No Bubble Yet (Bangkok)

Property price inflation in Thailand has been quite benign, which could lure foreigners wary of established but struggling markets

Thailand is facing a very limited impact from the sub-prime mess in the United States, mainly because Thai banks are still haunted by the ghosts of 1997 and have been very conservative in their lending to the real estate sector, says James Pitchon, the executive director of CB Richard Ellis.

However this does not mean Thailand is completely immune from sub-prime tremors because between 30% and 49% of the buyers of high-end residential condominiums are foreigners.

‘‘The good news is that because Thailand insists that any foreign purchasers bring in the money from overseas, limiting the ability of foreigners to borrow, the market for condos above 80,000 baht a square metre is extremely unleveraged because 40-50% of the buyers are cash buyers,’’ says Mr Pitchon.

‘‘It’s probably the most unleveraged luxury property sector in the world.’’ While this is very positive, he warned that with residential real estate markets falling in the US, Spain and Ireland at the moment, coupled with the risk that markets in other western countries could also slump, it raises the spectre of western buyers initially becoming reluctant to buy Thai property. ‘‘But on the other hand it also provides an opportunity that as other markets go down people will focus on markets that are not in a bubble and have not had dramatic price inflation — and Bangkok is one of those cities.’’

It is also worth remembering that the sub-prime crisis is bigger than most people think. Mr Pitchon notes that it is not merely a problem of property owners in the US defaulting on their mortgages but a problem caused by many types of structured credit, leading to a credit crunch in numerous categories.

Domestically the market has been subdued, with CBRE data showing total new residential supply for the first nine months of 2007 fell 20% year-on-year.

‘‘If you look at mortgage loan growth there was almost no growth in the total value of new residential loans and that has been the situation since 2004,’’ says Mr Pitchon. ‘‘So for the overall Thai market, the broad-based picture is that we have less new supply, almost no significant growth in new domestic mortgage loans, we have had conservative lending from Thai banks and we understand that banks have been rejecting up to 30% of new mortgage applications.’’

Mr Pitchon sees a key change in Bangkok, which is becoming more centrally focused. Historically the ‘‘centre’’ of the capital has tended to shift to wherever the newest buildings were being built. Years ago, Charoen Krung Road was the main zone, followed by a shift to Surawong and then Silom. When offices were built on Sathon and Wireless roads, they became the central business district.

‘‘The centre could have kept moving whenever and wherever people built new buildings, that’s stopped, because the mass transit systems have anchored the city centre,’’ says Mr Pitchon. ‘‘It’s no longer this moving object, now all developments are focused on the masstransit stations and very much in the city centre where networks cross over.’’

This has led to Bangkok for the first time seeing a scarcity of land. ‘‘Bangkok has only historically seen scarcity of development sites in certain locations. This has now changed especially in Lumphini and parts of Sathon and Sukhumvit,’’ he says. ‘‘For example (the developer) Sansiri bought an old apartment building on Soi Ruam Rudi and demolished it in order to build a new condominium building. That has been very rarely seen in Bangkok before. I think this central focus to the city underpins value.’’

Bangkok is also seeing quite dramatic price rises, mostly linked to replacement costs. Over the last 10 years land costs have essentially doubled in the city centre areas and construction costs have increased by 40% since 2000. Construction costs of a luxury condominium project now range between 50,000 and 80,000 baht per square metre of net sellable area. The land cost element of the net saleable built area of a high-end condominium in the Lumphini area is around 50,000 baht a sq m, down to 25,000 baht in other central zones. It means that the combined cost of construction and land of these high-end condos is at least 75,000 baht a square metre before a single baht of profit and marketing costs and professional fees is added. This clearly illustrates that Bangkok is not currently facing a price bubble because prices are closely linked to replacement costs.

Total downtown condominium stock last year was 42,700 units with 4,700 being completed during 2007. CBRE expects 8,600 units to be completed this year. Prices continue to rise in the best quality projects, units available at the recently completed Athe´ne´e Residence are fetching up to 150,000 baht per sq m and record prices have been obtained by Sukhothai Residences, where the average is 220,000 baht per sq m and a penthouse fetched 343,000 baht per sq m.

Mr Pitchon observed that these statistics indicate that Thailand is going in the opposite direction to the rest of the world with prices continuing to appreciate.