Bangkok housing developers upbeat

By David Fullbrook

BANGKOK - Despite loose talk of a property crash, Bangkok's developers remain sanguine. They sense an enduring boom because Thailand's population is young, housing has never been more affordable thanks to market reforms that eliminated much of the risk, and the economy is humming along despite expensive oil. However, there is one bubble ready to burst — luxury condominiums.

Developers are confident long-term because most Thais are young and aspire to own a home. "If you look at the demographics over the next 10 years there is going to be a huge segment in that baby-boom generation that will enter the market, similar to what we saw in the [United] States in the 1960s and 70s," says Liakat Dhanji, chief executive of Golden Land, a developer of condominiums and offices who will start work on some of Bangkok's prime sites over the next two years.

Household sizes will fall to 3.7 from 4.1 over the next five years, estimates the Bangkok Metropolitan Administration, generating demand for another 400,000 units. That roughly equals the current construction rate. "I think you will see sustainable growth in residential building over the next five years," says Dhanji, a Canadian who has worked worldwide and came to Bangkok after the Asian financial crisis.

After the dust settled from financial crash in 1997, banks badly burned by shoddy corporate lending switched their focus to consumers, albeit with a little nudging from the government. That kicked off a credit card boom similar to that seen in South Korea a few years ago, which predictably turned from joy to horror when Korea's economy stumbled. Such a situation could yet be Thailand's.

Banks also eased terms for mortgages. By 2002 mortgage terms lengthened to 20 years or more and interest rates fell as low as 4%, against a backdrop of land prices 40% below their peaks — terms not as soft as in Hong Kong or Singapore, but certainly a lot easier than the 12-17% interest rates common before the crash, when banks rarely gave borrowers more than 10 years to repay.

Even then, because of the nature of the market, it was doing very, very nicely. Consequently, unless interest rates rocket overnight, they should not have a major impact on demand.

"The Thai housing market is more resilient to interest rate rises than other markets because it is being bought primarily not as an investment or savings vehicle, but for its use, to live in. We had a booming market, with interest rates at 12%," says surveyor James Pitchon, executive director of CB Richard Ellis Thailand.

Banks now only require deposits of 20% for properties worth up to 10 million baht, and 30% for properties costing more than 10 million baht (US$244,326). It seems likely that as banks become more comfortable and competition increases, deposits will fall to 10% or less.

Easier mortgages are not the only change making home buying safer and more affordable. Many developers now escrow deposits. That will become mandatory if regulations under consideration for the past few years ever see the light of day.

Pre-approved mortgages have become common over the last few years, encouraging people to buy. "Not every developer follows this, as banks will only extend this arrangement to credit-worthy developers," says Dhanji, who insists on pre-approved mortgages.

After a buyer places his or her deposit, in escrow preferably, the bank releases the mortgage cash to the developer in exchange for land-title deeds. Because the developer pays interest on the mortgage until construction is completed, there is an added incentive for them to finish on time.

Mortgage reforms also underpin the market, supporting demand when the economy softens or interest rates rise, giving developers hope. "The affordability index is good, even if global interest rates climb," says David Nardone, an American who is president of Hemaraj Land, a Bangkok-based developer that is moving from industrial estates to high-style condos, starting with The Park, arguably Bangkok's most luxurious condominium.

Together, these measures eliminate much risk, a fundamental shift that makes a repeat of 1997's residential market meltdown unlikely. Thailand's residential market more closely resembles mature markets seen in Hong Kong, Singapore or the United Kingdom. More change is to come, perhaps by the decade's end.

Mortgage-backed securities will appear as the local bond and futures markets develop, further spreading risk. Buyers need more choice. Invariably, mortgages are simple repayment plans today. Sophisticated mortgages, such as endowment policies — most likely linked to a major stock index as Thailand's bourse remains small and volatile - also will emerge at some point.

Another major change that may take longer to develop is Bangkok's secondary housing market. It remains limited for now because Thais much prefer buying new houses. That is due partly to superstition — even highly educated Thais are wary of ghosts in older houses — and partly because they can afford new homes. It may take another decade before Bangkok's vast tracts of empty or under-utilized land are taken up, forcing people who want to live in a particular area to buy older homes.

However, some developers at least are not sleeping quite so easily these days. Spoiled-for-choice buyers are savvier, scarred by 1997's crash. Expensive oil has trimmed growth forecasts for Thailand's healthy economy. Stocks are wading through a swamp, sapping confidence. Meanwhile, construction costs are up as developers crowd in. "I think you will see more challenges on the demand and supply side, there's a more cautious tone," says Jim Chang, City Realty's senior executive vice president.

Those challenges coupled with a condominium supply surge could elbow marginal developers, the speculators, out of the market. "If consumer confidence starts to decline, and with so many new players in the market, there will be a squeeze in the short term, however, the long-term indicators remain intact," says Dhanji.

Projects yet to break ground that are still chasing buyers may remain a mirage of glossy brochures. Increasingly, banks will not advance loans until a developer pre-sells a certain number of units. "Right now, if you are still planning people may not want to build for you, especially if it's a fixed-price materials contract, it loses its sexiness," says Chang, a Taiwanese who has ridden Bangkok's property ups and downs for 23 years.

Forecasts project 11,000 new condominium units will go up within two-to-three years, against 36,000 already in the market, of which around 3,000 are grade-A. Fears are growing that a bubble in this luxury sector could burst soon.

Consequently, prices, now above pre-crash highs, have peaked for this year, at least as sales slow. Top-end condominiums along prime Sukhumvit, Silom and Sathorn roads are unlikely to go much beyond the 90,000-100,000 baht a square meter seen now. Average prices are around 75,000 baht per square meter.

Meanwhile, the market for single detached housing is in better shape, with 50,000 properties completed annually — 90,000 below pre-crash levels — and comfortably within the 80,000 a year real demand envelope. Houses are more affordable due to easier mortgages, despite prices averaging 12 million to 15 million baht, up from 6 million to 8 million baht pre-1997.

"There's very little speculation in the housing market," says Nigel Cornick, Raimon Land's chief executive.

Copyright 2004 Asia Times Online Ltd. All rights reserved.

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