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24 Jun 2008

Real Estate and Construction

Condominiums, 2H08: Skyrocketing Costs, Ebbing Purchasing Power (Business Brief No.2207)

Since early this year, condominium developers have been hard hit by soaring construction costs caused by record high prices for oil and steel coupled with a sharp rise in building material prices to reflect the increasing production and transport costs. Moreover, land prices along mass transit routes have so far more than doubled or tripled in line with rising demand for project developments, and wages for construction laborers have been lifted with the recent hikes in the minimum wages. Amid these unfavorable factors, signs have lately emerged that some developers will soon raise home prices that they have kept intact for some time. Until recently, the reduction in the Specific Business Tax offered by the government has eased their operating costs somewhat and offset their heavier burdens as a result of the rising construction costs.
KASIKORN RESEARCH CENTER (KResearch) holds the view that accelerating construction costs have prompted some developers to raise housing prices and others will soon follow suit, especially if construction costs continue to escalate. Given this, the further development of inner-city condominiums catering to medium-income customers, priced at THB1.5-3 million and more, which are located in the central business district (CBD) or along the mass transit lines may prove to be an uphill task. The city condo market may thus succumb to significant changes, e.g., they may focus on upper middle-class clients rather than the mid-range income segment, and their prime locations may shift to the suburbs of Bangkok and community areas adjacent to shopping malls.
As the planned two mass-transit rail lines – i.e., the Red Line linking Bang Sue - Taling Chan, and the Purple Line linking Bang Yai - Bang Sue –will expand to suburban Bangkok and the satellite provinces and are now in progress toward construction, other types of residential units may become more popular. Among them would be townhouses and single detached homes at prices that suit affordability. Still, there are some consumers who prefer to stay in the CBD or near mass-transit routes to save on commuting costs and travel time. Amid increases in housing prices, however, middle-class consumers succumbing to dampened buying power due to the self-perpetuating spiral in the cost of living and bullish interest rate trend may opt to rent rather than buy a new home.

In KResearch's view, the housing market is a dynamic market where demand tends to change with the economic environment, social developments and values. Developers of condominium projects with lengthy construction period should thus take this into account and make their projects more viable and realistic to implement.

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