Phuket Luxury Villa Market Update Part 2

As discussed last week, the upper end of the luxury villa market has outperformed the Phuket property market as a whole, with many successful property launches despite political turmoil and global economic woes.
In last week's column we drew upon recent market research to outline some trends in the luxury villa segment, defined as projects with units priced at 65 million baht and above. This week we will take an in-depth look at some of the factors affecting supply and demand for luxury villas.
Looking forward

It is evident from the luxury villa pipeline that upcoming supply is expected to be limited in the next 12 to 24 months. This is due in part to global economic pressures that are likely to result in some projects being put on hold.
From the lending side, banks are withdrawing commitments to fund projects. Also, buyers are unable or unwilling to fulfill their obligations. In some cases, certain developers may be under cash pressure. While liquidity remains tight, we may see a slowdown in new project launches and progress on developments already underway.
We will likely see more Thai-based developers with access to debt servicing entering the market as opposed to institutional investment vehicles, 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 costs are easing due to decreasing energy costs and expected price stabilization for construction materials in the face of weaker demand. It is likely that well-capitalized developers could benefit from lower development costs and associated risks. As such, projects already launched or about to launch would appear to have a favorable jump start over the next 12 to 24 months.
Another supply issue relates to the availability and pricing of land in Phuket. The scarcity of prime beachfront and sea 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 along Phuket's east coast, as well as Mai Khao and Phang Nga. Examples of this trend include new entrants to the Greater Phuket market including Taj Exotica on Koh Lone and Raffles in Phang Nga.
Demand

In terms of demand, when all of the figures are in, it is likely that we will see a softening in second half of 2008 luxury villa sales and a weak start in the first half of 2009. This is mainly due to a "wait and see'' attitude on the part of potential purchasers, who may be affected by the global financial shakeout.
While Thai political instability is often considered as a factor in reduced demand, we do not see this being a significant or long-term deterrent to potential buyers in the upper end of the luxury villa market. Discussions with real estate professionals in Phuket indicate that while sales are being completed and the top-tier market continues to do relatively well, 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 sea view or beachfront 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 and liquidity problems. Moreover, Phuket's strong tourism industry continues to bolster the residential market and this trend appears set to continue.
Investment in the lodging market continues along with projected increases in tourist arrival figures. 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% (about 10,000 units) are of international-rated standard. As such, this additional inventory will increase total supply of such properties by 50% in a short period of time.

Villa Sales Issues

An interesting trend in Phuket is the change to the definition of "luxury villas", both in terms of pricing and location. As pricing levels push upwards, with an average price of 125 million baht in the top tier luxury sector, there is some discussion as to where "high-end" becomes "luxury" and which properties qualify.
In the past, the über luxury was benchmarked to Amanpuri, followed by a few select properties such as Trisara and Banyan Tree. Now, however, the growing supply of properties coming online in the 100- to 200-million-baht price range is re-defining the luxury landscape in Phuket.
Another related change is in that most crucial aspect of any development: location, location, location. It used to be that the west coast with its "Millionaires Mile" in Kamala was the home of luxury in Phuket.

However, with a growing high-end pipeline on the east coast with banner projects such as Jumeirah Private Island, Taj Exotica and the Philippe Starck/Jean-Michel Gathy collaboration at The Yamu, it is likely that the emerging landscape of "Phuket 2.0" is going to be a very different from its predecessor.
Pricing

There are several factors which should help sustain or further drive up price values in the Phuket luxury villa market. The following are among them:
Change in demographics: The Tourism Authority of Thailand has been very effective in opening up new tourism markets. Its current focus on increasing the number of visitors from emerging markets. Visitors from China, Russia, India and the Middle Eastern should allow Thailand – and Phuket's property market – to benefit greatly from shifts in global wealth distribution.
Arrival of the 'Super Tourists': A major trend in the luxury travel market is the increasing impact of a group who have been termed as "super tourists" – conspicuous consumers of extremely high-end products. With the addition of a planned private jet airport, Phuket is positioning itself to be attractive to the extremely wealthy. Furthermore, recent upgrades to the marina sector mean that mega-yachts can presently be accommodated at three local marinas.
Yachting market: Phuket is becoming known as a boating destination. Its sheltered east coast is ideal for marina developments and is a logical access point to Phang Nga Bay. Given the sheer size of the global boating market and the value of boat slips and residential properties at marinas in other markets such as the Caribbean and the United States, this represents a valuable opportunity for developers in the region. At present, Phuket has four private marinas in operation – a figure which will increase to five when Jumeirah opens.
Boutique developments: The shortage of suitable land in prime areas has led to an increase in the number of small-scale developments – those with 20 or fewer units. Examples of this trend include Tamarind and Sava Natai. This trend is expected to continue as availability of land shrinks further.
Infrastructure development: Appropriate infrastructure is being developed to support long-term growth of the tourism industry, including the expansion of the Phuket Airport's passenger traffic capacity from 6.5 million at present to 11.5 million by 2010. It is expected that airport traffic will continue to increase and that the airport will be further expanded to cope with an anticipated 15 million arrivals per year in the longer term.
Community consultation: As in other parts of the world, there is a grassroots rights movement emerging in Phuket that is directly related to the effects of development on the lives and livelihoods of local residents.An example of this is the refusal of planning permission for a small marina planned at The Yamu in Pa Khlok in response to community dissent. Governor Preecha Ruangjan has indicated that development projects will be more carefully scrutinized in future in order to better assess their benefit to Phuket as a whole.
This is a somewhat positive development, as much of Phuket's charm lies in its natural environment and sustainable development, which is the key to longevity in the residential market. However, it is important that the long-term interests of investors are also taken into account and that the approval process remains fair and balanced enough to maintain Phuket's position as a market leader in the resort residential market.