Is Phuket Property Too Expensive?

Posted: 14 Feb 2009 | 12:00 pm

As we continue our voyage into 'uncharted territory' the favored catchphrase of every politician and multinational CEO with regard to current market conditions: nothing is at all clear. My days are marked by more jitters and swings of opinion than a visit to Surin park on a Sunday with my daughter who loves going up and down on the teeter-totter.

Of late the question of land values and, more recently, overall property prices have spurred a healthy and no doubt long-term discussion on whether property in Phuket is just too darn expensive, and if it was lower would there be a faster market recovery? Aside from the obvious answers being yes, no or maybe it's a complex and long reaching question with no easy answer.

The island's property market is not a cohesive single entity that can be easily discarded into a dumpster, but, as in recycling, you need to sort through the various elements and break it down into manageable chunks of information. A vast majority of the mid - 5 million baht plus - to upper tier - 65 million baht plus - developed real estate is strongly dominated by foreign buyers. Research indicates this to be in the region of 60-70% owned by the foreign segment with the remainder being domestic purchasers.

Taking this a step further you have end users, those who buy a house and use it as their primary residence, and then others purchasing a holiday home, second residence or lifestyle investment unit which is often hotel managed or rented through estate agents. The majority of these properties were purchased on a cash basis and there is limited exposure to local banks within this segment.

Despite its phenomenal growth over the past five to six years, Phuket remains a developing market - albeit one which has certainly moved further into its cycle over the years. The lack of available mortgages and debt, recent emergence of a scalable resale market and a predominance of small private developers over institutional and listed firms would indicate it still getting it's legs in a broader global or regional marketplace.

Taking a step back to 2002/2003 when the market started an upward cycle of double digit year on year, capital appreciation, extremely favorable supply/demand ratios and prices have continued upward at a significant pace each and every year. Take a reality check and you can see that the current slowdown did not begin with the start of sub prime. It commenced 24 months prior to that with the start of the political instability of the Thaksin government, a foreign business act scare and serious increases in supply of new developments at every conceivable price point.

Tracking the market during the last two years, certain segments have continued to perform well - the upper tier luxury villa market which has capitalized on an under supply of product and the lower end condo market within the 2-4 million baht range, which has seen an influx of Thai speculative buyers who can leverage units with banks. Mid range condos, townhouses, apartments and the recent rash of smallish pool villas all within the 7-12 million baht band in tertiary locations have continued to come at rates far faster than they can be sold.

Arguably, there currently exists a robust supply of mid range product at a time where demand is flat, thus making speculators and industry firms, such as brokers, wonder how to spur an increase in transactions. Unfortunately this comes at a time where every corner of the globe is facing severe crises that many experts are saying will continue to sway for at least 12-24 months. There is no easy quick fix.

Talking to developers and agents, prices, for the most part, are holding on property; although many buyers who are actually purchasing stand alone units and smaller developments have received some discounts. For the most part these are completed inventory where only a few units are remaining and it's more a matter of businessmen who want to exit an investment and cash out.

It's a questionable strategy in this type of market to advocate large scale devaluation of property in order to attract new market share, as, currently, there isn't a wider overseas market in existence. The effects on existing purchasers of property, who's value has held against other diminishing assets, would create possible challenges in attracting new buyers in the future. Its easy to sell cheap, but at the end of the day whether Phuket wants to go the way of Spain or other mass housing markets remains a key question.

A overlooked key factor is currency, which remains important when many buyers bring funds from overseas. Over the past year the Thai baht has depreciated 15% against major currencies and the current forecast is for a further five. This presents a 20% decrease for overseas buyers on property in Phuket. New property launches are declining and the construction pipeline looks to be constrained for a sustained period. While some discounting may take place on existing products, the market absorption of these excess units will be accelerated and see a more balanced demand supply ratio going forward.

As pointed out in this column, many times in the past, the key to growing Phuket's market remains in the availability of financing which allows it to compete with developed markets, along with greater foreign ownership rules. While many may argue that lowering prices may benefit short term growth; long-term success and this market's sustained viability can only be achieved if stability and investor confidence are maintained without a knee jerk reaction to the world around us.

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