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Bangkok's vertical property boom
High stakes and high returns in the condo market
The Nation October 5, 2007

Property firms attract buyers by creating special events to promote their city condominiums.

Location and convenient transportation are the two main factors that lend advantage to condominiums located in Bangkok's central business district (CBD), as well as those located near Skytrain or subway routes, because they save on transport costs and slash the time taken in travelling to and from work.

On the other hand, condominiums located outside of the CBD must work hard to attract their target buyers.

Experts in the property industry agree demand for condominium units located in the Ploenchit, Chidlom and Sukhumvit areas is always high, and those located along new Skytrain routes will certainly have a bright future. But those located in the Ratchadaphisek, Lat Phrao and Phaholyothin areas could be at risk from faulty marketing analyses, because those locations are only attractive "at a certain level".

However, having so many condominium projects rising in the heart of Bangkok is certain evidence that this is the golden age of the condominium, and both newcomers and major players in the property-development industry are working hard to take advantage of it.

Offering a modern lifestyle for families that choose to live in high-rise buildings because of their convenience, condominiums in the CBD are enjoying a strong market. Many new projects have benefited from high revenue. Some are even sold out in the presale period.

However, it is not only their easy access that makes them attractive. Many styles are unique, totally dismissing all of the old perceptions of condominium units being limited, uncomfortable residences.

As well as those developers stirring up the current condominium trend, including Sansiri, Areeya Property, Property Perfect, Preuksa Real Estate, Chanissara Development, Supalai, Asian Property and Prinsiri, many others have adjusted their business plans to join the gold rush.

Property broker Realty World Alliance has become caught up in the condominium market. President and managing director Visit Kunatharakul says the company has more than 200 units on its books, with prices ranging from Bt1.2 million to Bt1.5 million, making them worth an accumulated Bt250 million to Bt300 million. The units are from people who have already taken ownership and those who still have loan instalments to pay for down payments, such as some units in Condo One located in the Lat Phrao area, City Home located on Ratchadaphisek Road and Noble Lite.

"A lot of people buy condominiums as investments," Visit says. "The prices keep increasing at 8-10 per cent a year after purchase. This has resulted in a boom in city condominiums, particularly those with prices in the low Bt1-million range."

Plus Property's Research and Development Department says the company has so far offered 61 new projects with a combined 16,933 units. It finished building 32 of the projects, with a total of 8,786 units, in the first half of the year. Combined with units from earlier projects, it currently has a total of 113,257 finished units - 8.4 per cent more than last year.

The company expects to finish building another 14,000 units in the second half and plans to construct at least 47,000 more in the next year or two.

Popular room types are studio and one-bedroom types, with prices ranging from Bt700,000 to Bt3 million. From a home-buyer's viewpoint, they offer the same convenience as bigger units, and the prices don't bring a big burden.

However, since high demand for condominiums will cause high demand for land and construction work, the cost of both are sure to rise. Therefore, in order to offer the same prices in the future, developers may have to diminish the size of individual units.

Within the next two years, there will be no fewer than 17,000 new condominium units on the market.

The overall average price for a unit is Bt78,501 per square metre, up 10 per cent from last year. Not surprisingly, the highest prices are in the CBD and around Sukhumvit Road, ranging from Bt86,222 a square metre in the Sukhumvit area (up 4 per cent) to Bt92,646 a square metre in the CBD (up 2 per cent).

In terms of price rises since construction, condominium units around Rama III Road have appreciated most, by 30 per cent to an average Bt70,000 per square metre, followed by the Phaholyothin Road area, where prices have risen 13 per cent to an average Bt60,248 a square metre, and the Phya Thai area, where prices have risen 11 per cent to an average Bt83,377 a square metre.

In the wider picture, prices of units in mid-range condominiums have climbed to almost Bt100,000 a square metre, while prices in high-end condominiums have increased to B200,000 a square metre.

"Prices of condominiums that are located along Skytrain routes have risen continuously, because of increasing demand. Normally, prices rise at a rate of 5-7 per cent above the original. Some projects even witness increases of 10-20 per cent," one source said.

Condominiums that are located along Skytrain routes but not in the Sathorn, Silom or Sukhumvit areas, as well as those that are located near shopping centres, have a big potential for price increases to Bt100,000 a square metre. They have high original and resale prices, because of demand from Bangkok residents, people from up-country and foreigners, all looking for a conveniently located home.

Meanwhile, prices per unit for high-end condominiums, starting with those located around Soi Langsuan and Wireless, Rajdamri or Sathorn roads, will continue to rise to starting prices of Bt200,000 a square metre.

The high demand has created a burgeoning market for investors who buy units for resale or rent. They sometimes buy many units in projects in good locations and either wait for the best time to sell or make money in the long-term from renting. Good locations will always give a good return, regardless of the country's economic situation. The chances of doubling an investment are high.

For example, the Pathumwan Resort condominium, which was launched in 1997 and priced at Bt42,000 a square metre, suffered a price drop that year to only Bt35,000 a square metre. Today, its prices have increased to Bt70,000 or Bt80,000 per square metre.

CB Richard Ellis (Thailand) managing director Aliwassa Pathnadabutr says that over the past five years, her company has witnessed increases in prices for condominiums reaching 30-50 per cent. In 2002, the average price for a condominium on Sathorn Road was Bt58,100 a square metre, while today it is Bt108,000. In that same year, condominium units in the Sukhumvit area cost Bt49,000 a square metre, but today the figure averages Bt88,000.

Prices for condominium units even increase while they are being built. In the early construction period, prices will rise 10 per cent over the developer's original figure. During the middle construction period, the price rises accelerate to 15-20 per cent and they reach their peak when construction is nearly complete. Then, the appreciated prices become the "standard" prices for future reckoning.

Foreigners can safely invest in leasehold properties and are unlikely to run afoul of the Foreign Business Act (FBA) in its current state or even if the changes planned by the current government are implemented, according to Marcus Collins, a partner with the Bangkok law firm McEvily & Collins.

The FBA does contain a number of business activities that have a direct impact on the property sector, chiefly property development and rental of property. Rental is going to be in Annex 3 which is a services provision and land development is in Annex 1.

An important change being considered is that the majority of directors need to be Thai but Mr Collins explained that the FBA in its current form does not have such a provision.

"So you could argue that if it doesn't deal with that, why make it tougher than it is? Why make it tougher than the original intent of the purpose of this law, a law ... that was put in place by a military dictator in the 1970s?"

Legal interpretations still hazy, says Mr Collins
The original law, which is the FBA as it stands today, says a company is Thai if the majority of the shares are held by Thai shareholders, which is minimum 50% plus 1 share, for the purpose of engaging in activities in Annexes 1, 2 and 3. This is not the same as what the Land Code says, in which the split has to be 49-51%.

"It doesn't say they have to have the majority of the votes in a shareholders' meeting, nor does it say you have to have majority of Thai directors in a company."

However, Mr Collins explained that if the changes are implemented it would allow existing companies that have different shareholding ratios and fall under Annex 3, which includes rentals, to be grandfathered. "So any company that now has a leasehold development with different rights for different types of shares would be okay because it wouldn't have to change that."

However, the nominee issue persists because a company would still have to have Thai shareholders who are not considered nominees.

"That issue doesn't go away ... either in the Land Code or the FBA. That issue has not been addressed properly in any of the discussions that we have seen in the past year or so, [under] the military government that has been in place or even previous to that when the whole debate started about Thaksin Shinawatra and Shin Corporation.

"So it's funny, it's been a year now and nobody has yet come out from the government with a statement. 'Okay, we believe the nominee is the following person, we consider the following structures to be nominee."'

Mr Collins added that this was an issue that must be resolved even if the authorities abandon FBA amendments.

"If we focus on the rumour for a moment, some Democrat Party members have come out with statements ... that first they felt it was wholly inappropriate that a temporary military government would start messing around with laws that have such an enormous impact on the Thai economy. So their first statement was. 'Apart from all this discussion about amending the FBA, we feel that actually this current government shouldn't really start messing with this law."'

If the Democrat Party is part of the next government, it is possible that it could opt to deal with sensitive business issues by means of specific laws already on the books, for banking, insurance or other sectors. "That is the way they should do it because it would be a much more targeted approach," says Mr Collins.

However the nominee issue lingers in the Land Code, which has not been amended for many years.

Mr Collins pointed out that over the years the Interior Ministry has instructed Land Department offices how to deal with land acquisitions by companies that are partially owned or run through a board of directors by foreigners.

"And we have that experience in the past year or so. ... It has made it a lot more difficult to transfer land, there is a lot more evidence that has to be supplemented to show that Thai shareholders in these companies have really invested money in these companies."

So while action has been taken in relation to the usage of a Thai company to purchase land, Mr Collins observed that the Land Code itself hasn't really been amended or any regulations issued that clarify what the Interior Ministry feels is the definition of a nominee.

"We have to kind of guess. The example I give a lot of people is if you are a foreigner and legally married to a Thai woman and your Thai wife holds shares in your company, which is very usual to do anywhere in the world _ people operate private business, their wife is often a shareholder, their children are often shareholders _ is that a nominee?

"The wife may not physically invest money but if you are married, in a lot of legal systems my money is her money, her money is my money, so why wouldn't we share the money? That is one example."

He offers another example of a small company with registered capital of two million baht, which has invested in property worth 50 million. It is entirely legal under Thai law and is done all the time, but you have to show the Land Department where the rest of the money comes from. But it is not necessarily a problem, as the money may be lent by a director or a shareholder or even a bank.

"This still has to be under the Land Code of 51% Thai shareholding but the Land Department doesn't say anything about the issue of differential in voting rights," says Mr Collins. "It doesn't say you cannot have _ as the bill for the FBA says _ different classes of shares. The Land Code just says if you are using a Thai company that buys property you have to have 51% of the shares registered in the name of Thai nationals.

"So it doesn't say anything about the directors having to be Thai or voting rights having to be one share one vote ... but it also doesn't say what the nominee means while mentioning that it nominee arrangements are illegal."

In this company with two million baht, the Thai shareholder holds shares worth a little more than a million but it could be insisted that the Thai shareholder has to invest that money himself or borrow that money from somewhere to truly invest that money in the company.

"We as a firm take the position that if you have this kind of a structure, then yes, you need to make sure that the Thai shareholder indeed invested that money in the company and you need to show evidence that that money was paid up for the shares. Otherwise you do run the risk that that Thai shareholder would be considered a nominee.

"But would it be necessary that the Thai shareholder invest 51% of the overall project cost? If you can leverage a project by borrowing money from elsewhere, I don't see that that would be a requirement but these types of questions we don't have an answer to. I know that a number of our colleagues take the same position as we do and say that as long as you make sure that your Thai investor invests the money in the shares _ at par value of the shares _ he or she shouldn't be considered a nominee.

"But after all these discussions this past year or so, some of us are not even sure anymore whether that is actually the correct statement. So in that sense there remains a lot of uncertainty."

Despite the vagueness, Mr Collins says he sees no rush by people to get out of freehold situations just because they are afraid something will happen.

The fact remains, he says, that people are selling because they can make profits, and prices in the likes of Phuket, Samui and Krabi are still going up substantially.

Reducing the base for property tax calculations could help increase public acceptance of the system, according to Somchai Sujjapongse, a fiscal adviser to the Finance Ministry. Dr Somchai recently visited the United States to survey how property taxes are assessed in different states.

He said that while US property taxes were relatively high, ranging from 0.75% to 3% depending on the individual state, the base for calculations varied as a proportion of the actual asset value.

Land for lease, for instance, is assessed starting at 50% of land value, residential buildings are assessed at 20% and industrial land at 40%.

Dr Somchai said a similar concept could be applied in Thailand, where the tax base has varied as a proportion of the actual asset value depending on property use.

The Fiscal Policy Office has already completed a draft law calling for a new property tax on land and buildings based on valuations set by the Treasury Department.

Finance Minister Chalongphob Sussangkarn, however, has refused to submit the bill to the National Legislative Assembly, arguing that the proposed law should instead be left for the new government to fully consider the widespread impact a property tax would have on the public.

The Fiscal Policy Office says a new property tax would make the tax system more equitable as well as create new revenues for local administrations to develop public services for different communities.

The new property tax is also expected to help curb speculation within the property market itself. Under the draft law, undeveloped land purchased and left unused for three consecutive years would be subject to an annual tax double that of normal rates. It would then double again every subsequent three years.

Dr Somchai added that a clause waiving property taxes for landholders 65 years or older had been withdrawn from the final draft due to fears of potential tax evasion. Landowners could shift their titles to proxies to evade tax liability.

The draft calls for tax rates to vary depending on location, with a minimum tax rate set at 0.01% of the assessed value of the property. Tax rates would be set by local administrations, giving communities a voice in setting rates and deciding on development priorities.

The draft law would replace the existing land and building tax, where land and buildings offered for lease are taxed at 12.5% of the lease revenues. Current law applies no tax for land and properties not used for lease.
source: Bkk Post

Capital restrictions on property funds are preventing Thailand from attracting investment, say foreign fund managers.

Chris Reilly, vice-president of the Asian Public Real Estate Association (APREA), said Thailand was missing opportunities to attract foreign investors due to the 30% reserve rule imposed by the Bank of Thailand on foreign inflows.

He said that property funds, known abroad as real estate investment trusts (REITs), were typically classified as low-risk assets, as fund managers were restricted to investing in completed projects with concrete revenue streams.

The REIT market worldwide was worth around $700 billion, with 150 international funds worth $1 billion or more each.

Mr Reilly said Thailand was the only country in the region with capital controls and high taxes.

Singapore, for instance, waives taxes on REITs, while Hong Kong charges a corporate tax of just 16%. Thai corporate tax is fixed at 30%.

The Thai REIT market remains in its infancy, with just 16 listed funds and a market capitalisation of $1.45 billion.

''By regional and global standards, the market is relatively small and illiquid, but there is potential for it to grow with considerable benefits for investors, real estate operators and the economy,'' said Mr Reilly.

Suvabha Charoenying, managing director at Thanachart Securities, said of the listed property funds on the Stock Exchange of Thailand, only two had market prices over their initial public offering prices.

''This reflects the fact that investors might not yet understand REIT investments, or possibly the fact that the products aren't meeting investor needs,'' she said.

Mrs Suvabha said Thai REIT has potential to grow, but that time was needed to educate investors.

Thanachart plans to launch three property funds this year with a total size of 10 billion baht, including both freehold and leasehold funds.
source: Bkk Post

The sub-prime meltdown in the US will ultimately affect the cost of borrowing and the ability to do so in Thailand because a lot of funds that flow into this market come from institutions in US and some of them have been affected, says Nigel Cornick, the CEO of Raimon Land Plc.

Financial institutions' general risk awareness increases when there is talk of mortgage defaults, repossession and price slumps, ''so those things tend to spread even though [the real impact] may be confined to America'', he says.

The problem in the US is rooted in the willingness of lenders to finance property up to 100%, and second mortgages are commonplace. Many homeowners are leveraged far beyond their ability.

''Now [sub-prime lending] is a market that is to some extent unique to America, so when you get a hiccup _ and it happens very quickly _ people's equity gets wiped out overnight, leading to less inclination to pay back your debt because you know your real estate asset is worth less than what you borrowed.''

The key lesson that Thais can learn from the sub-prime crisis, he says, is to keep within realistic debt-to-equity and loan-to-value ratios.

Despite the global sub-prime jitters Raimon Land continues to be optimistic about the future of the Thai property market. It is gearing up for the launch its posh twin-tower The River condominium, opposite the Shangri-La Hotel, in October; a soft launch took place earlier this year. The show units are nearly ready and the company will also be launching its own boat shortly to ferry people to the site. Piling is to start this month and is expected to last six months before the main contractors move onto the site.

Raimon Land is also working on another exciting project, 185 Ratchadamri, which is where the Cambodian embassy used to be located.

''We are going through a very detailed design development exercise to try to customise the number of units to the identified customer base that we have built up as a result of direct contact,'' Mr Cornick explains. ''So we envisage that there will be 180 to 200 units _ larger rather than smaller units _ I doubt if there will be any units smaller than about 120 to 130 square metres.''

However, the company is not in a hurry to unveil 185 Ratchadamri with the timing roughly around early next year for now. The price is expected to start as high as 200,000 baht a square metre. ''Where we finish we don't know.''

Mr Cornick advises people not to be put off by the prices of luxury condominiums in Bangkok because he expects them to double if not quadruple over the next five to 10 years. Underscoring this is the price of Somkid Gardens, which during the 1997 financial shake-up was around 100,000 baht a square metre but today, if there is a unit for sale, it would be at least 140,000 to 170,000 baht a square metre. Even this is only 70%, and most people expecting the price of their property to double over a decade.

''That would be most people's expectation in a normal market, in markets such as the UK it has probably quadrupled, but in this market the prices currently being achieved are not high, historically or regionally, and they can only go up.''

Those who think that coughing up 12 million baht to buy a condominium here in Thailand a huge investment should note that there are not many places in Europe where one can buy much with this sum of money. ''There may be in some of the eastern (European) states but I think in any major city in the world 12 million baht will not buy you much.''

But given recent worries as well as months of political drift, Raimon Land has seen evidence of consumer wariness in the number of sales it has made since the beginning of the year. Despite this the company has sold six billion baht worth of real estate so far this year with 70% of it bought by foreigners.

The company's foreign buyer base is spread quite widely now with its top buyers coming from the UK, US, Europe and Australia. ''Interestingly we are seeing a number of Russian buyers now, particularly in Pattaya but also Phuket and in Bangkok on the river, so that is going to grow,'' says Mr Cornick.

Raimon Land also expects more investment to flow to the Thai property market from the Middle East, not just at the institutional level _ Raimon itself has new investors in IFA Hotels & Resorts from Kuwait and Istithmar Hotels from the UAE _ but also by individuals.

''There are something like a million people coming to Bangkok for health care and other reasons out of the Middle East now, which is a significant number of people,'' he says. ''They all have money in their pockets, and a lot of it will be converted into buying real estate, I am sure.''

Given the high foreign interest, Mr Cornick has urged the authorities to consider increasing the percentage of foreign ownership in condominiums from the current 49% limit. ''That is one we have always recognised as being an easy option but one they haven't taken yet.''

Second, he says, the authorities could ease some of the controls they seek to put on foreign ownership of Thai companies. Third, they could consider allowing foreigners to borrow money locally to buy condominiums.