Clouds form on the SKYLINE

Dark is the night as the local industry struggles to cope with a double blow that has kept potential buyers and investors on the sidelines

Dark is the night as the local industry struggles to cope with a double blow that has kept potential buyers and investors on the sidelines

Unstable politics and tighter credit have hit the local market hard in the latter half and no end to the gloom is in sight. But this acid test will leave the industry in better shape than ever, with only truly tested warriors the last men standing

Thailand’s property market next year will encounter two big waves – the global economic tsunami and prolonged local political problems – despite positive signs from easing inflation, falling prices of steel and oil, and a possible extension of the government’s tax incentives.

For the local market, 2008 has been a volatile year. The market in the first two months of the year continued to be sluggish, a trend triggered late last year by the rising prices of oil and steel and political uncertainty.

The sentiment of homebuyers recovered in March after the government announced tax incentives that took effect from March 29 this year to March 28, 2009. Sales of most property developers, especially those developing low-rise units or units ready to be transferred within the period, soared in the second quarter of the year.

But the sales boom lasted only a few months and were reduced to a trickle when the People’s Alliance for Democracy seized Government House in late May. Many homebuyers put off their decisions, as they were concerned about the impact of political strife on the economy while some potential customers were simply in no mood to buy.

Bad signals from the endless political conflicts and high inflation driven by soaring oil prices were seen in a steady decline in housing sales among many listed developers, according to a report by the securities firm Asia Plus.

Sales of 14 major listed developers dropped from an average 30 billion baht a quarter to 28 billion baht in the second quarter and 25 billion baht in the third quarter, a gloomy testament to the fact that even the tax incentives could not help lift the demand.

The decrease affected not only sales but also realised revenue. Customers who had booked units failed to win a nod for loans from financial institutions, which became increasingly cautious in approving mortgage loans.

Many developers found the average rejection rates of their customers by banks rose from 15-20% to 20-25% in general and from 20-25% to 25-30% in the middle- to lower-priced segment where customers were quite sensitive to the state of the economy.

Atip Bijanonda, president of the Thai Condominium Association and deputy managing director of the listed developer Supalai Plc, said the rejected loan application rates inflated the overall housing stock as more untransferrable units were added to the supply.

“Some [developers] needed to offer resale units at discount prices but this didn’t mean losses or lower profits for them as they had already got down payments of 15-20% of the unit prices from the previous customers,” he said.

At the same time, some developers tried to re-sell to the rejected customers smaller-sized but lower-priced units or ones that gave them a longer time to make the down payments.

Thongma Vijitpongpun, chief executive of the listed developer Preuksa Real Estate Plc (PS), said that after rejection rates and cancellations rose, the company needed to track each customer’s payment capability and tried to fix the problems as soon as possible in order to re-sell the units as quickly as possible.

He said the economic slowdown had a negative impact on homebuyers’ confidence but real demand still existed. Unlike buyers in the middle-priced segment and those shopping for second homes, not very many first-time homebuyers delayed their decisions.

“The impact on homebuyers in the lower-priced segment or unit priced lower than one million bath is greater [than that in the upper segments]. Their expenses kept rising but their incomes stayed the same,” said Mr Thongma, a budget-housing tycoon.

He also foresaw a drop in the residential market growth rate by 5-10% compared to last year. “The government should stimulate demand with megaprojects and extend the tax incentives,” he suggested.

Although the mid-year situation was not so good, many developers had hoped to see sales pick up in the fourth quarter, a high season for housing sales. But so far the situation has worsened.

Their hopes were dashed when the global credit crunch, unleashed by the defaults on sub-prime mortgage loans in the United States, emerged in late August. One financial and investment behemoth after another has since fallen across the world, creating an unprecedented domino effect that brought credit markets to a standstill.

At home, the global credit crunch has raised concerns and eroded confidence among all players. Property buyers have delayed their decisions. Financial institutions have been increasingly reluctant to release both project finance to developers and mortgage loans to consumers. Funds investing in properties overseas have also withdrawn in droves.

The full extent of the impact of the global crisis on the local market is unpredictable as the situation is far from over. But what developers have learned is that they need to adjust their strategies to keep risks at a minimum.

Some developers have downsized their projects or reduced the number of units launched to minimise their investments. Some have opted to increase down payments to compensate for a possible decrease in project finance while others have taken to monitoring the situation on a day-to-day basis.

Anant Asavabhokhin, president of the country’s largest developer Land & Houses Plc, said that in the aftermath of the US financial crisis, liquidity would be tight and real-estate investments by overseas investors would drop.

“The property market next year will face a slowdown as Thai buyers will continue delaying their decisions while foreign buyers will vanish,” he said.

Developers’ business expansion would be limited because it would be more difficult for them to raise funds. “No one [among developers] has announced an investment expansion for next year. Many are hesitant to announce new development plans while some have postponed launching new projects and stayed on the sidelines,” Mr Anant added.

Kessara Thanyalakpark, director of Sena Development Plc and an assistant professor and finance lecturer at Chulalongkorn University, said the indirect impact from the global credit crunch would be more stringent loan criteria both on the demand and supply sides.

“For the lower-priced segment, customers’ behaviour has changed from the past – from selecting whichever banks that offered them the most attractive financial packages or lowest interest rates to accepting any bank that could approve them loans as soon as possible,” Ms Kessara said.

But even in the darkest hours of the crisis, there is always a silver lining, added Ms Kessara. Property developers would be stronger as they needed to adjust themselves to a possible market slowdown. This would screen out non-professional developers and improve the quality of the overall market in the long run.

“It will be more difficult for new and small-sized developers with no credit record to get project loans. It will no longer be easy for newcomers to just enter and exit the property industry. From now on, only truly professional ones will remain.”

About the author

Kanana Katharangsiporn Kanana Katharangsiporn
Kanana Katharangsiporn is a senior journalist with The Bangkok Post, Thailand's first English language newspaper and specialises in property and real estate areas.
Other posts by Kanana Katharangsiporn ( 41 )
Website: http://www.bangkokpost.com/

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