New Construction and Market Strength
Mark Smith, a frequent visitor to Phuket asked "I have noticed
a resurgence of new construction around the island in the last few months.
Can you let me know how much of this new construction is residential,
and how you see the market developing? Do you still perceive residential
property as a good investment?"
There is indeed a resurgence of renovation and construction work underway all over the island. After six yeas of, slow sales and depressed prices, (stemming from the oversupply left after the 1987-1990 boom) the Phuket property market started picking itself out of a long downturn in late 1996.
The devaluation of the Baht in July 1997, (in stark contrast to its effects in the rest of the country), further stimulated the local property and tourist markets, with foreign currency buyers suddenly finding the island eminently affordable. During late 97 and 98 most of this increased demand was focussed on the large stocks of unsold or re-sale property. The only area seeing significant new residential construction being in two or three prime waterfront villa developments.
As we moved towards 1999, and a second year of record breaking tourist arrivals and hotel occupancy, the dire hotel room shortage, resulted in many residential rental properties moving into short term vacation letting, drying up the supply of long term rental housing and stimulating the housing market still further.
All of these factors are naturally leading to the increase in construction that you have noted. Closer inspection however reveals that much of the building work now underway is renovation and expansion work rather than completely new development. There has been a significant take up of hundreds of hitherto vacant shop houses by the many new small businesses, restaurants and bars set up to cater to the ever expanding tourist numbers - once neglected and run down sois are suddenly sporting a line of new shop fronts and restaurants.. Hotels with over booking problems are also looking for ways to convert under utilized space into a few extra guest rooms - yet despite the obvious increased demand and activity, there is in fact relatively little brand new construction underway and almost no sign of the frenzied building speculation that was present here between 1987-1990. The main reason for this is probably the total absence of any bank finance for new projects and the (some what novel) reluctance of local investors to borrow and undertake risks in the same manner that they have been wont to do in the past.
Several new resort housing and small low rise condominium projects are however now underway, or just about to be launched, but they have all been carefully designed by their owners to require the minimum of capital investment and the construction is typically carried out only in small phases in direct response to sales that are made on a strictly cash basis to buyers who are typically the end users of their purchase. New large scale speculative condominium and housing developments (with soft payment terms) are nowhere to be seen and to date there have been very few new hotel startups, though several large new hotels are expected to break ground soon.
This type of development is healthy and sustainable since it is unlikely to result in any significant over supply. Prime residential property prices in Baht have of course been rising for the last two years, but while it is immediately obvious that property prices in foreign currency terms are still lower than their levels at the bottom of the last cycle (1996), it is also interesting to note that Baht prices in some locations, while on the face of it looking increasingly high are still considerably lower than the 1990s peak if viewed in real terms. As such it is my belief that there are still several more years of growth in the current cycle and that continued shortage of construction finance will serve not only to prolong the cycle but also prevent an oversupply that could, as in 1990, trigger a sharp fall in values.