US Woes Cloud Horizon
During a recent trip to the US, I spoke with several players in the domestic property and tourism industry. The reality of the current US market is a stark reminder of how quickly tides can turn. According to analysts, as much as 60% of investment in second homes and vacation properties bought from 2006 is now in negative equity.
The market value of that new holiday house you bought is now lower than when you invested in it. While these remain paper losses until such time as a property is sold, it's a strong indicator of a recession. Retail brokers are reporting that transactions involving such properties are now flat with no expectation of uplift in the near future.
Turning to world financial markets, petrol futures trading for 2016 is now in excess of US$160 a barrel, with today's prices now over US$130.The significance of this is that long-term futures are now higher than the current price of the commodity. Petrol prices are affecting airlines, with direct flights to Los Angeles and New York by Thai Airways and Singapore Airlines now rescheduled due to higher fuel consumption for Airbuses.
On the supply side, levels of fuel production have been underestimated by the production giants and growth in emerging economic tigers – Russia, Brazil, India, China – is not forecast. Everything points to oil prices broaching US$200 a barrel in the not-too-distant future. As we move through the second quarter of 2008, the fate of the US dollar remains uncertain. While the upcoming presidential election will create a change in US international policy, effects from the disastrous "Bushonomics" era will potentially take several years to reverse.
Historically, there are some benchmarks, with parallels between the current sub-prime debacle and previous savings-and-loans crises during the Reagan era. It's going to be a long and arduous journey for the world's leading economy; uncertainly continues to grip the majority of investors' minds.
In Thailand, the knock-on effect for fuel and commodities, such as rice and seafood, is seeing prices rise at hyperinflationary levels. Labor costs continue to skyrocket as a result. For the man on the street this equals a rapidly diminishing paycheck, barely keeping ahead of the cost of living. The Samak-led government was quick off the mark with rapid economic reform, which was welcomed by overseas investors, but the current mud slinging and uncertainty over political factions is causing concerns.
Another event having a large-scale impact is the recent earthquake in China's Sichuan province, which will require enormous rebuilding in the area, hence the region's steel prices are soaring. Dispensing with the doom and gloom for a moment, this column is supposed to be about property. While it is important to give thought to key economic indicators and look at the bigger picture, you may be wondering how all this affects Phuket.
While I was in the US I met a number of institutional investors who are looking to Asia as a ray of hope. These are firms that continue to have liquidity and need to invest money in high-yielding markets. There has been a shift and redeployment of resources by overseas firms specializing in leisure and mixed-use projects. They see potential growth in the property markets of Vietnam, China and Thailand. From afar, Phuket is perceived as a marketable brand with a considerable upside while capturing significant market share in the Asia Pacific leisure-property sector.
Looking at recorded property transactions, the numbers don't quite gel with the consensus of a total market slowdown. However, oversaturation of the market along with corresponding incremental transactions and a growing resale market are cause for disparity. While the overall sales volume is there, less units are selling while the number of projects is rising. Most long-term investors are on the lookout for when a market peaks, which may be about to happen in Phuket.
One key indicator is when initial investors start to cash out of the market. Analyzing Land Department transactions shows that this is happening with many medium to higher-end properties. The good news is that the people selling up in Phuket are reinvesting in more-expensive properties on the island. Market sentiment is important. Investors in Phuket continue to act with confidence without knee-jerk reactions to troubles elsewhere in the world.
I have no doubt that we are heading for troubled times – in Phuket, Thailand or else around the world – but the industry will have a soft landing with continued development for years to come.