Luxury Villa Property State of the Market

The Phuket Gazette.
For most, 2009 has been a year they wish would just end, and New Year's Day is becoming more anticipated than its more well-heeled relation, Christmas.
Over the past two years, the broad Phuket property market, Thaksin Shinawatra's demise, a once-in-a lifetime global recession and the high profile political events within the Kingdom have made Thailand headline news on breaking stories across the globe.
While the broader resort-grade real estate market has hit mid-market products hard because of its reliance on overseas buyers who have been temporarily sidelined because of financial constraints, there has been much speculative talk on the state of upscale property.
Hospitality consulting firm C9 Hotelworks has done some market research on the state of play for the first half of 2009 and compiled the recently completed Luxury Villa Market Update. The results may surprise many naysayers.
For the period of January to June of this year, sales in the luxury villa market totaled 3.5 billion baht from 19 properties that were sold in the 65 million baht and above category.
A resale market has developed with existing villas producing a total of one billion baht in sales from a total luxury market value of 10 billion baht with 92 units for sale.
Comparing geographical demand, Kamala with its vaunted 'Millionaires Mile' and Nai Thon and Bang Tao with their respective Malaiwana and Istana developments led the pack.
During last year's market overview, the east coast registered developments ranked highly, but the three highest profile projects – Cape Yamu, Jumeirah and Sri Panwa – have moved the majority of their inventories into this year, providing buyers with comparable units to those on the west coast shoreline.
Phang Nga and northern Phuket attained the highest price per square meter – in excess of 200,000 baht – as the desirable beachfront locations could demand premium prices.
Mixed-use or hotel-managed properties as opposed to straight residential offerings are emerging as the preferred investment vehicle in today's challenging conditions. Sales absorption rates for these properties have registered considerably higher and attained higher pricing based on pricing per square meter by 55 percent.
Projects offering guaranteed yields traded faster compared to those with optional rental programs.
Interestingly, there have been a number of cases where hotels have been able to convert repeat guests into property buyers on the basis that they have become familiar with and loyal to the product during their visits.
For developers, the first half of 2009 brought some stability to fluctuating commodity costs with many returning to what they were in the first six months of 2008. This shift has primarily come on the back of a reduction in the cost of steel.
Currently, there now exists less risk to margins than at any other time during the past 12-18 months and longer-term volatility looks to be flattening out.
That said, the fact that labor costs have continued to rise together with inflation has most major quantity surveyors I spoke to believing that costs will remain at the current level for the remainder of the year.
Viewing the prospects of recovery remain dependent not only on Thailand's political and economic issues, but the wider global picture.
With continued flat market conditions expected to continue into 2010, anticipated recovery has been pushed back to 2011.
It's important to note that excellent long-term fundamentals are at play for Phuket: its improving international airlift and number of direct flights, high brand concentration and critical mass of brands.
Investment by the government is being pushed into a new international airport terminal and improvement of the islands road network, while further development of demand generators – marinas, golf courses and the service sector – have continued to grow which all bode well for luxury property.
At the same time, however, the luxury segment is hitting barriers to entry due to limited prime seafront land. This will push new areas of development into Phang Nga and the bay. As a result of the current recession, property launches have been constrained, which has allowed excess product from the supply stream to be absorbed.
Property is, by nature, a cyclical business and once normal trading patterns return, there is the potential to capture a good share of the upswing.
Phuket has continued to evolve from a sector mainly promoted by smaller independent developers into something more in line with traditional norms and standards.
Areas to watch for growth are resales, rentals and high-end fractionals. Given the connection now between hotel chains or managed products and shared ownership, I believe by next year we are going to see this segment becoming a significant niche market.
While the broader market needs to move away from its reliance on foreign purchasers and increase domestic sales, the luxury market looks set to keep on the same successful course for the time being.