Bangkok developers are turning their attention to the top end of the market because record prices are being set, and a tightening of credit for buyers at the lower end of the property market means fewer new launches at the lower end of the sector, according to new research from CBRE published this week.
In its latest report, the real estate firm said that in Q1 2015, many of the larger Thai developers were targeting upper class purchasers, who are less impacted by slow economic growth and continued rising household debt that the Kingdom is experiencing.
According to the research, the number of condominium units launched in the down town area during Q1 increased 143 percent year-on-year (Y-o-Y), while the number of launches in the midtown and suburban area declined by 34 percent Y-o-Y.
This first three months of 2015 also recorded the lowest rate of new launches in the midtown and suburban areas since Q4 2011.
Despite a weak mass market, record-breaking prices and high sales rates were achieved in some newly launched condominiums in the Bangkok downtown area. More than 90 percent of Nimit Langsuan, a freehold condominium by Pace Development, was sold within the first month of its launch with record prices of in excess of THB 300,000 per sqm.
CBRE believes that success was limited to projects that matched buyers’ expectations in terms of location, quality, design, and specifications to justify the high asking prices.
As for the midtown and suburban market, the majority of units launched during the first quarter were from small- to mid-sized companies. Well-known developers are currently more cautious about launching new condominium projects in the midtown and suburban areas, according to CBRE.
The pressure from the large number of midtown and suburban condominiums expected to be completed this year, coupled with the lower level of demand due to tighter lending criteria and reduced appetite from speculators, have contributed to the stagnant midtown and suburban condominium market.
CBRE’s research noted there are more than 78,000 midtown and suburban condominium units expected to be completed this year, and more than 32,000 units will be completed in 2016.
The risks is whether speculative buyers of these units, who have only paid 10 percent of the price, will default if they cannot resell before completion, and how many end-user buyers will be able to get mortgage loans. Banks have continued to tighten their mortgage lending criteria and this has made it difficult for end-users, especially lower- and middle- income earners, to secure loans.
Listed property developers can only recognise revenue once a project has completed and the units transferred. The cancellations from both speculators who cannot resell units and buyers who cannot get a loan means developers could be left with built but unsold inventory which they may have to discount to sell. This will deter speculative buyers purchasing new projects if they believe that prices are no longer rising.
CBRE said that speculative purchasers are a necessary part of the condominium market because they make quick decisions – quickly allowing developers to attain the 40-50 percent sales rates required by banks for them to start drawing down project loans. Sales will be slower without speculators.
Looking forward, CBRE believes that developers will continue to focus on the upper-income market especially in the downtown area and the midtown area along the edge of the downtown area.
Some newly launched downtown condominium projects in this quarter have set a new price benchmark; but this does not guarantee that every new downtown project will be able to achieve such high prices.
More than 90 percent of tenants who rent residential properties in Bangkok with rents of more than THB20,000 per month are expatriates, noted CBRE, and most expatriates who come to work in Thailand prefer to rent rather than purchase property. This is because they are usually only here for a few years and it is very difficult for them to borrow money to fund a property purchase. This makes buying less attractive.
The number of expatriates holding work permits in Bangkok has increased to 78,818 at the first quarter of 2015, increasing by approximately 9.5 percent from Q1 2014. This number excludes diplomats and expatriates with work permits in other provinces but actually living in Bangkok.
Typically, expatriates prefer to live in a limited number of areas. The majority choose to live in Sukhumvit between sois 1-63 and 2-42, Sathorn and Central Lumpini. The Sukhumvit area remained the most popular location among expatriates because of easy access to the BTS skytrain in Sukhumvit and a large number of shops and restaurants
The supply of standard expatriate apartments (single ownership buildings) has only grown slightly over the past ten years because of low yields, which makes it less attractive for developers to build new apartments. Condominium units (multi-ownership), where individual owners are buy-to-rent investors, are direct competitors of apartments in the Bangkok expatriate residential leasing market.
The number of new condominiums has grown much faster than the supply of new apartments, and CBRE expected that about 30- 40 percent of units in most new downtown condominiums have sold to buy-to-rent investors.
Some 70 percent of condominium units under construction in the downtown area are one-bedroom or smaller units however, there is strong rental demand for two- and three-bedroom units; some 75 percent of CBRE’s leasing deals are for two-bedroom or larger units.
The demand for well-decorated two- and three-bedroom units is going to increase provided that expatriate numbers continue to grow. The demand for two- and three-bedroom units is starting to exceed supply given the age and condition of older condominium buildings. As demand will exceed supply, lump sum rents that have stayed at the same levels for almost 25 years will finally increase. However, lump sum rents have not increased, but occupancy is rising for two- and three-bedroom refurbished apartments and condominiums, and there is a waiting list for some of the best apartments.
Overall, CBRE concluded that Bangkok’s condominium market sentiment for the remainder of the year would largely depend on the buyer’s confidence, the developers’ ability to transfer completed units, and the presales of newly launched projects, especially in the midtown and suburban market where buyers are most impacted by banks’ tighter lending criteria.
The full CBRE research report can be read here.
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.sg