Real estate prices are falling in Phuket !

    Since the sub-primes bubble burst, Thai authorities keep churning out that Thailand - whose GDP depends for over 70% on exports and tourism - is immune to the economic crisis.

Now property prices are finally decreasing in Phuket.

Even if, officialy, prices are still increasing, in fact, everything is negotiable and some property owners have already reduced their asking price by as much as 45% !

    For example, this house, located in Rawai in the South of the island, which was initially advertised at THB 10.5 million ($ 315,000), has recently been sold for THB 5.9 million ($ 175,000). 

 

Another example is this 5-star hotel of 41 luxury villas, for sale at THB 380 million ($ 11.3 million), was advertised at $ 14 million one year ago.

But, it with property developers in difficulty that best bargains can be found.   
 

For example, this unachieved project in Cape Yamoo (click here for details) whose asked price dropped from  $ 1,790,000 (THB 60 million) to $ 1million (THB 35.4 million). The project includes 4 villas under construction and a land plot with services to build 3 additional villas. one of the 4 villas under construction is worth alone 40 millions Baht which would cover the asking price for the whole project.

Or the land plot of this 60 condos + 6 villas project in Bangtao (click for details), which was for sell on the basis of Baht 11,5 million per Rai (about $19 per sq.ft) is now priced at THB 10 million per Rai (about $16 per sq.ft).


In Botan Village, a 3,800 sq. ft villa was bought for THB 25 million ($715,000). The buyer was not able to come up with the money so the villa is back on the market at only THB 16 million ($335,000).

Then does it mean that we are in crisis?
For, even if there definetely are some good bargains at the moment, the downward trend has not become widespread yet. Especially the prices drop shown here tally the asking price of the properties not a loss compared with the price the property was previously bought.

    I will first list the negative arguments, which would cause a lasting drop in prices, then the positive arguments, which plead for a stabilization of the market; then I will try to forecast a trend for the short  / medium term.

1. Negative arguments
   
1. Political Instability:
   The conflict that broke out in 2006 has two consequences.
   First, it revealed the deficiency of the Thai legal system in protecting ownership rights especially in the real estate sector.
   Second, the sight of the airport held up by demonstrators gave fear that the country could go out of control.
2. The international crisis has repercussions on the Phuket market.
   Before, local banks did not offer loan to foreigners. Foreigners willing to purchase a proprerty in Thailand used to pay "cash", but with money that they borrowed to a bank in their country of origin; this loan was secured by the purchaser's personal assets. This is no more possible today.
   A Colliers International Thailand survey showed foreign purchasing power, especially among home-buyers from the US, Europe, Hong Kong and Singapore, had already dropped 20-50 per cent. Nevertheless the grounds of this study are questionable since Colliers is not really involved with the Phuket market.
3. A "P/E" (price/earning ratio) deeemed too high: a low rental yield due to high purchase price.
4. High maintenance cost.
   Generaly, maintenance fees in gated communities in Phuket are around 50  ฿ per m². owners who pay over $500 fees every month are not unusual.
5. The fall in row material cost, and consequently the fall of construction costs, will lead to a decreasing of price of new properties and therefore will lead the whole market down.
6. An anarchic development that takes no care of the environment.
    
2. Positive arguments
   1. Even if the political crisis is far from over, troubles have apparently calmed down. It is noticeable that there is in Thailand a feeling of safety that does not exist anymore in Europe.
   2. Yes, Thailand is hit hard by the economic crisis, but its impact on the local real estate market, especially in Phuket, is different than in the rest of the world.
      First, there was not here really any "sub-prime" effect, since the banks were previously not or rarely granting loans.
      When a market flourishes, a certain part of speculation is unavoidable.
      Nevertheless, what I have observed here since 2004, as a real estate broker and as a property developer is not a pack of investments funds looking for the best return and building up a bubble, but rather individuals who were buying a property for their own use, i.e. holiday or retirement. Since the main goal was not to make money on a short term, and since these pruchases were paid up cash, finally few property owners really need to sell there property at this point.
   3. The P/E is indeed high, in particular for properties located near the West Coast beaches and oriented toward the seasonal market. However, it is still possible to find properties with a decent rental yield for properties oriented toward the resident market -instead of the seasonal market- and bought at a reasonable price.
   4. The deflationist argument will stand only over a very short period of time, since we are talking about limited (non-renewable) ressources: steel, copper, cement, without talking about oil -which multiplifies cost rise with transportation cost- all these commodities are "exhaustible". Besides, since we are on an island that is even smaller than Singapore (respectively 543 m² and 693 m²), the price  of land for development is likely to remain high. Moreover, many projects have been canceled or suspended, which reduces steeply the offer.
   5. At last, there is what I would call the "non-quantifiable".
      Here are a few shots of the islands of Phang Nga Bay. It's an hour drive away from Phuket and it's wonderful.It's an essential factor; people come to Phuket for i's quality of life.
       

    Before concluding, I would like to highlight that the Phuket real estate market is, by essence, slow. We are evolving into an 'international" market, which means that, once the property is put for sale, that it is advertised on an international medium, we still need to wait for the prospective buyer to organize a trip to Phuket (i.e. that he/she makes some free time, books a plane ticket etc...) in order to visit it.  This lengthens the time during which the property stays on the market. When it is counted in days in Singapore, in Phuket, a property is rarely sold in less than 6 months.

Therefore, when I speak about short term, I look at the high season 2009-2010 or even 2010-2011. 

At a national level, analysts working for big real estate companies such as Supalai, Land and Houses or  Asian Property Development forecast less transactions for 2009, even thought the value of properties should decrease by 5 to 10% due to construction cost fall and despite the fiscal incitation created recently by the gouvernment.

This analysis cannot be applied directly onto the Phuket market, because of its specificity. 
On one hand, fiscal incitations (tax allowances on sales would raise from  ฿ 100,000 to 200,000) will have a an impact only on sales inferior to THB 3 million (about $80,000), and Phuket market is rather high end.
On the other hand,  it is rahter a second home market than a main home market: the buyers' concerna are different.

Nevertheless, I also think that few transactions will occur during the next 12 to 18 months.

Afterwards, it will depend on 2 parameters, i.e. the international economic situation and the local political situation, but I would rather be inclined to think that the market will consolidate and even start raising again.

Comments

[condo Philippines]

The price so high. That's all I can say about this.

Deirdre