Bangkok--Dec 14--CB Richard Ellis
Despite the overall pace of development activity in Bangkok being slower in 2005, this cooling of the supply side is positive for the market and has encouraged some consolidation. Each sector of the property market is in a different stage of its cycle, with some sectors leveling off because of new supply and others just commencing the growth cycle, according to Ms. Aliwassa Pathnadabutr, managing director of international property consultants CB Richard Ellis.
The GDP growth is expected to be 4-5% at the end of 2005, compared to the early-year forecast of 6%. However, this was offset by increases in the oil price, inflation, and interest rates. Demand for property for sale and for rent were healthy, but slightly slower this year, due to the uncertainty of economic situation, resulting in weaker property buyer confidence.
Residential Sector - Housing
2005
The housing market faced a number of challenges in 2005 with increasing construction costs, rising interest rates and weaker consumer confidence. Lenders’ cautious attitudes to providing project finance has caused some developers difficulties in launching new projects. This has resulted in a reduction in the number of active developers which has helped cool down new launches on the market.
Housing demand in 2005 has still been strong, as can clearly be seen from the expected total number of newly registered houses of 69,000 units as of the fourth quarter of this year. Small developers are working in a more competitive environment, while some of the large or listed developers are still performing well. This indicates that the small developers continued to be pressured to increase their competitiveness. CB Richard Ellis witnessed some developers either working with development partners or contractors or using innovative financial tools such as property funds to increase competitiveness. Increased construction costs and land prices will also push developers to look at the potential of smaller sized housing plots.
In general, the townhouse sector is less competitive than the single-detached house market because it is perceived to be a large market for lower priced products. At the end of 2005, the total number of newly registered townhouses is expected to reach 18,000 units, lower than the pre-crisis peak of 60,000 units.
2006
The outlook on the demand side for housing in 2006 depends on Thailand’s overall economic performance. High levels of employment and a continued move from the extended to nuclear family will stimulate demand. CB Richard Ellis expects to see a reduction in the number of developers, with most new supply being built by larger developers who have access to project development funds and economies of scale in construction and marketing. Construction efficiency will be a challenging factor for developers. Those who fail to improve their competitiveness will face some difficulties.
CB Richard Ellis believes that opportunities will exist in areas where there will be convenient transit system routes. Many housing developers will focus more on the middle and lower markets. Those who will concentrate on high-end developments will have to improve their products’ specifications and designs to match the more sophisticated requirements of home buyers. Prices for high-end products will be closely linked to quality, whereas prices for the middle and lower markets will be unlikely to fall as a result of rising costs.
Residential Sector — Condominium
2005
In the condominium market, there was a sharp reduction in the number of new launches in downtown Bangkok. A total of 20 projects with 4,803 condominium units were launched in downtown Bangkok in 2005, compared to 40 projects with 7,736 units in 2004. Lenders have been increasingly cautious about providing project funding and only well-capitalised developers can afford to initiate projects.
Sales performances in all segments were reported to be strong. Average numbers of units sold in projects launched in 2005 stood at 69% and 85% in high-end and middle market developments in downtown Bangkok, respectively. Many developers focussed on mid-market condominium developments situated close to mass transit stations and in midtown areas; both LPN and Supalai launched several successful mid-market condominium projects in 2005.
In the luxury sector, these projects have seen high levels of owner occupation and low vacancy rates once owners have completed fitting-out. CB Richard Ellis has not seen the high level of speculative activity that characterised the boom of the early 1990’s.
The total stock of downtown condominiums increased by 10%, to 42,978 units year-on-year. The average occupancy for existing condominium projects in the downtown area increased slightly, to 88.4% in the third quarter of 2005 from 86.4% in the same period last year.
2006
Developers will face increased construction costs next year, which will squeeze their profit margins. Due to the increased cost of construction, some price increases may be seen among grade A projects in prime locations. However, prices of new grade B units are not anticipated to rise because doing so may affect the affordability of the units.
There is also an affordability ceiling on the pricing of projects aimed at the mid market where further increases will significantly impact on demand. CB Richard Ellis expects to see fewer of luxury projects launched in 2006 as more developers will focus on the middle income market.
The supply side continues to be restricted by lenders’ caution in providing project financing. There will be limited speculative activity among buyers in the residential sector and CB Richard Ellis believes that development will continue to be driven by end-users, rather than speculative demand in 2006.
Residential Sector — Expatriate Rental Apartments
2005
The apartment supply in downtown Bangkok totalled 9,966 units, an increase of only 5% or 474 new units from the end of 2004. The number of expatriates in Bangkok also increased, by 13% year-on-year.
The average occupancy rate remained generally stable at a high level of 90% during the third quarter of 2005, compared to 89.5% in the same period last year. Average achieved rental rates for grade A and B apartments remained firm, compared to the previous year, at THB 368 and 278, respectively. Developers of new and refurbished projects are seeking higher rents. Rents for new buildings increased in 2005, while rents for existing older buildings remained unchanged.
2006
The rental apartment market will see an increased supply, with approximately 341 newly completed units to be added. Besides the units in the apartment projects that are currently under construction and planning, in future, competition will come from individual owners of units in new grade A condominium projects, the majority of which will be completed by 2006 and 2007. Some of these condominium units have been purchased as an investment, making them available in the rental apartment market. Due to rising construction costs and strong demand for good quality buildings, more apartments will be renovated next year to maintain competitiveness and achieve higher rents. Rents in quality buildings will increase slightly.
Residential Sector — Serviced Apartments
2005
Serviced apartments enjoyed a strong year in 2005, with high occupancy rates and increased rental rates. Demand for serviced apartments remains stable. The total supply of serviced apartments in downtown Bangkok will be 8,565 units at the end of 2005, a 10% increase compared to 2004. The new serviced apartment supply in 2005 includes the expansion of the Meritus Suites State Tower, Shangarila Suite, Centre Point Thonglor, and Urbana Langsuan. The average occupancy rate of serviced apartments is 5% higher year-on-year, having increased from 83% in the third quarter of 2004 to 88% in the third quarter of 2005.
According to the new hotel regulations which came into effect in May 2005, many serviced apartments obtained hotel licenses to maintain their short-term customers. There have been some increases in terms of operational costs and taxes, depending on the quality of services and customers whom the serviced apartments are targeting.
2006
In 2006, supply is expected to remain healthy, with new 854 units or 10% located in 4 new serviced apartment projects. Several serviced apartment projects expect to receive hotel licenses according to the submission of applications in 2005, to increase competitiveness. This will further increase competition in the coming year and could limit increases in rental rates.
Office Sector
2005
2005 was a breaking years for office rents, with some developments seeing increases of up to 25%. The slower economy has not yet dampened demand. The total office supply in Bangkok stood at 7.2 million square meters. Total take-up increased to 6.3 million square meters, from 5.95 million square meters in 2004, and the average vacancy rate will drop to 13% from 17.2% last year. CB Richard Ellis expects that total net take-up will be over 300,000 square metres at the end of 2005.
The average achieved rents for Bangkok offices increased by 16.6%-25.6% year-on-year in different grades and locations. It is expected that rents will continue to rise in 2006, but not at as high a pace as in this year.
Office developments that are scheduled for completion at the beginning of 2006 such as Q. House Lumpini, The Column, and Exchange Tower have achieved strong levels of pre-leases prior to completion.
2006
The Bangkok office market will continue to strengthen. Rents are expected to increase further, as demand exceeds supply. CB Richard Ellis expects that the continued rise in rents will trigger the start of new office developments in 2006 as well as the continued refurbishment of existing buildings.
Grade A offices rents will continue to increase by approximately 10% in the next year due to the limited supply. Also, rents of grade B and C offices are expected to increase. About 230,000 square meters of office space will be added to the market in 2006, but this is not expected to dampen rents as demand will continue to exceed supply.
Retail Sector
2005
The retail sector in Bangkok remained steady. The total retail space in Bangkok stood at 4.4 million square meters in 2005, with a very low vacancy rate of 4.5%. The take-up of retail space in the downtown area decreased slightly compared to 2004, at both grade A and B centers, due to many retail projects undergoing renovation in order to remain competitive.
The competition in Rajprasong and Patumwan is becoming increasingly intense. Many retail centers are renovating in order to remain competitive after the completion of Siam Paragon which is scheduled to partly open at the end of 2005. The renovation trend is also spreading out to other retail areas.
Due to the development restrictions on large-scale superstores, some developers have shifted their focus to smaller scale developments in the downtown areas, closer to residential compounds. Expansion of modern retail space has improved the quality of life for Shoppers and triggered retailers to improve their shops and services.
2006
The Bangkok retail sector will remain robust. CB Richard Ellis expects that developers will bring in new retail concepts to match changing consumer behaviour and lifestyles. Only approximately 220,000 square metres of retail supply will be added next year, whilst demand for good quality space will continue to be strong as a result of retailers’ expansions. Although demand will be strong, rental trends will be closely linked to the economic situation.
Industrial Sector
2005
Industrial estates enjoyed a strong year in 2005. During January-September 2005, land sales totalled 3,086 rai, a 51% increase compared to the first three quarters of 2004.
The supply of Serviced Industrial Land Plots (SILPs) increased by 1,744 rai in 2005. The major players are currently making land acquisitions to maintain an inventory of land for new industrial estates and expansions.
Demand for SILPs continued to increase, particularly in the eastern and northern parts of Bangkok. Average occupancy rates increased slightly, to 83%, compared to 81% last year.
Likewise, the demand for Ready Built Factories (RBFs) remained strong due to expansion and relocation of multi-national companies, especially from Japan. Average achieved rents remained unchanged at THB 180-190 / square metre / month as of the third quarter of 2005.
2006
The industrial market in Thailand is expected to continue to grow. Various industrial sectors are likely to expand over the next few years. Demand will continue to come from companies consolidating their regional manufacturing centers and moving their production base to Thailand, or those expanding their existing facilities. There appears to be a continued wave of Japanese investment and the prospects for both industrial estate land sales and rentals of Ready Built Factories (RBFs) are good a new supply of 4,700 rai for SILPs is expected, as well as stable rents.
Major industrial developers will diversify their range of products into other areas of the industrial and logistics property market, including distribution centers and factories for rent. CB Richard Ellis expects to see new players enter the RBFs market because of its bright prospects in 2006.
Hotel Sector
2005
The luxury hotel sector in Bangkok remained healthy in terms of occupancy and yield. The average occupancy rate among Bangkok’s luxury hotels was 75% and the average achieved room rate was US$ 128 per night in the third quarter of 2005. The total number of tourist arrivals at Don Muang international airport during January-September 2005 rose by 3.3%, compared to the same period in 2004.
Apart from the Bangkok market, the tsunami disaster continues to have a negative effect on the market on the Andaman coast. Although there were natural disasters in other areas of Thailand, they did not have any strong impact on the hotel business. The Pattaya, Hua Hin and Samui markets still perform well. The number of hotels that are managed by international chains has increased significantly in resort areas, improving the image and market exposure of these locations.
2006
Competition in Bangkok will increase with a possible 13% increase in the supply of luxury hotels and first-class hotels in 2006, from 14,621 rooms in 2005.
Thailand is showing huge potential for further growth in the tourism sector in the near future as a result of continued promotional activities and the opening of the Suvarnabhumi International Airport.
Property Funds
2005
Thailand’s Property Funds for Public Offering market is booming, with six property funds established and listed on the Stock Exchange of Thailand (SET) in 2005. These funds have invested in residential and commercial properties. The largest property fund by asset value is the CPN Retail Growth Property Fund, which acquired its properties from Central Pattana Plc. This fund, managed by TMB Asset Management Co. Ltd., is worth THB 10.915 billion. It has invested in Central Plaza Rama II and the Central Plaza Ratchada-Rama III Shopping Complex projects. Thai property funds carry yields of 6 - 8%, significantly higher than the average yields of 3.7% and 5.1% offered by J-REITs and S-REITs, respectively.
2006
Property funds listed on the Stock Exchange of Thailand (SET) will be increasingly popular among local and foreign investors. The key attractiveness of property funds is the return that they offer. Yields ranging between 6% and 8% are considered high, compared to other types of investment. As a popular tool for funding new projects, more developers who own properties are keen to spin off their projects into property funds which they themselves control. On this basis, a growing number of property funds are planned for establishment next year.
Conclusion
In 2006, Thailand’s economy is anticipated to be improved, which will result in a better growth rate of the property market. Oil prices are expected to fall, whereas the inflation rate will increase but at a slower pace. Interest rates are likely to be stable in the second half of 2006.
Challenges to developers in 2006 will include controlling construction costs, quality control, and customer satisfaction, as well as project financing. Developers will focus on the middle and lower market segments, with smaller unit sizes. Mass transit system routes will continue to play a key role. Opportunities will continue to exist in every property sector. CB Richard Ellis anticipates steady growth in the property sector in 2006. End.