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12 Dec 2007

Real Estate and Construction

Condominiums, 2008: Balancing Supply and Demand… Risks that Should Not Be Overlooked (Current Issue No.2008)

Broadly speaking, the real estate industry encountered a prolonged slowdown in the Year of the Pig. The Thai economy, plagued mainly by political uncertainties, has jolted the decision-making spirit of homebuyers. Even so, condominiums have flourished substantially, bucking the overall trend. Over the past few years, property developers have shifted to building condominiums, particularly in the central business district and along the Skytrain and MRTA subway routes. Amid this economic slowdown where consumers have been hard hit by surging oil prices, some property developers have turned crisis into opportunity, focusing on medium-priced condominium units listed at between THB1-3 million located along commuter train routes. Medium-income customers are regarded as the target mass market, most of whom want to live near their workplaces, which is certainly an important convenience with shorter commuting times. Lately, the unveiling of new condominiums has received overwhelming response from potential buyers, where condominiums costing THB1-3 million along those Skytrain routes have mushroomed everywhere.

KASIKORN RESEARCH CENTER (KResearch) forecasts that condominium completions in BMA in 2008 may total some 17,000 units, a year-on-year increase of 6.3 percent over the projection of 16,000 units for 2007. That increase will likely be due to a massing supply of completed condominiums that were launched during the previous bullish economy.

Concerning the trend for condominium homes in 2008, it is projected that an important variable that will affect economic recovery and consumer confidence is and will be the political situation. A recovery in the domestic economy is up to the stability of the new government and its efficiency in proceeding with economic policies, including their ability to expedite mega-project investments, e.g., three mass transit train routes, etc., that would be helpful toward reviving the economy and ensuring consumers increase their spending.

However, KResearch holds the view that Thailand's economic situation in 2008 will still be subject to risks that will influence the homebuyers' purchasing power. At present, those who want to buy homes will think that they should be more careful and exercise caution in such plans, opting to wait and see how the economy goes. Therefore, their buying decisions may be postponed as they consider the following factors:

Oil prices that have reached record highs If oil prices continue to blaze to new heights next year, that will obviously affect Thailand's economic recovery. Previously, rising oil prices played a vital role in helping consumers decide to buy condominiums that are close to mass transit train system routes or are in downtown locations as these areas allow consumers to economize substantially on commuting expenses, despite the burdensome oil prices. Public transportation bus-fares and the price of cooking gas have also increased along with gradual increases in consumer goods' prices by some manufacturers. Definitely, rising prices versus fixed income levels will directly impact the purchasing power of homebuyers.

Inflation is tending higher – This is driving loan rates higher than expected. Rising inflation is a variable that will influence interest rates next year. The key factors that will determine volume in home sales will be economic factors, e.g., interest rates and home prices. If home prices adjust higher at a faster rate than incomes, this would surely be negative to home buying because purchasing power decreases relative to current prices that consumers might find affordable at the rates now.

Amid the economic risks caused by many uncertainties expected next year, condominium entrepreneurs have to be cautious in expanding the property supply because there is the risk of higher oil and other consumer product prices, plus the trend expected for interest rates. If those factors become more severe, they will drastically affect the purchasing power of consumers. As a result, the real-estate market may very well not grow as predicted, which would lead to an over-supply in the condominium market.

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