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23/02/2009 - Is it time for a correction in the Phuket property market?  23/02/2009 - Is it time for a correction in the Phuket property market?

On 3rd February 2009 an article appeared in Property Report Asia which claimed Phuket property experts were saying that Phuket residential real estate is overpriced.

It transpired, on reading the article, that there was little substance for this apart from the comments made by one estate agent.  As it was obvious that this article had been badly researched and lacked any substantial evidence we decided to launch our own investigation into the status of the Phuket property market.  

We were originally asked to comment for the article, but as our comments were contrary to the article’s premise, they were not included.  We felt compelled to write this in depth article in response.

“We need a visible display of reality,” the article quotes the estate agent as saying. “Prices have to adjust to invite people back in."

“If some developers do not grasp this nettle quickly, then they will not be around to cross the finish line," it continued.  

(People who have not recently visited, or have never been to Phuket, could be forgiven from the tone of the article that the real estate market was in crisis, there was mad panic by developers, projects were lying in tatters, no construction was going ahead and certainly no interested clients.)

But what do the experts say?

I interviewed a number of well respected Phuket property developers and real estate professionals for their responses.  The majority have been constructing, selling and providing legal services for property transactions on the island for many years, surviving the '97 Asian Financial Crisis, the 2004 tsunami and more recently the 2006 military coup.  


John Howard, Managing Director of Tilleke and Gibbins International Law Firm in Phuket, had this to say in response to the article,

"Interesting, but I do not agree - and the history of property prices in Phuket supports me. Even when there were "bodies in the streets" after the tsunami, prices did not drop. Water will find its own level, and what we are seeing is incentives offered - include the furniture etc etc - again because most owners are not leveraged, there is no pressure on prices - or evidence to suggest that lowering prices will translate into a sale. The problem now is a shortage of buyers ready to commit - they are nervous about the future and holding back (often to their disadvantage given the daily lowering of value of their home currency).”


“In the last week of January and the first week of February we have received new instructions on a daily basis from purchasers of property in the 25 to 35 m baht range, which indicates the strength of the Phuket property market.” John also commented.

The fortunate situation in Phuket is that most developers are not leveraged, don't have huge bills to pay and can just afford to wait for better times.

So what is the justification for the argument that prices should fall?  

The only attempts to substantiate comments in the original article are to compare Phuket with other markets, as in  "When assets across the globe are undergoing value adjustments there is no discredit in seeing the same occur here – in fact, on the contrary, the message can be a positive one – Phuket is operating in a mature and responsible market.”

The truth is Phuket is already acting far more responsibly than many other global markets and has been for some time.  

Peter Hamilton, Chief Executive of Campbell Kane, developer of several prestigious luxury developments, including The Yamu, The Bay and Cape Yamu points out, "Phuket isn't a mature market, that doesn't mean that it is unsophisticated or over priced simply that it is still in an early stage of its development."

He continues, "The capital market that supports Phuket property investment is under developed. There are very few mortgages and the secondary market is in its infancy - although we have seen that buyers are prepared to pay premiums for completed villas."

Paul Moorhouse, Managing Director of Dufor Ltd, developer of Layan Gardens and Luna, shares these views, "In the past three years Phuket property has gone up by between 15% and 25% in total. Singapore has gone up 100%, Hong Kong has gone up 75%, the UK had gone up 50% etc. etc. These markets are tumbling and they need to because they are massively over priced because of everybody's access to cheap money and plentiful supplies of it, now it isn't [accessible] there the prices are falling rapidly. [In Phuket] We didn't have the same increases, there is little or no financing here and little or no speculative buying as the aforementioned markets have seen. Hence they are collapsing and ours isn't!!"

So whilst Phuket remains unleveraged and property purchases are made with cash, no 'bubbles' are created in the market, this makes Phuket a very safe place to invest.

The fact is that the fundamentals of Phuket property are excellent, high quality properties are in demand and developers do not intend to reduce their prices.  

Bill Barnett, Managing Director of C9 Hotelworks, commented; "It’s easy to end up discounting what market there already is. Lack of prime land means longer term I doubt land prices will go drastically down, Phuket remains mostly an upper end luxury purchase and it’s the same deal, is BMW or Porsche dropping prices by 40%?".

Stephen Hughes, Managing director at the popular Pearl of Naithon, added, "The issue is not local price points as [the article] suggests but more to do with some European exchange rates and the availability of funds for many prospects from Europe."

Sterling has dropped over 35 per cent against the Thai Baht in the last year.

"The number of prospects is certainly down on last year however I think this is a world wide issue and Phuket is holding up it's price points and sales volume very well compared with it’s overseas competition."

So how will Thailand perform during the current global financial crisis?

Ironically, due to several negative events in the past, Thailand is positioned very favourably to survive this current downturn.  

Firstly, the 1997 Asian financial crisis forced regional banks to tighten up their lending practices to the property sector. Secondly, the country has not undergone a real estate boom in recent years such as those experienced in Singapore, China and India. Finally, real estate prices are still very competitive and offer good returns on investment.

"With strong underlying profitability, improved asset quality and more modest growth in preceding years, Thai banks should be better prepared to face the expected drastic economic slowdown this year than during the 1997-98 crisis," said Vincent Milton, managing director of Fitch Ratings Thailand.

So will developers in Phuket start cutting prices?

Certainly there are deals to be had and we do know of a number of developers who have cut prices on some properties by as much as 30% to try and stimulate some interest.  However, these are short term and isolated measures.  The vast majority of developers are happy to discuss price but it's not the only incentive investors have for buying property in Phuket.

Peter Hamilton, of The Yamu points out "Discounts may not simply be about stimulating demand, - there are many opportunities for investment in other markets and sectors at present - if a flexible arrangement suits both the buyer and seller a discount on a sale now may allow a developer to accelerate investment in another project or market which over the longer term may generate a higher return than holding out for sticker price."

"My conclusion is that quality products will continue to sell without discounts because they still offer long term attractive returns to investors."

It is more common for developers to offer incentives, such as furniture packages, guaranteed returns and even cars to lure new investors.  The majority of investors are more interested in longer term gains than in any initial price reduction, this could even be seen to down value the asset they are thinking of buying.

Kevin McGinn, the developer of luxury condominium development, Sansuri, is optimistic for the future "There are indicators that property investors are starting to move in places like London, and some financial markets could be improving as well."

It is apparent that Phuket has proved resilient in the face of crisis in recent years and will not suffer the problems associated with mass-leverage currently being experienced in many other more established markets. As a result it appears that the Phuket property market has the fundamentals, resilience and confidence to ride out this current situation and continue to flourish.

Based on the facts and the consensus of professional opinion, it would seem that Phuket is not set to undergo a major correction in property prices. It is also likely that the current period, when incentives are on offer and property developers are keen to make deals, offers one of the best opportunities to gain a foothold in the Phuket real estate market.

Further to this, John Russell of Hanuman Developments, Kamala Bay said, "Buyers at the moment are in a very strong position.  I'll talk to anyone who is serious." Take note - he said serious, the Phuket property market is not interested in vultures. 





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