Supply:

The upper end of the luxury villa market has outperformed the Phuket property market as a whole, with many successful property launches. Looking forward, it is evident from the luxury villa pipeline that upcoming supply is expected to be limited in the next 12-24 months. This is due in part to global economic pressures, which are likely to result in the following supply effects:

Certain projects are being put on hold because
a) banks are withdrawing commitments to fund,
b) buyers are unable or unwilling to fulfill their obligations, and/or
c) in some cases, certain developers may be under cash pressure. We may also see a slowdown in new project launches and development progress while liquidity remains tight.

We will see more Thai based developers with access to debt entering the market as opposed to institutional investors, which are temporarily squeezed. For those with capital (purchasers, investors or developers), there will be opportunities to benefit from any temporary softening.

Inflationary pressures on construction are easing due to decreasing energy costs and expected price tabilization for materials in the face of weaker demand. It is likely that well capitalized developers could benefit from lower development costs and associated risk and as such, projects already launched or about to launch, look to have a favourable jump start over the next 12-24 months.

Another supply issue relates to the availability and pricing of land in Phuket. The scarcity of prime beach front and ocean view property, as well as robust land pricing levels, could also be a contributing factor to the slowdown in upcoming supply. The shift to less costly parts of Greater Phuket is evident in the location of upcoming supply, with the bulk of announced luxury villa projects to be situated in the East Coast and Phang Nga areas, as well as Mai Khao. Examples of this trend include new entrants to the Phuket market, Taj Exotica in Koh Lone and Raffles in Phang Nga.

Demand:

In terms of demand, it is likely that we will see a softening in 2H 2008 luxury villa sales and a weak start to 1H 2009. This is mainly due to a ‘’wait and see’’ attitude on the part of purchasers who may be affected by the global financial shakeout.

While Thai instability may be a factor in reduced demand, we do not see this being a significant
or long-term deterrent to buyers. Discussions with real estate professionals in Phuket indicate that while sales are being completed and the top tier market continues to do relatively well, the lower tiered product is facing more of a challenge in today’s environment. This is largely due to over-supply and lower quality products at the lower price points. Conversely, the strength of the top tier segment can be attributed to demand drivers such as a shortage of prime ocean view or beach front property in Phuket, high quality concepts and finishes and a small but exclusive supply of new developments. Another valid reason for the continuing purchaser interest in the high end villa sector is that luxury buyers in Phuket are largely cash buyers, who may be less affected by the market fallout.

Moreover, Phuket’s strong tourism industry continues to bolster the residential market and this looks set to continue. Investment within the lodging market continues, in order to cater to the projected increase in tourist arrivals. Thirty new hotels are currently at various stages of development, with nearly five thousand rooms due to be added to supply through 2011. Of the existing hotel inventory, about 25% (or ten thousand units) are of international rated standard and as such, this additional inventory will increase total supply of such properties by 50% in a short period of time.