Distant Sound of Thunder

Hunting season is now open and the "woods" are teeming with "bears". We've seen a rapid regression in both global and regional growth, so it seems if you want to run with the bulls, a plane ticket to Pamplona would be the most likely way to accomplish it. Here in Thailand, snack boxes full of cash seem easier to come by than boxes of chocolate and what appears to be the eminent demise of the Samak government is causing uncertainty for overseas investors.
While this column appears in the Phuket Gazette, and thus to its wide range of readers abroad, I yearn to return to the routine issues of the local property market. Fortunately – or perhaps unfortunately, depending on where you sit – the local property market remains highly leveraged and somewhat dependent on foreign buyers. In short, the fate of Phuket's market outlook goes well beyond this island's shores.
As the world turns at an ever-increasingly active and reactionary pace, so do events in our own backyard. The critical questions are what threats and opportunities exist in the Phuket property market today and where will trends take us on this roller-coaster ride.
Given the huge across-the-board fall in sales demand during the first half of 2008, the question on every developers tongue is when will the mass of buyers return? With pockets of growth, such as strata-titled freehold condominiums in prime locations, together with resales of upper-tier luxury villas; generally the wind is out of the sails in market momentum. In the short to medium term, an ongoing US recession, global oil shortage and hyperinflation point to challenging investment conditions
Tourism as always dominates Phuket's fortunes and despite 2007's 5-million-plus visitors, ongoing oil crises will have a marked impact on travel. Much of he current growth has been as a byproduct of the entry of a multitude of low cost airline carriers (LCCs). Over the past few months, we've seen Jet Star cease Singapore flights and Nok Air is now in the throes of a fiscal crises. In all likelihood, there will be a culling of the herd within the LCC sector. Airlines that stand to suffer are those that operate on lower margins and simply don't have the balance sheets to ride out losses from astronomical increases in operating costs. For all the industries that depend on tourism, lower airlift capacity will mean reduced tourism numbers.
Today's hotel room pipeline of new supply highly favors products intended for the five-star market, with substantial new inventory entering over the next 12 to 36 months. Market fundamentals of supply and demand would indicate that average room rates during the absorption period would most likely flatten or decline.
Should the region experience a large-scale economic downturn, hotel rates would be affected across the board, with pressure from upper-tier hotels hitting mid-market hotels and even further to economy properties. It's a domino effect that naturally occurs when supply outstrips demand.A secondary key indicator would be that with higher airfares, there will be fewer more affluent long-haul business travelers and greater dependency on lower-rate paying, short haul and domestic visitors.
Considering these factors while looking at the long term, while keeping in mind Phuket's tourism infrastructure, world-class resorts and easy access to key feeder markets, Phuket's ability to weather short-term pain for long-term gain is a key advantage, as history has shown. One of Thailand's greatest strengths in tourism is its value for money for tourists and quality hotels. With continuing depreciation of the baht against major currencies, pent-up demand will focus on the most attractive markets during an upswing, which is a compelling advantage for tourism here.
Given that a wider diversification of residential pool villas is expected, condo hotels and managed properties will start eating into the traditional hotel market. The increasing trend towards direct internet bookings is also leveling the playing field between internationally branded properties and independents.

With its interdependency on tourism, the property market looks posed to develop to a more mature industry. The mixed-use formula currently used by many developers to fund or capitalize on hotel-managed properties is already starting to see some cracks in the silver lining and guaranteed returns on capital for such projects may be at risk if tourism numbers decline.
The growth in resales, which is becoming a major segment in transactions, is a given at this juncture. This growth displaces a portion of new sales or off-the-plan purchases. With rising construction costs and a slowdown in sales demand, delays in large-scale projects are being incurred and a number of new buyers view completed projects as carrying less investment risk.
These conditions would point to a supply surplus and most probably a flattening of prices, with some segments even experiencing short-term declining values. With the lack of domestic buyers leveraging real estate, strong market fundamentals and most buyers having the necessary liquidity, unlike other markets we appear to be headed for a soft landing.
Investment horizons for property vary and most buyers take a long-term view. Phuket has already survived long, drawn out recovery from the 1997 Asian Crisis and shorter recovery times through SARS, the tsunami and the 2006 coup. Owners in the market today are best to raise their heads to a longer-term horizon, but there remains every reason to believe the Phuket market basics remain sound.
As for potential new buyers, currency depreciation means greater buying power with dollars or euros, and there are more products to choose from either new developments or resales. We can't ignore the world around us, but buying opportunities arise during recessions. The bears might be behind every tree in the forest at the moment, but keep an ear to the ground for the thundering of hoofs down the track with the return of the bulls.