Property Boom Likely To Continue Into Next Year

[george]

Property boom likely to continue into next year

The property sector is booming but how long will it last, and what are the signs that downturn is near?

"Whenever the country shows a trade deficit, alarm bells are set off," said Thongchai Busarapan, vice president of Noble Development Plc.

But that will not come for at least another year.

The National Economic and Social Development Board expects a trade deficit in 2005 when Thailand experiences a recovery in private investment, a situation that creates demand for imports.

Speaking in the seminar titled "2004 Property Sector Outlook" held by Krungthep Thurakij newspaper, five top real estate executives shared their views on the outlook for the property sector.

For the time being at least, they are all optimistic.

Sales of newly built residential units were expected to reach Bt100 billion this year, said Sopon Pornchokchai, president of the Thai Appraisal Foundation.

"The projected sales for 2003, albeit a slight drop from Bt150 billion of last year, are still huge," said Sopon.

He said that in 2001 and 2000, the value of residential units sold reached only Bt25 billion and Bt13 billion respectively.

The are a number of factors driving the property boom. The lowering of mortgage loan interest rates to 6 per cent or less, compared to about 15 per cent in the past, is one of the most important.

Tax privileges for developers and homebuyers as part of the government's property stimulus package is another, along with good economic growth.

Thongchai said that all those involved in the property sector should closely follow economic indicators, especially balance of trade figures. Although the economy is doing well at the moment, some external factors might have a negative impact on the property sector.

Thailand's economic growth for this year is estimated at 6.3 per cent. Next year, analysts say it will be between 7 and 8 per cent. The trade surplus this year will be US$5 billion (Bt200 billion), and the same amount is estimated for 2004.

Thongchai said the US economy is experiencing the same symptoms as Thailand in the run up to the 1997 financial crisis. Consequently, the US may be under pressure to keep its currency weak to maintain exports.

The baht will continue to appreciate against the US dollar, resulting in a loss of export competitiveness and a reduction in foreign exchange earnings.

"As a result, the country's balance of trade figures might shift into deficit," said Thongchai.

Most property firms are likely to post lower growth in sales and margins next year due mainly to a higher degree of competition.

It is likely the government will extend tax incentives for homebuyers (property transfer and registration fees of 0.01 per cent each), which are due to expire at the end of this year, up until the end of the first quarter of next year.

The tax for property developers, which were reduced from 3.3 per cent to only 1 per cent per annum, will expire at the end of this year.

There is also a risk of higher interest rates, as the current historically low rates cannot be sustained over a long period of time.

In 2004, higher interest rates might cause an overrun in construction costs, while homebuyers will have to bear higher monthly repayments.

"Whenever the interest rate increases by 1 per cent, it increases homebuyers' monthly repayments by 8 per cent," said Sopon.

Earlier this month, the central bank initiated a mortgage-loan ceiling on luxury properties in a bid to stem speculation. Those who buy a house for more than Bt10 million can only get a maximum mortgage of 70 per cent of the value of the property.

Speakers at the seminar praised the Bank of Thailand's pre-emptive measure to prevent property price speculation by requiring buyers to put down 30-per-cent deposit for a home worth Bt10 million or more.

Pre-sales projects have increased because of a higher rate of return than developers could gain from pre-built projects.

For example, Thongchai said, a developer could invest Bt2 million in a Bt10-million pre-sales project. This means that when all properties are sold within a few months of the launch he has made Bt8 million. Because of high initial costs, developers in pre-built projects might have to wait for 12 to 24 months before seeing a similar gain.

Tawatchai Sudtikitpisan, managing director of Kiatnakin Finance Plc, said the property boom has not been driven by financial institutions. Total outstanding mortgage loans are only Bt280 billion, compared to a peak of Bt800 billion before the 1997 financial crisis.

Next year property developers will face more competition. A rise in domestic interest rates will have an impact on the sector prospects, particularly if they rise by more than 50 basis points.

Kawee Siribhadra, managing director of DTZ Debenham Tie Leung (Thailand) Co, an international property adviser, said property development in 2004 would focus on prime areas such as Sukhumvit and Sathorn.

Rawat Chindapol, founder of Rhino Holidays Co said the government's open-skies policy for airlines would boost tourist arrivals from 4 million to 5 million to Phuket next year.

Hotel and resorts in Koh Pha-ngan and Krabi would benefit from a spill over of tourists from Phuket, Rawat said.

--THE NATION 2003-12-22