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Learning from Property Cycles of Decades Passed

Category: , Posted:11 Dec 2010 | 10:50 am

The Phuket Gazette.
Those of us of a certain age have come to appreciate that learning from the past is never a bad idea.
Those around Southeast Asia in the 1990s witnessed the region virtually burst at the seams with new property developments. Bolstered by a "golden age" of rises in the stock market, appreciating currencies and the resulting property market boom, a generation of nouveau riche was born.
Budding entrepreneurs and strong conglomerates enjoyed home-field advantage with access to credit, connections to land-owners and the ability to maneuver the Political landscape to push development projects through.
It was a Field of Dreams "build it and they will come" mentality until the market crashes of 1997 – the "Asian contagion".
Welcome to 2010, and round two of the "tiger economy's" fight for success.
As Asia is leading the world out of the 2008 global economic crisis, many are asking the question: "Are the good times here to stay'?" In other words, "Has the region learned from its mistakes in the first round of the 'fight' which saw it knocked clown to the mat?"
The playing field is much different now than it was in the 1990s. At that time, the West was leading the world with its quest for dominance in all things military and economic.
Now it is the East that is poised for global leadership with China and India behind the wheel.
Although the sub-prime mortgage crisis in the US sparked decreases in oil prices, a hedge fund "Houdini act" plunging UK and Euro currencies and a global recession, Thailand is experiencing a reverse trend.
Despite a series of political hijinks – which have been all-too-well documented in the media – Thailand has seen a skyrocketing domestic property market, massive liquidity in firms listed on the Stock Exchange of Thailand (SET), and a "rubber-band effect" of recovery, even seeing growth in the personal holdings of high-net-worth individuals.
Today, as we start what looks to be a new economic cycle, the sustained period of overbuilding, primarily in Bangkok, has reached a critical point. Both established properties and new developments are carrying significant amounts of debt.
The Bangkok "syndrome" is having a trickle-down effect on resort destinations including Phuket, Koh Samui and Chiang Mai.
The hospitality industry is continuing to push the limits with entrepreneurs developing even more hotels in virtually every part of the country.
As Thailand struggles to recover momentum in the tourism industry, it is faced with the likelihood that a mass model for development has to be adopted in order to tap into new demand and increase in numbers of tourists.
It's a tricky issue, as even growth for growth's sake – without a mass model – can be sustained for long periods of time, causing significant damage in the long term.
The most profound effect on hospitality investment is that business decisions are not based on sound financial logic.
Rather than making an economically wise investment, prospective hotel owners often want to develop a new property as a showpiece or legacy – leaving existing hotels out to pasture.
So, we have arrived at a crucial point and have to start asking the question: "When is enough, enough?"
Curbing Thailand's enthusiasm for new hotels is not going to be easy, but it is – and must stay – on the government's agenda.
Greater incentives for redevelopment such as zoning and tax incentives for upgrading existing properties are a logical stalling point.
While 1997 seems like a long time ago, it remains a painful memory of just how things can, and often do, go wrong.

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