Property Crosses Into Muddy Waters

The Phuket Gazette.
LEAVING without warning is one of the themes for the famous John Hiatt song Crossing Muddy Waters. The recent outcry over the alleged multi-million-dollar fraud case at Purnavarna Resorts – and the resulting half-completed project – hints at a symbolic “crossing into muddy waters” for Phuket's property market, of which the direction is neither clear nor direct.
The Purnavarna case looks set to play out in the legal arena. There are indeed two sides to every story and the CEO in question is due his day in court.
Meanwhile, a visit to the incomplete residential luxury estate in Rawai reveals a spot where water buffalo graze and a fresh crew of gardeners battle nature to reclaim the partially completed project. It's certainly not the only incomplete project on the island.
A trip back in time through our brochure files comes up with promotions offering 10% annual guaranteed returns to buyers, free airline tickets and the option to sell shared ownership at increasingly low prices, a tactic from when the market was being hit by the global financial crisis.
The acquisition of the Royal Phuket Yacht Club from a then-healthy Lehman Brothers only increased debt to the project, which in the end saw the estate change to an optimistically named “Summer Palace”.
Despite the current scandal, from an analytical perspective, the island's property business has been let off fairly lightly compared with many developed markets the world over. Estimates in the US financial press say 16 million US home buyers are currently “under water”, meaning their debt is higher than the market value of the property they are sitting on.
In Phuket, defaults have been relatively isolated instances of non-delivery (versus delays) in the residential market.
Another high-profile case is the ongoing restructuring of the Lersuang group's Tamarind Hills project, which is just now seeing units completed.
Truth be known, there will still be blood in the real estate sector, but no different than markets in virtually every corner of the globe. Perhaps the best case to argue here is that with the dominance of foreign buyers for resort-grade real estate, there exists very limited developer debt.
In the absence of large-scale debt, the ability to rehabilitate or restructure failed projects is becoming a significant factor. As seen at Tamarind Hills, Metta Visessombat's Sepco Asia was able to work with banks to assist in moving the development forward.
For the past few years, there has been a defined shift in the profile of developers at the mid-and top tiers from foreigners to Thais. This is no reflection on competence or ability, but founded mainly on the financial reality that inhibits overseas interests in obtaining local bank financing.
With projects in the past, when supply and demand was favorable, cash flow from pre-sales was able to provide the funding to see the completion of many developments on the island. Once the pendulum swung, then this is when the trouble arose and project defaults come into play.
The good news is that markets have a way of correcting themselves, and we've been seeing that take place. The past 18-24 months has seen resales becoming increasingly prevalent due to buyers seeking mitigated risk and vacuuming up excess supply at low costs.
New project launches have remained generally muted, though a rash of new low-entry condominium units in the range of 1.8 to 3 million baht have hit the island for sale in the first quarter of 2010, aimed primarily at the domestic segment.
Moving forward, liquidity in the Thai development sector remains high and listed property firms continue to have excess cash that needs to be put to work. It's interesting to see Sri Panwa developer Charn Issara now look to form a property fund using the hotel as an underlying asset in order to recapitalize for expansion.
In my discussions with developers in recent weeks in both Phuket and Bangkok, the market is seeing an influx of new capital coming to the island, both for longer-term banking and also for developing property.
For stressed and distressed projects, in all likelihood, we may see a number of developments being restructured by listed Thai companies or emerging real estate funds.
The bottom line in all this is: liquidity is much like the flowing waters of a river, for now the hollow sky has been filled with rain clouds and the river is rising. It's a new twist in the ongoing cycle of island property, but the journey goes on.