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Further Reading:

Bangkok’s Financial Woes and Phuket’s Property Prices

The SET has recently hit an 8 year low and several property developers are reported to be seriously overextended. Should I be able to pick up properties in Phuket at heavily discounted prices ?

Odd as this may sound, the answer is in most cases No.

I realize all to well that in this period when it’s very much the fashion to knock Thailand’s economy (CNN recently suggested a redefinition of the initials SET - "Sell Everything Today") that I am sticking my neck on the line with that statement and will have to justify it.

My reasoning follows three main arguments. 1) Phuket is not Thailand, 2) Until the banks agree to absorb part of the losses, developers in trouble really have their hands tied, 3) Even if the banks do start to cut their losses, the troubled developments are generally in secondary locations and developments which rarely make the best long term investments, even at bargain basement prices.

Phuket is not Thailand. The Thai economy is generally a low cost manufacturing export orientated economy and it’s current difficulties stem predominantly from competition from other even lower cost manufacturing export economies. Phuket’s economy once based on Tin and Rubber, is now almost exclusively a tourist based economy and it’s business cycle moves in line with the global tourist industry trends. After a booming 80’s and a crash that can be dated quite precisely to the Gulf War in 1990 (which provided the emotional disincentive to travel) and simultaneous onset of the recession years in the major Western economies, tourism in Phuket has been picking up steadily since 1993. The oversupplies in hotel rooms have been substantially absorbed and several new investments in this area have been, and continue to be made. A similar pattern (albeit running about two years behind the hotel cycle) can be seen in resort housing and development land. After 5 years of very slow business, volumes have picked up significantly in the last year, stocks are reducing and for the first time in 7 years prices are beginning to rise.

The story in Bangkok during the same period was very different, property there largely brushed off the Western economies recession, and as Thailand’s export led economy boomed through the early 90’s, new investment in property continued apace. That market has now quite definitely hit and passed it’s peak. In Bangkok and central Thailand, both residential and commercial properties can with patience be picked up at 40% off their peaks of a year or two ago.
Many of the properties that are in serious trouble in Bangkok and too a lesser extent in Phuket, have a problem, in as much as they are already priced as low as the developers can set them, (typically below the cost of production) and cannot be reduced further because bank finance (together with accrued interest) now exceeds the value of the remaining stock.

The banks however remain very reluctant to foreclose on properties with negative equity. The issue here is primarily oversupply not overprice (at least not relative to production cost). The banks, who were largely to blame for this in the first place with their over generous lending to undercapitalized developers, and are now taking steps to rectify this oversupply in the form of very tight new lending policies that will severely curtail new development - while at the same time making loans for the domestic purchaser even easier to obtain. It’s a bit late certainly, but the banks really have no option but to stick this one out - so, no, I don’t see mass foreclosure and fire sales.

Some limited foreclosure and restructuring will of course occur and where it does, some bargains may become available, but it is my view that these will occur primarily in the most extremely overextended properties, which will in turn be in the developments that were least well conceived in the first place and consequently the least likely to see growth or appreciation in the future. Generally best avoided as investments whatever the price.

In conclusion, Bangkok, which is just now beginning it’s recession, will see some bargains emerge and prices falling further over the coming months and years. Conversely properties in Phuket which are just now coming out of a very long down turn, are already very competitively priced and there is a very real expectation of immediate growth.