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Buyer Bailout: Bottom Feeders Could be Phuket's Saving Grace

Category: , Posted:18 Oct 2008 | 12:00 pm

As Black October continues to unfold, there seems to be no escape from the chaotic fallout global financial markets' free fall, Thailand's political uncertainty and now what appears to be an Asian contagion. While Phuket remains a relative backwater, clearly there is no escaping the harsh reality of current events. We are seemingly are updated on a daily basis of talks of long-term recovery periods of up to five years along with questions about how near the bottom we are, while fear and speculation run riot.
For the property investor, developer or business owner in Phuket, these huge chunks of uncertainty have put a kink in everyone's horizon. Looking at current events, it's simply impossible to know what's in store, but in the short term defined trends are already starting to emerge, which is what I'd like to examine in this column.
With a current and growing surplus of supply over demand of property on the market, many people are under the impression that this is a relatively new phenomenon. A look in the rear-view mirror shows that take-up (or market-absorption) rates did not truly slow with the change of the Thaksin government and the 2006 coup – we'd have to go back 18 to 24 months and look at the significant new supply pipeline as the main indicator. The growth of property developments has simply outpaced demand. However, there has also been knock-on effects from the Foreign Business Act scare, considerable appreciation of the Thai baht and continual political instability in Thailand.
A health check of the real estate industry here reveals that one of the first causalities of a prolonged downturn would likely be a reduction in the number of brokers. During the onset of the boom years, you could count the agencies on the island on two hands – there are now well over 100 agents on the island. This sector looks certain to have a shakeout quite soon, but it's not all bad news as it forces entrepreneurs to look at their business model and perhaps innovate new products or services that will pay dividends in the long run.The local economy, though, will suffer – especially the car dealerships that have flourished with boom sales of Fortuners, CRVs and Vios.
As discussed many times in this column, resales appear to be representing a growing share of the property sales market. Off-plan products look set to attract increased competition due to growing concern by buyers about liquidity and financial security overall and the perception that existing homes and condos offer less risk. Looking at the long list of completed or nearly completed projects, first-in buyers have been smart, taking up the best units and leaving the less desirable ones with location issues, inferior views or less attractive factors.
In the past, strong demand has meant little difference in prices for these units. We have not seen developers of multi-unit estates or blocks with just a few units remaining for sale for long periods of time. However, it is expected that prices for these "last to go" units will now be reduced to close out developments, which means better value for those who buy these last remaining units.
As the global financial woes continue, we have already seen "value shoppers", or what some may call "bottom feeders", on the market. This is actually a positive trend as it initiates sales transactions across the board. It's more than likely that this could be the saving grace of the coming high season, with a resurgence of these types of buyers coming in.
Overall, as our market is not highly leveraged with debt, land prices have no reason to retreat and there is little indication that they will go anywhere but up. Unit prices in prime west coast locations have no imperative to move down, but the existing inventory of developers or investors who have already broken even or are earning profits, will see units being sold cheaper. This is not a doomsday scenario by any means. You can't take margins to the bank, but you can take cash.

Offspring products, such as rentals, also look set to see some price falls, but Thailand remains a value destination and short-term cheaper prices will lead to a more stable market and the restart of a new business cycle.
A key emerging trend will be the conversion of condos and villas into hotel-type products in order to get sustained yields from them. While tourism numbers will be constrained in the short term, the longer-term expectation is that this will eventually be a direct competitor of the traditional hotel market and mimic many other leisure destination markets, such as Hawaii or Spain.
While it's important to have a reality check on current events, the political and economic landscape will have already changed by the time this article sees ink. Even the Internet news agencies are having a hard time keeping pace with the latest developments. Property continues to be considered one of the safe havens in economic turbulent times, but it's a long-term play. The sun will shine sooner or later, but until that day comes, there will be gloom.

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