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14 May 2008

Real Estate and Construction

Property Development: Facing Challenges in 2008 (Current Issue No.2070)

KASIKORN RESEARCH CENTER (KResearch) takes the view that amid scores of positive factors, particularly the government's real estate incentives and economic stimulus programs, including the intense competition in home loan extension at financial institutions, Thailand's real estate industry are still amid numerous risk factors, i.e. –
- Skyrocketing oil prices – Steep oil prices may derail a Thai economic recovery, and real estate is no exception. Property projects have felt the pinch from soaring construction costs as a result of steep and volatile fuel prices. The average prices of construction materials are expected to climb further over the remainder of this year. Higher construction materials – a key component of construction costs – will result in hikes in new home prices during the latter half of this year. Other negative factors also include rising land prices, especially in the areas along mass transit routes, as well as increasing labor costs in light of recent minimum wage hikes.
- Political uncertainties – Both property developers and consumers should closely monitor the domestic political situation, as it may affect consumer confidence and decisions on home purchases.
- Higher competition in the real estate market – Despite the recently launched real estate incentives, consumers have been hit hard by the soaring cost of living, and may adopt a cautious stance when it comes to home buying. Their decision on home purchases may not solely depend on tax incentives or the interest rate trend as seen before. Against the backdrop, it may prove to be an uphill task for property developers to secure higher sales turnover, and many of them should adopt the more proactive marketing campaigns. Amid restrictions in home price increases, property developers may have to shoulder some burdens caused by the rising costs themselves.
- Changes in real estate related laws that are aimed at consumer protection include the Escrow Account Act, the Condominium Act (No.4) B.E. 2551, plus laws pertaining to environmental protection and city planning in the Bangkok Metropolitan Region (BMR), etc. Property developers' compliance with these laws is very important, otherwise their financial costs may rise needlessly and their image may be at stake, let alone consumers' trust in their projects.
- Financial institutions' stricter credit approvals – With greater risks plaguing the economy, financial institutions have to adopt a more cautious stance in their underwriting to control loan quality.

Under these circumstances, emphasis may be placed on cost reductions and the cutting of special offers to maintain profitability. Other strategies may include downsizing condominium or residential units but maintaining the same quality standards and prices. In the midst of highly competitive environment, effective construction management is very important, especially the shorter construction periods. With the rising prices in sight, due to the runaway construction costs, property developers may be able to turn crisis to opportunity, through the offers of sales at the existing prices, which may hasten decisions among prospective buyers.

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