Thailand Crisis

The chance of failure for condominium developers in Bangkok has grown to almost 50 per cent as competition heats up amid a glut of fresh supplies, warned Aquarius chief executive Yongyuth Chaipromprasert.

After conducting a study during the past five months, the building consultant said even inner Sukhumvit, an area once deemed immune to downturns, “no longer guarantees success”.

“The average take-up rate for Bangkok condominiums is now 54 per cent,” he said. “That is considerably lower than about 70 per cent for last year.”

“Of the 50,000 units that are expected to be launched this year, about 46 per cent won’t be sold,” he deduced from recent statistics. “One out of every two developments could fail.”

“The inventory left over from last year should also add to current stock, making the situation even tougher for sellers, especially newcomers,” he said.

With 15,000 unsold units from last year and 25,000 units from this year, the market will have an additional 40,000 units to clear in 2009. (Nation)

From time to time, Nation publishes a bearish article, AKA not written by the Boiler Room. Refreshing. Anyone can understand the problem : the market is flat (in volume)… but dozen of news condos are being built all over Bangkok… That leads to : over supply.

The Boiler Room hates this word…

[look at the chart of condo registrations, from 2000 to 2007]

What’s new at the boiler room ? Some tasty stuff.

The Thai government’s economic stimulus package is expected to help boost property trading activities in the second half of this year, according to a leading real estate services agency.

Supin Meechucheap, president of Jones Lang LaSalle (Thailand) Co, said that although the government issued varied policies to stimulate the economy in the first quarter of this year, key external factors including surging oil prices and concerns over the global economic slowdown had undermined Thai economic growth.

It resulted in an unfavourable climate in property trading activities with the demand for housing and commercial building units growing at a slower pace since consumers’ purchasing power had declined.

Simultaneously, potential homebuyers are now being more careful in committing themselves to debt obligations from housing purchases and investors are more selective in investment.

In addition, rising oil prices had pushed up construction costs, which directly impacted the housing market.

However, she projected the state economic stimulus package would produce a fruitful result in the second half of this year. (TNA)

You got the picture ? I translate for you.

The market was supposed to boost during the first quarter, thanks to the marvelous “stimulus package” of our amazing government. Unfortunatly, things do happen. Yes. Too bad. Although, nothing to worry about (oil, inflation, global economic downturn, USD crisis, really small fry).

Therefore… we need to wait… Again…. until the second half of the year. But you’ll see : it’s going to rock ! We promise !

One advice to Jones Lang LaSalle : have some rest guys… You’re going to need it badly by the end of the year.

More of the Dildo Economy, more stimulation to come

The government claims that GDP growth will hit 6 % this year, but meanwhile… creates packages to “stimulate the economy“. We had a first one (42 billions) then a second one (for rural people, with an absurd total amount of 570 billions THB), and now a third one, to boost… the real estate sector.

Anyway, it’s a good news for the boiler room.

In an attempt to boost the real estate sector in Thailand as well as assisting the poor to be able to own their own homes, the Cabinet on Tuesday approved additional measures to stimulate the economy, which it targeted to grow by at least six per cent this year.

Under the added measures, the registration and mortgage fees for buildings with land areas not exceeding one rai will be reduced from two and one per cent respectively to 0.01 per cent.

The incentive will be enforced the day after the order is published in the Royal Gazette and remain in effect until March 28 next year (TNA).

What’s new in the boiler room today ?

I follow up my piece about Ocean 1 in Pattaya, the so called future “tallest condo in Thailand” (read here).

At that time, I wrote that the prices were surreal.

An article about… Phuket, published in Bangkok Post today, gives some weight to my views, I believe.

It’s about “Bluepoint” . This “condominium is located on a hill and offers stunning views of the developed Patong beach. Bluepoint is causing quite a stir with 12 of 20 units in the small boutique development already sold. Bluepoint costs 110,000 baht a square metre.“

Canadian architect, eco friendly, “grass roofs and and lots of natural shading“… the whole nine yards. As for the price of the land… Patpong Beach is the must.

Prices for studio at Ocean 1…. start at 140 000 THB per square meter. 28 % more.

Now compare the market, compare the vista, compare the name : Pattaya / Phuket… You see ?

Fair enough, some of you would think that both are EQUAL slumps. I’d fully agree.

But my point, within the boiler room, Ocean 1 is for sure a… winner.

[by the way, it's worth reading the article from Bangkok Post, you'll find some delicious pieces... like the quote about the "hundreds of restaurants" available on Patpong Beach and the fact that now "they have the Jungceylon Plaza" ! For sure that's a good reason to buy a condo over there ! It's really funny]

When I started looking for an apartment in Bangkok… something was weird I thought : the advertisings with the sign “to sale or to rent“.

This kind of ads was against the (conventional) wisdom and my western logic. When you own a property, you’re supposed to know what you want to do : to sale, or to rent.

You don’t let others, or the events, to decide.

Anyway. Here is a little game. Peruse some of the gazillions websites dedicated to real estate in Thailand. And find those famous ads “I-didn’t-make-up-my-mind” or “cheese-or-desert“style.

And then, calculate the ROI with the rent, compare to the price to buy…

What to think about this little funny game ? Well, some facts about the market.

Some owners in Thailand… are just looking for the “Sucker” with a big S.

Therefore, they put a real amount for rent (because the competition is high, and the offer so large)… And a totally insane price for sale.

It’s the Sucker-Price. A price that defies gravity law, common sense and… ROI rules.

And then, like if they have laid an egg, they sit on, and wait.

They can wait a very long time. But no matter what, they will stick to the Sucker-Price.

And in a way, it’s higly ironic, the more they wait, the more they need the Sucker-Price.

“Rent 30 000 THB or Sale 7 200 000 THB“… That’s the thai way to do business.

[here are some examples, have fun]

Bangkok’s serviced-apartment sector is expected to face a chronic oversupply in 2011, when 38 new projects with 6,580 units worth Bt27 billion come on stream, a study by Colliers International Thailand warned yesterday.

Twelve of the 38 projects are being jointly develop between local and foreign groups. The global partners are mostly from the Middle East, Singapore and the United States.

The remaining 26 are by local developers, but most of them will be signing contracts with global chains to run the apartments.

A breakdown of the new supply shows a strong concentration along Sukhumvit Road, with 3,659 units, or 56 per cent of the new supply.

The central business district (CBD), which includes the Sathorn, Silom and Lumpini areas, will house 1,029 units, or 15.6 per cent of the new supply.

The remaining 1,892 units are located outside of these areas.

Colliers managing director Patima Jeerapaet said there were now about 10,685 units in 75 serviced apartments in Bangkok. The sector enjoyed an average occupancy rate of 83.33 per cent last year. In 2006, average occupancy was slightly higher at 85 per cent. (Nation)

It means that in 3 years, the offer will increase… by 62 % (from 10 685 units now to 17 265 units in 2011).

Keyword  : “could face oversupply problem”.

Here is an update of my chart, with the whole year 2007.

This chart shows the “Condos/Apartments Registrations Nationwide“, per units, from 2000 to 2007 (source Land Department, stats here).

Definition given by the Bank Of Thailand : “This is the request to register the developers’ condominium when the construction of condominium and facility is complete 100%, excluding decorating.”

Orange = Bangkok. Yellow = other provinces.

“The market is healty” . Bangkok had in 2007 a growth of 11,7 %, down from +34 % in 2006 compare to 2005.

More and more new condos built, everywhere. We shall rejoice ourselves.

Interesting… The president of the Thailand’s International Real Estate Federation, himself, start to speak about “oversupply” for the condos market in Bangkok…

You know my positions… as a good contrarian, when the boiler room itself starts to say that the wind is turning around… it’s time to buy an outbound ticket : one way.

Assoc Prof Manop Bongsadadt, president of Thailand’s International Real Estate Federation, estimated average demand for residential projects in Bangkok and the surrounding area at 66,000-80,000 units a year, with nearly 40 per cent being condominium projects. But nearly 20,000 units have been launched this year, exclusive of nearly 30,000 existing units.

Meanwhile, a number of property developers plan to launch other city condominiums numbering 30,000-40,000 units in the second half of the year.

That means city condominium projects launched this year combined with last year will number 80,000-90,000 units. Compared with real demand in the market, Manop believes city condominiums are facing an oversupply and a possible bubble situation. (Nation)

Bold, isn’it ? But wait, it’s getting better.

Nexus Property Consultants managing director Apisit Limlomwongse agreed with Manop, adding that nearly 30 per cent of customers buying city condominiums now were investors planning to generate rental fees or speculators hoping to generate high profits from sales.

“We cannot separate how many buy for rental or sale, but this trend has shown strong growth this year compared with last year,” he said.

Again, we need to understand that this kind of language, from thai people involved in the real estate business, is quite new.

They say exactly what I’ve been saying on this blog since one year (read here).

And it confirms 2 basics observations, on the ground, that everybody with a little common sense and who is living in Bangkok can make :

-cranes everywhere, glossy advertisings everywhere, new condos everywhere… The heat is definitely on.

-once finished, most of these new condos buildings… stay remarkably… empty. At night, with only a few lights… Now, that’s strange, isn’it ?

But, confident we remain : the new government will save us. Interest rates will go down. Mega projects will boost the demand. And no, there won’t be any crisis.

Gimme more.

There is one theory that states that recessions are correlated with… skyscrapers (read article here).

In 1999, Andrew Lawrence, then of Dresdner Kleinwort Benson, created his skyscraper index. He suspected that construction of the world’s tallest buildings coincided with the business cycle – and he was right.

Let’s hope it won’t be the case in Thailand…

After a long wait for the approval of its environmental impact assessment (EIA), construction is due to start on March 30 of Thailand’s tallest residential building, the Ocean 1 Tower on Jomtien Beach, according to its developer. Bruno Pingel, chief executive of Siam Best Enterprise Co Ltd, said the company had not expected such a lengthy EIA process for its 12-billion-baht project, which consists of one 91-storey building of 327 metres high.

It latest prices are 125,000 baht per square metre for levels 10-14, 130,000 baht per sq m for levels 15-50, and 135,000 baht per sq m for levels 52-85. All studios are 130,000 baht per sq m. All prices will increase by another 10,000 baht per sq m on the construction date.

However, Mr Pingel said he believed that the Ocean 1 prices were very competitive and realistic when compared to other developments. (Bangkok Post)

Bruno Pingel will probably know what the expression “non sense” means.

140 000 THB/sqm for a studio ? In Pattaya (a hell of a dump) ? And “realistic when compared to other developments” ? You have to love it.

Bubble. Mania. Burst.

UPDATE
You’ll find here a portrait of Bruno Pingel (august 2006), a german doing business in Pattaya.

In the article of Nation, there is a very important detail about the financing of Ocean 1 :”Half the budget will be borrowed from TMB Bank, while the remainder will come from the company’s revenue from selling the units.“

It’s exactly the problem that a new law (Escrow Account Law, waiting for the King’s endorsement, read here) wants to address  : developers who use down payments from customers as cash flow for… construction !

A good piece about real estate in Thailand, published by International Herald Tribune. As usual, you won’t find this type of article in the thai press… It’s a shame.

Resort housing developments in Thailand typically have fancy Web sites, catchy slogans, glossy magazine ads and even celebrity sponsors and launch parties at five-star hotels.

What they often lack, however, is money to construct the actual buildings.

“A lot of projects never get started because of funding difficulties,” said Larry Cunningham, managing director of Phuket One Real Estate.

“First-time developers often just have enough money to buy the land with no construction. When they don’t get sufficient sales, it never gets built. In the future, this could be quite a negative for the market.”  (to continue)

Here is a perfect example of the relations between property developers and banks.

Kasikornbank, Bank of Ayudhya and TMB Bank have jointly extend 4.14 billion baht in loans to support the construction of the Millennium Residence in the Sukhumvit area.

Each bank will lend 1.38 billion baht to MR Sukhumvit Ltd for the luxury condominium comprising two 50-storey and two 51-storey buildings to house 604 units on a 12-rai plot situated between Sukhumvit sois 16 and 20. The company had sold 179 of its units as of the end of last year. Construction is 20% completed and is scheduled to be finished at the end of next year.

The banks believed that condominiums near mass transit routes would continue to gain interest from buyers due to high fuel costs. (Bangkok Post)

-it’s notorious that there is an over supply of condos, especially in the “luxury segment”. This is why many developers have switched to small units (between 1 and 2 millions THB) to tap the middle income buyers.

-so why these 3 banks believe in this grand project, located in an area, already full of condos and luxury projects ?

-then, you have to admire the astonishing logic : “The banks believed that condominiums near mass transit routes would continue to gain interest from buyers due to high fuel costs.”

-but wait a minute : do you think that buyers of luxury condos care about… gasoline prices ? Will they take the BTS to go to work in the morning ?

I’m sure that ING (dutch bank), the new “strategic partner” of TMB (the Thai Military Bank, with a lot of financial problems) gave its green light for such project…

I don’t say that the Millennium Residence is a bad or a good project (I do not have the details, what is the total cost of the project compare to the 4,14 billions loans, what was the initial financial plan, why the banks are apparently stepping in now etc.) it just shows how the boiler room can work.