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Will Thai property market join Asian boom?

Economic booms and property bubbles normally go hand in hand, and so with growth accelerating around Asia, we are already seeing the beginnings of some property booms around the region. Back in April, the International Monetary Fund’s (IMF) Global Financial Stability Report warned that residential property markets in many Asian countries were in danger of overheating – notably the markets of Hong Kong, China, Singapore, South Korea, New Zealand and Australia – with prices now above pre-2008 levels.

So what then is the outlook for Thailand’s residential property market? Are we too headed for a boom? Booms are generally concentrated on the commercial centres and Bangkok experienced its last boom just prior to the 1997 financial crisis.

The pre-1997 property boom in Bangkok was clearly linked to the corresponding economic boom at that time. In the years leading up to 1997, the country had been experiencing economic growth rates of more than 7% a year, rising to 14% in some cases. Naturally, many people prospered during this period, with riches being made and plenty of “easy money”. Inevitably, this was a recipe for property market speculation, as many people bought new properties with the intention of making good profits on the rising prices.

However, the bust came and many people lost money. Prices in Bangkok today have still not returned to pre-1997 days. It is most unlikely that we will see another boom in the near future.

Apart from the fact that Thailand’s modest economic growth over the past few years has been well below pre-crisis levels, there are a number of other factors which will inhibit future growth in the Thai residential market.

Most of the countries mentioned by the IMF attract high levels of foreign investment in their property markets. Conversely, in Thailand, foreigners account for less than 5% of investments made in the real estate market, with the majority concentrated in resort areas such as Phuket and Pattaya.

Another factor that inhibits sharp rises in property prices in Bangkok is that most people prefer to buy their residences rather than rent. At around 3%, rental yields for property investors here are very low compared with other cities where yields are closer to 8% to 10%. These low yields in Bangkok are clearly a deterrent to potential property investors.

As a general rule, the residential and commercial property markets rise in parallel; commercial rents in Bangkok are therefore also very low compared with other major cities. Rents for commercial properties in Bangkok costs approximately 1,200 to 1,500 baht per square metre, well below those of other commercial centres across the region. By way of comparison, commercial rentals in CBD districts in Singapore and Shanghai are quadruple this level.

Although all this is perhaps discouraging for property speculators, it is good news for companies based in Thailand as rent is obviously a very important cost of doing business.

Meanwhile, generous tax incentives are being offered to companies that establish regional operating headquarters in Thailand and Thailand’s economy is expected to grow by at least 4% this year despite the disruptions of the past few weeks. GDP rose by 12% in the first quarter, the highest quarterly growth rate in Thailand for more than 15 years.

The rapidly growing regional economy will also ensure steady future growth in Thailand. The IMF expects emerging Asia, which excludes Japan, Australia and New Zealand, to expand 8.5% this year and 8.4% in 2011.

The key challenge now for the Thailand property market is for confidence to be restored. Fortunately, past experience has proven that Thailand is very resilient, with foreign visitors and investors very forgiving, coming back quickly despite various problems.

While Thailand is not likely to experience a property boom in the near future, we can be optimistic that investor confidence and economic fundamentals will continue to improve and that future growth will be sustainable, rather than the boom and busts that occurred in the past.

Piya Sosothikul, is an executive vice-president with Bangkok Bank. Meeting the Challenges appears every two weeks. Questions, comments or suggestions can be sent to asiafocus@bangkokpost.co.th

  • Published in Bangkok Post: 31/05/2010 at 12:00 AM
  • Newspaper section: Business


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