The Year to Come
As a boy growing up, I remember being driven though the suburbs of many American towns and cities, particularly the outskirts, down by the railroad tracks. I would occasionally spot a depression-era wooden house, its paint peeling, with barren patches of grass and a hypnotic neon sign with the words "Psychic Readings – Know Your Future" illuminating the starless night. I never did make it into one of those shady establishments, right out of a scene from The Last Picture Show, but, perhaps, if I had, I might have gleaned an inkling of what was to come in 'Black October' in the year 2008.
Looking back just 12 short months, oil was being touted to hit over US$200 dollars a barrel, Hilary Clinton was pegged as the next US president and Thai politics was in turmoil. Well, at least we can depend on one thing remaining a constant. Now, as I write, with the price of oil hovering around US$37 a barrel, Barack Obama's arrival in the Oval Office anticipated with much the same fervor as the second coming, and the Thai democratic process continuing its roller coaster ride, it is clear there have been some dramatic changes in the lay of the land over the past year. As we head into the New Year, the obvious question remains – what happens next?
Sadly, I am no descendant of Nostradamus, and given my larger-than-average frame, I'd scarcely fit down Alice's rabbit hole. That notwithstanding, there are clear signs emerging of what will come to pass in the coming 12 months. We are, without doubt, heading into a time of turbulence and crisis, the like of which most of us will never have experienced. Its effect will be felt throughout the world, across region and right here, by you and me. It will get worse before it gets better, with predictions of eventual recovery seemingly deferred with each dire installment of financial news.
Staring into my cafÃ© latte, a sorry substitute, I admit, for a crystal ball, I do foresee some fundamental changes affecting the property market here in Phuket. First off, there is the issue of supply and demand. The segment incorporating upscale 4-5 bedroom villas on the west and east coast – be they oceanfront or significant ocean view – will most likely continue to trade at a premium. Given the substantial entry barriers for developments and the limited inventory of new and re-sale units, the key offerings in the first half of 2009 are the Amalfi and the new Banyan Tree Grand Residences, which are now providing a non-rental pool option. The top end of the market looks set to retain its luster. This, as you are about to see, however, is the exception to the rule.
The middle and lower segments are experiencing a substantial oversupply of existing product. With re-sales gathering pace, new projects are starting to show signs of a serious slowdown. These segments are looking vulnerable to a price re-alignment, bridging the current gap between prices being offered by owners and developers and what prospective purchasers are willing to pay. The current lack of parity has led, in the past few months, to a number of existing projects with unsold inventory offering discounts in the region of 20-30%. The 'vulture' buyers have begun to circle, expecting large write-downs over the coming six months. It needs to be acknowledged, however, that these buyers are speculators and are not indicative of the larger marketplace. What is expected is that retail pricing will hold, but substantial discounts will be absorbed by those wishing to transact in the current maelstrom.
While property values will not, as a whole, decline, the market will plateau for an extended period. Moving forward, we will see only limited sales volume, in keeping with current global trends. An absence of debt in the marketplace is both a blessing and a curse. With the unavailability of financing to foreigners, who dominate the market, there is little existing leveraging. In an extended crisis, bank foreclosures in markets with significant domestic content, such as Bangkok, will come into play and over the longer term, drive market values down.
Here in Phuket property remains basically a cash trade, so while there is no danger of large scale property devaluation, new foreign buyers coming into the market cannot mitigate risk and get financing for new sales, which, in turn, severely limits short- to medium-term growth potential. Many cash-rich regional and Asian investors are now looking to markets such as North America, Australia/New Zealand and even Europe to capitalize using debt leveraging.
As we look further into the future, an extended downturn will correct any supply-and-demand inequities and new launches will be limited until the existing supply can be absorbed into the market. This will create a good platform for longer term upward momentum. Risk profiles have shifted, with existing product out-trading off-plan in order to limit perceived development risk. For 2009, the general consensus is that it is going to be a challenging marketplace for property, so it's best to buckle up and hopefully steer clear of those potholes on our journey into the future.