Will Phuket be Hit by a Property Bubble?
I am a big fan of the Martin Scorsese movie Casino. One of the most telling lines is from Robert De Niro's character Ace Rothstein who waxes poetically: "In the casino, the cardinal rule is to keep them playing and to keep them coming back. The longer they play, the more they lose, and in the end, we get it all." In many ways Phuket's broad property sector has been hit again with a gambling-like mentality. A strong wave of new low-priced products have hit the market over the past 18 months, which looks to alter the playing field of real estate far into the decade.
These offerings priced from 1- 2 million baht have a sustained surge in transactions and it's been hard to feed the beast of overwhelming demand. Somehow the trend makes the hair stand up on the back of my neck as it reminds me of another era.
In the old days, about 10 to 12 year ago, Phuket moved into growth mode and Chalong played home to some of the early domestic-oriented housing projects – the multi-phase Villas 1, 2, 3 and now I've even lost track how many there are. Then came Land and Houses with a pocketful of attached to semi-attached and detached houses, which offered something for every budget.
These projects were aimed mostly at domestic Thai buyers but they also saw pick up from foreigners. Mostly folks were end users, who would live in these units, raise families and had roots in the community. Coincidentally, at the same time the overseas market was picking up.
Along coastal areas lifestyle migrants from Hong Kong, Singapore and elsewhere were buying second homes or eventual retirement havens. Again the common thread was buyers who wanted to use the property.
As the 'greed is good' days of the mid 2000s arrived, the foreign market ramped up with a case of halcyon-induced euphoria and investors flocked to our shores, looking to double their money overnight.
Somehow the big Bangkok listed property developers were so entrenched in the nation's capital they forgot about the upcountry market of Phuket.
Domestic offerings were mostly attached or semi-detached homes on inland plots of land.
We all know what happened to the foreign market after the financial crisis – oversupply, flat demand and the all encompassing secondary resale market.
While after the crisis a steady flow of listed Thai firms made inroads to Phuket, property for the most part has been a domestic storyline. Somehow supply and demand were kept in check but the rising affluence of an increasing middle class, and readily available credit multiplied the catchment of willing property investors.
Today there are well over 5000 entry level condominium units in the development pipeline on the island, which will be completed over the next 24 months.
Typically, buyers are Thai rather than foreigners, and in many cases they have purchased multiple units.
Like a casino, the game is to make a small down payment on launch, speculate that project pricing will appreciate during the development phase and flip the unit prior to registration of the condo. This forestalls either doling out cash or else raising bank finance. In theory strong market sentiment has worked in their favor over the past year.
Now, the question is how deep the buying pool is and what will happen when all of these completed units are transferred on.
Inevitably the tables will turn as those unable to flip, will be forced to rent. This effectively will displace possible buyers of new launches, as renting will become cheaper. Secondly, there will be a resale market with considerable inventory.
One can almost overlay the same situation, which happened in the resort grade foreign sector five years ago and it's likely that a similar scenario will occur.
Cycles are a fact of business life.
As Phuket grows, its real estate industry will fractionalize into new sales, resales and rentals.
While pundits may point out that domestic growth can continue unabated, as it has done in Bangkok, there remains a limited population base here and saturation will come inevitably.
There is also a possible mismatch of product. While the shoe-box influx of units that are 20 – 30 square meters is aimed at a certain demographic, it will not attract Thai couples who want to have kids or those with families already.
Geography is another issue.
While Bangkok has these flats along key transportation lines like the BTS and bus routes, traffic in Phuket is getting worse.Businesspeople and employees are increasingly drawn to being closer to their work so where the largest build of these units are, may be less desirable in the years ahead.
That given, the trend is not all bad. Planned estates, reasonable scale and a rise in the quality of domestic products are good things.
But the concern is the voodoo-like spread of inexperienced first time investors who are only prepared financially for the upside and not the possibility of market volatility.
Buy a good product, pick a strong location and be willing to ride out the storm and your investment should provide a reasonable return.