Can Investors Still Make Money In The Jomtien/pattaya Real Estate Market Even During A Downturn ?

[KhunTao]

(I will also post this in the Real Estate forum)

The theory is as follows:

a) 1st price list, pre-constuction

Typically, when a developer first launches a new condominium project, it attempts to generate a buzz by offering subsidized "1^st price list" pricing. This 1^st pre-construction pricing at which the condominium is positioned into the market place could possibly be at

par with, or even lower than, the projected building costs, whereby the developer hopes to more than make up for initial loss-leaders by selling other units, at a later stage in the development cycle, at significantly higher prices. For low rise units (i.e. up to 7 floors), depending on the quality of materials and finishing, construction prices (excluding land, finance costs, marketing costs, etc…) should be in the Bt.17,500 – 27,500 range (rough estimates). Typically, developers launch projects and start selling well before securing environmental approval and a construction license, sometimes as long as a full year in advance.

Possible capital gains

There is therefore a theoretical opportunity, for a 1^st price list buyer, to realize significant capital gains, to be realized through re-sales at a later stage in the development cycle of the project. As a rule of thumb (in my opinion), such investment could be worthwhile from a risk/reward perspective if the buyer is able to project a capital appreciation of at least 50% in local currency terms (i.e. Baht) during the lifetime of the development cycle of the particular project.

c) Wholesale discounts at the developer and/or agent level ?

In addition, some developers will entertain the concept of a further volume discount (over and above the 1^st price list), in the region of 5-15%, in case the buyer considers buying 5 or more units. Typically, developers will pay real estate agents 3% of the value of units sold as a reward for their marketing efforts. In certain extreme cases (unpopular projects on the dark side of Sukhumvit, for example), more desperate developers will pay a considerably higher commission, sometimes up to 10%-15%. Therefore, the 1^st price list buyer can assist the developer with justifying such a volume discount by approaching the developer directly, instead of through a real estate agent. In case the developer is unwilling to monetize the benefit of a 1^st price list buyer coming to him directly, certain real estate agents are willing to rebate part of their sales commission back to such 1^st price list buyer, in case of volume purchases. For example, in case of the purchase of 5 units, it should be possible to agree with the real estate agent that 50% of the real estate agent´s commission is rebated back to the 1^st price list buyer. Again, this is theory, I have not tested it yet.

d) Project completion risk

As no ESCROW a/c mechanism is practiced in the Jomtien/Pattaya market yet (that I am aware of ….), the 1^st price list buyer´s money is typically allocated by the developer towards the project´s costs. In other words, in case the developer fails to complete the project, the 1^st price list buyer is left with an unsecured claim on a defaulted developer. This real risk highlights the need for the 1^st price list buyer to pick projects sponsored by reputable, proven developers with a solid track record of delivery in the chosen market. A 1^st price list buyer will have to do his due diligence on previous projects completed, the developer´s standing in the real estate community, the level of maintenance and security applied to its existing projects, the developer´s track record as to completion on schedule, etc… Whilst such due diligence certainly mitigates the risk of non-completion of a project, it does not eliminate it. Hence, the high risk profile of such 1^st price list purchases and the associated need for high projected returns on capital invested. It should be noted that certain well established developers (think Major, Raimon Land, Noble, etc..) work with approximately 30% of customers´ funds and 70% bank financing, therewith reducing the 1^st price list buyer´s exposure.

e) Return on investment

Assuming a 50% appreciation of the asset during a two and a half year development cycle, and an evenly spread payment schedule during the development cycle (say 25% upfront, 25% upon completion and evenly spread payments during the two and a half year cycle), a 1^st price list buyer can look forward to annualized returns on actual capital invested of around 25-30% in local currency, a yield possibly further enhanced by a possible volume discount upfront.

This is the theory …. I am wondering whether it still makes sense in today´s reality in Jomtien/Pattaya in particular and in Thailand in general, given the ongoing political crisis, lower arrival figures for tourism and the strong possibility of the local currency depreciating vis-à-vis convertible currencies during the next coming years.

Please let me have your views ….

[KhunTao]

Apologies, my line spacing seems to be off. New attempt:

(I will also post this in the Real Estate forum)

The theory is as follows:

a) 1st price list, pre-constuction

Typically, when a developer first launches a new condominium project, it attempts to generate a buzz by offering subsidized "1^st price list" pricing. This 1^st pre-construction pricing at which the condominium is positioned into the market place could possibly be at par with, or even lower than, the projected building costs, whereby the developer hopes to more than make up for initial loss-leaders by selling other units, at a later stage in the development cycle, at significantly higher prices. For low rise units (i.e. up to 7 floors), depending on the quality of materials and finishing, construction prices (excluding land, finance costs, marketing costs, etc…) should be in the Bt.17,500 – 27,500 range (rough estimates). Typically, developers launch projects and start selling well before securing environmental approval and a construction license, sometimes as long as a full year in advance.

Possible capital gains

There is therefore a theoretical opportunity, for a 1^st price list buyer, to realize significant capital gains, to be realized through re-sales at a later stage in the development cycle of the project. As a rule of thumb (in my opinion), such investment could be worthwhile from a risk/reward perspective if the buyer is able to project a capital appreciation of at least 50% in local currency terms (i.e. Baht) during the lifetime of the development cycle of the particular project.

c) Wholesale discounts at the developer and/or agent level ?

In addition, some developers will entertain the concept of a further volume discount (over and above the 1^st price list), in the region of 5-15%, in case the buyer considers buying 5 or more units. Typically, developers will pay real estate agents 3% of the value of units sold as a reward for their marketing efforts. In certain extreme cases (unpopular projects on the dark side of Sukhumvit, for example), more desperate developers will pay a considerably higher commission, sometimes up to 10%-15%. Therefore, the 1^st price list buyer can assist the developer with justifying such a volume discount by approaching the developer directly, instead of through a real estate agent. In case the developer is unwilling to monetize the benefit of a 1^st price list buyer coming to him directly, certain real estate agents are willing to rebate part of their sales commission back to such 1^st price list buyer, in case of volume purchases. For example, in case of the purchase of 5 units, it should be possible to agree with the real estate agent that 50% of the real estate agent´s commission is rebated back to the 1^st price list buyer. Again, this is theory, I have not tested it yet.

d) Project completion risk

As no ESCROW a/c mechanism is practiced in the Jomtien/Pattaya market yet (that I am aware of ….), the 1^st price list buyer´s money is typically allocated by the developer towards the project´s costs. In other words, in case the developer fails to complete the project, the 1^st price list buyer is left with an unsecured claim on a defaulted developer. This real risk highlights the need for the 1^st price list buyer to pick projects sponsored by reputable, proven developers with a solid track record of delivery in the chosen market. A 1^st price list buyer will have to do his due diligence on previous projects completed, the developer´s standing in the real estate community, the level of maintenance and security applied to its existing projects, the developer´s track record as to completion on schedule, etc… Whilst such due diligence certainly mitigates the risk of non-completion of a project, it does not eliminate it. Hence, the high risk profile of such 1^st price list purchases and the associated need for high projected returns on capital invested. It should be noted that certain well established developers (think Major, Raimon Land, Noble, etc..) work with approximately 30% of customers´ funds and 70% bank financing, therewith reducing the 1^st price list buyer´s exposure.

e) Return on investment

Assuming a 50% appreciation of the asset during a two and a half year development cycle, and an evenly spread payment schedule during the development cycle (say 25% upfront, 25% upon completion and evenly spread payments during the two and a half year cycle), a 1^st price list buyer can look forward to annualized returns on actual capital invested of around 25-30% in local currency, a yield possibly further enhanced by a possible volume discount upfront.

This is the theory …. I am wondering whether it still makes sense in today´s reality in Jomtien/Pattaya in particular and in Thailand in general, given the ongoing political crisis, lower arrival figures for tourism and the strong possibility of the local currency depreciating vis-à-vis convertible currencies during the next coming years.

Please let me have your views ….

[suiging]

Simple answer is always supply and demand. Any form of buying now can only be for long term hopes, as the short term turnover investor is harder to find than a virgin in Lucifers.

[midas]

This is the theory …. I am wondering whether it still makes sense in today´s reality in Jomtien/Pattaya in particular and in Thailand in general, given the ongoing political crisis, lower arrival figures for tourism and the strong possibility of the local currency depreciating vis-à-vis convertible currencies during the next coming years.

Please let me have your views ….

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There is nothing new about this idea. Yes people have made money doing this in Australia over the years-

but that was Australia where you have strong consumer laws and a fair and sensible justice system

I wouldnt do this in Thailand even during " normal " economic times !

But now we are heading into totally uncharted waters regarding the global economy ( eg this morning there

is now a question mark above Lehman Brothers ). We dont how credit supply is going to pan out over the next 1-3 years...............