Bangkok Office Market
Bangkok’s commercial office market is facing contrasting dynamics; while the overall supply and demand profile is positive, the wider economic outlook means that any optimism is largely unjustified.
Despite a difficult 2008, the commercial market, ironically, enjoyed one of its better years in the last decade, with the large supply overhang of recent times being much reduced.
James R Pitchon, executive director, C.B. Richard Ellis (Thailand) told Property Report Thailand, “Many of the office buildings completed in the last ten years were those that were started prior to 1997 and which were completed as the market improved thereafter. There are very few new commercial buildings in the pipeline with only a couple of notable developments due for completion in 2010, such as Sathorn Square.”
The reasons behind this apparent ambivalence to providing new commercial property appear to have been market driven. Developers have been focusing their attention on the residential market which has seen much stronger returns in the last five years or so. Yet, even in spite of this, the office market is not necessarily poised to enter a boom period anytime soon.
“Although the commercial property market may seem to be doing better than others at the present time, it is still not really a favoured sector because of the low rates of return. Lack of development in the sector is mainly due to thefact that, currently, rents just don’t justify the financing.” Pitchon added.
Still, with a tightening of supply comes the prospect that rental rates will continue to enjoy some measure of support. Of course, against this relatively bullish news on fundamental supply and demand comes the still unquantifiable global economic crisis which has unfolded at an alarming rate and which is very likely to continue to do so.
In the main, the market in Thailand is heavily dominated by multinational occupiers and there is limited scope for expansion given the underlying economic slowdown
Marcus Burtenshaw, director, Knight Frank Chartered (Thailand ) told Property Report Thailand, “It is likely that the prime market will be the first to be affected by the economic slowdown as occupants will be searching for better value as part of their drive to control costs. The ‘B’ grade commercial market actually enjoys a lower vacancy rate, and this will likely to continue to be the case as companies try to lock in lower costs of accommodation.”
In the main, the market in Thailand is heavily dominated by multinational occupiers and there is limited scope for expansion given the underlying economic slowdown. Almost all participants in this group rent office space as opposed to purchase it, which makes the rental market very susceptible to an influx or otherwise of foreign occupiers. However, the affects may be felt less severely as compared to markets elsewhere in the region.
“It is important to remember that rental rates in Bangkok have not risen as rapidly as has been seen in Hong Kong or Singapore where rents almost doubled in a year. Even with a moderation in rates, there is less likely to be a sharp drop that might be evidenced in these other markets,” Pitchon added.
So, these opposing forces might keep the market in check, at least for the near term, but there could be some potential dangers lurking. One seemingly obvious concern is that developers who planned to cash in on the booming residential market might start reconsidering a switch back into commercial projects.
“There are a few good parcels of land in the city, besides those which have already been earmarked for development. It is expected that the market will move to areas slightly further out from the CBD, such as along the stretch of Ratchadaphisek road from Rama IX to wards the Cultural centre.” Burtenshaw said.
Even with land available, a new construction boom in the commercial market is unlikely to occur. This is not exclusively due to market conditions, but can instead be attributed to the lack of credit available to developers. With banks being much more prudent, it now falls to developers to make decisions about medium and longer term investments.
“Whilst residential developments are built to sell, the commercial market is predominately built to rent, requiring longer term financing. In the current environment this is unlikely to be forthcoming meaning that developers will have little appetite to switch their attention to the commercial market.” Pitchon said.
Other factors are also at play that are unique to the Kingdom. Suphin Mechuchep, managing director, Jones Lang Laselle (Thailand) Limited said, “Demand for the last two years or so has been under pressure due to the fact that some foreign companies have put plans on hold pending the political uncertainty. I think the resolution of this will help to offset reduction in demand due to the global economic slowdown.”
[relatedposts]For domestic occupants, the economic environment may not be as severe as for their western counterparts. Even in spite of falling exports, Thailand and a number of Asian countries which were affected by the 1997 crisis are likely to weather the global economic crisis quite well, creating a backstop of sorts for the office market demand profile.
“Demand will likely fall, but the market should fare much better than it did in 1997 where oversupply pushed up vacancy rates to 38 percent, even against the backdrop of a strong economy,” Pitchon said.
Less debt, better balance sheets and more prudent lending policies than in the West will likely ensure that any recession in Thailand will be short lived. This should ensure that Thai companies will remain active in the market, and demand in this sector will likely remain relatively steady overall, especially when considering the wider economic environment.
“There is a feeling that since the new government has been put into place, demand has been getting stronger and so the market should be able to ride out the economic slowdown quite well,” Mechuchep added.
The end product of all of these interacting forces is that whilst there may be downward pressure on demand and rental rates in all sectors, the commercial market could be the first to recover.
by Jack Miles
Asia
Property Report
