Can a recession good for Bangkok Real Estate?
For those of use who live in the real world, and therefore the Capitalist World (the only form of human development that has any long lasting durability) we have to face the fact that with the Booms come the Busts, as with all aspects of life, with the Smooth comes the Rough!
We can’t have it good all the time and one can have too much of a good thing, so there have to be bad times ahead even in the best of times.
Ok enough with the clich?s, let’s get to the point. Bangkok and the whole of Thailand has just mimicked the rest of the world in that it has been a part of the Global Recession, a recession that has lasted in some parts of the World such as the US for 6 Quarters and in countries like the UK for at least 7 Quarters and is still not out of the woods.
Thailand, having learnt its lesson from the 1997 Asian Economic crash, where Thailand and particularly Bangkok was the catalyst in disaster has been better placed than the UK, US and Europe to withstand its own domestic recession, however as a modern global country, Thailand is of course dependent on and vulnerable to the successes and failures of the West.
Of course Thailand’s exporters such as those of Electronics, Cars and Rubber will suffer when the Western markets enter recession and this will bring a negative effect on the economy, particularly Bangkok’s which is the hub of all trade in Thailand. However Foreign Direct Investment (FDI) will also be affected and therefore expats living in Bangkok and potential immigrants to Bangkok will also be negatively affected.
International Property Agents have reported earlier this year that Condo sales to foreigners are down by 36% on last year, which is of course not good news for the market as a whole, especially when it is considered that up to 17% of condos in Bangkok are indeed owned by foreigners since the Condominium Act of 1997.
So by looking at the figures if just the reduction is Sales of Bangkok Condos to foreigners are taken into account, then the Condominium market as a whole has reduced by approximately 6%. However of course it is more than this as many Thais have not been buying, in fact Thailand’s largest developer LPN Development PLC has stated that in the first 2 months of 2009, Thai clients were looking but not buying. In fact they thought that property prices would drop considerably and so condos, town-houses and detached houses in Bangkok were not purchased. In fact the prices did not drop so much and so now there has been a realization of their mistake and now there is a relative buying frenzy in the last few months of this year. In fact projects like the Ideo in Wang Wien Yai, and The Citrine also located near to the Wang Wien Yai BTS station in Thonburi have sold out.
So the question has been answered….right?
Well not quite!
Yes there are lots of negatives, and of course by definition a recession or even worse a depression is not a good time for any economy. However it is also not all gloom and doom, as every cloud has a silvers lining (I will try and make this the last cliche for this blog :)).
When recession hits it is a chance to reduce the also-rans in the market. And therefore the Bangkok market is left with far more quality rather then quantity as a result.
As the market is deflated, the banks who supply the blood to run the economy are the first to notice. Repayments are not made, and non-performing assets (NPA) are on the increase. Therefore Banks are reluctant to lend, to either developers or potential owners. This is going to have a short-term negative effect on individuals or individual companies, but in the long-term will be of benefit.
Only the Developers with low debt to equity ratios will be able to obtain money from the banks and therefore, many ‘first time’ or ‘relative amateur’ developers will not be able to obtain the loans.
In addition Bangkok Bank announced that Developers have to close on between 20-25% of units in their pre-sales before further loans will even be considered. Not only that but the location and quality of the buildings are also greatly considered in times of recession. Siam Commercial Bank have stated that the new developments they have been supporting all have to be within 200m of either a BTS or MRT station or a BTS or MRT line. And the quality should be such that the units can realistically sell for THB 100 000/ sqm, which represents the higher-end of the market.
So to summarize it can be seen by laying down the following criteria that only a few and choice projects will in fact be allowed to proceed in such tight market conditions:
- Developer must be credit worthy and be of sound quality and reputation
- The projects must be located in desirable and highly sought after areas (such as near the Sukhumvit BTS, Silom BTS or Ratchada MRT lines)
- The buildings must be of high-end quality so that they can realistically attract buyers of up to THB 100 000/ sqm
So what does this mean to the medium term future of the Bangkok Real Estate Market?
Well it initially reduces the supply of properties in Bangkok and in particular condominiums in Bangkok. It seems just the best and most popular areas of Bangkok such as Sukhumvit, Silom, Sathorn and Ratchadaphisek will be significantly developed further in the near future.
Projects that have already started and have received banking approval will be finished in due course and will be of good quality. In addition as the developers have had to undergo strict financial tests to gain the loans they need, then clients that have invested in off-plan condominiums can be assured that they are likely to receive the property as planned.
Potential owners of condos too will be subject to strict investigations before they are issued with a mortgage and so there should be less defaulting on loans and the development of a sub-prime mortgage crisis, such as has been experienced in the West.
So all in all the future of the Bangkok Property Market looks good, with only the best developers being granted loans to develop condominium, townhouse and detached house projects near the Bangkok metro and transit systems. And in addition they have only been granted the right to do so when the buildings are of high quality.
Also with the US announcing its departure from recession and the other G8 nations (except for the UK) it looks like Bangkok’s market will move towards better times ahead!