While rental yields may seem moderate in the current economic climate, continued low interest rates are likely to ensure market stability as property remains the favoured investment.
Interest rates play a complex role in the property market. On the one hand, they help set the price of property by dictating the affordability of mortgage repayments. On the other side of the interest rate spread, bank deposit rates are eyed with interest, since these are instrumental in driving yield based property investments.
Currently it is well known that deposited funds in a Thai savings account will provide virtually no return, and so property rental yields as low as three or four percent still look attractive.
Dexter Norville, director of property and asset management, Jones Lang LaSalle Management Research said, “Nobody can expect to command the rental yields that they may have enjoyed two or three years ago, as rents have moderated. However, one thing remains constant. A decent unit in a decent building will still be just that when the economy upturns.”
For the current buy-to-let market, affordability is the real starting point in the equation. Rents will ultimately move to a level representing the maximum that tenants are willing to pay. In a market where there is a lack of demand, further downward pressure on rental rates can be evident. Properties are then priced with this in mind, taking into account a yield factor that is attractive enough compared to bank deposit rates to cover risk and effort.
Whilst relatively few buyers in the market are cash buyers, the deposit interest rate argument is powerful nonetheless. When rates are close to zero, a scramble for property ownership is often seen.
“Looking at the market, interest rates haven’t varied much in the last 18 months. In this environment, people are more inclined to diversify their savings and investments. Property traditionally has a yield and so is attractive from that perspective.” Norville added.
In the central business districts of Bangkok, the economic downturn has lead to rental affordability showing itself. Whereas a Bt10m condominium in Sathorn Road would have comfortably provided a Bt50,000 per month rental return in previous years, some owners are experiencing periods of vacancy and are starting to reduce their rental expectations.
Norville said, “Some investors are being nimble in the current market, renting out units at a discount for a short term period so as to cover themselves in the event that rents start to rise soon thereafter. This enables them to secure tenants, whilst preserving a good bargaining position at the end of the term.”
Discounting of rents has not overly affected property prices, since even a four percent yield is attractive in today’s market. Property prices have held firm with the yield recalculated accordingly.
This is all well and good against a stable interest rate background, but if rates move sharply higher, the spectre of property price movements looms. Higher deposit rates will look attractive against these current low property rental yields, and if rents are unable to rise due to affordability, then property prices may need to move down to fill the void. It is a scenario undoubtedly being mulled over currently by potential buy-to-let investors.
Robert Krause, director, Professional Property Consultants Ltd., told Property Report Thailand, “Although some might take the view that interest rates may rise in the future providing savings rates higher than current rental yields, this is likely to be a very gradual process and is by no means guaranteed in any particular time frame. All the while, rental revenue could have been forthcoming from a property investment made at the current time.”
It is worth noting that interest rate rises are usually accompanied by a more buoyant economy, allowing rental rates and property prices to remain firm. The depth of the contraction does support the premise that rate rises will come at a time of recovery.
“Buyers looking to secure a property investment in the current market could well find that low yields today turn into higher yields tomorrow,” Norville added.
In Thailand, recovery will likely lead to an increase in expatriate workers from countries such as Japan, reversing any exodus just as quickly as it took place. Even just an outlook for steadily higher rental returns can be enough to support property prices, ahead of any actual recovery.
Krause added, “It must also be remembered that higher interest rates often accompany periods of inflation. These are periods when money loses its value and so a stance of property ownership is well supported.”
At the same time it is important not to overlook the primary market forces of supply and demand. Typically in low interest rate environments, credit is easy to come by and developers are in a good position to start new projects.
Currently though, the low interest rate environment has persisted alongside very tight credit conditions. Off-plan buyers are also more cautious about handing over deposits. As such, new development potential is being limited to the stronger cash rich developers, providing a higher level of quality stock to the market, but less overall supply. This is welcome news as over supply has traditionally been a strong contributing factor to softer prices in the Thai market.
“For a long term investment, it’s a great time to buy if you have the money available or can get the finance. It certainly is a buyers market as you can negotiate very well in the current environment,” Krause said.
Although there are a number of new residential projects due to be completed in the coming 12 months in central Bangkok, most of these commenced in the years before the economic crisis started.
“It is well known that there will be added supply to the Bangkok market in the short term. This could be a good opportunity as it will likely strengthen buyers’ positions, albeit temporarily,” said Krause.
Thereafter, the Thai property market may well escape a cycle of over-supply, further adding weight to the suggestion that the current market could indeed be a buyers’ paradise.
by Jack Miles