws of foreign ownership change, it seems condominiums are set to continue leading the market in Thailand as the most attractive and convenient way for foreigners to own residential property outright.

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Samui Condos.