Realty Check: Is that a big bubble set to burst over Bangkok?

Som has just signed a contract to buy a flashy, new condominium in Bangkok. It won’t be the first property she buys, though. She’s been purchasing a new unit every five years – in cash.

Her strategy is simple: She buy into a condo before it’s even finished, rents it for five years, then sells it.

“Here in Thailand, the value of your investment always go up for the first five years,” she said. “Then it’s time to sell it for its maximum price and buy another one that’s almost finished.”

For her, there’s no room for failure. She’s been doing the same deal for decades, with just one rule: “Never buy a property with a mortgage,” she said. “It’s your life jacket if things go bad in the future.”

Sound familiar? This is the kind of rampant “flipping” which characterized the boom, bubble and bust of real estate markets around the world just a few years ago. And if the liquidity to invest in Thailand’s housing market suddenly disappears? It could already be happening.

Some economic doomsayers predict a big bust is just on the horizon, due to similarities of the market situation today with that of Southeast Asia’s 1997 crisis and the American and European crash in 2008.

Go short or go long, so long as the investment flows in

Buying property in cash may not be the most common practice, but the housing market is attractive to many in Thailand. Most of the buyers have faith in it as a safe investment and are not afraid to contract long-term mortgages. Especially with the average salary growing by 24 percent in the last two years, and almost 50 percent since 2010, according to the National Statistical Office of Thailand.

A new crash would be troublesome for buyers like Pui, a sales coordinator at a luxury hotel in Bangkok. She contracted a 25-year mortgage at THB12,000 per month – exactly her base salary.

“I use to make another 10,000 more per month with my service charge and commissions, and my boyfriend helps me some times, so I still can make a living,” she explained.

Pui recently poured everything into buying a 30sqm property in a condominium in On Nut. Signing the mortgage with the bank was not a problem, since she’s worked at the same company for more than two years, she said.

“I’m lucky to love my job, because I can’t stop working, since I have to pay the bills every month,” she said.

Of course, her plan is not to live there forever. Like Som, she doesn’t expect a big change in the housing market and aims to sell her condo in a few years to see a profit.

For them and others in to win on short, there’s little risk for the bubble to burst, because so much of the money in the housing market comes from outside of Thailand. During the first four months of 2013, total investment value in Thailand amounted to THB510 billion, a huge increase of 80 percent over the prior year, according to the Thailand Board of Investment.

In the same way, capital inflows had reached THB176 trillion by May, 2013, triple the income of foreign inflows during the Western crash of 2007-2008. That means a huge amount of money arrived into Thailand, a lot of which went into the housing market.

 

This is how you spell sprawl

This foreign investment in the Thai housing market is one of the major forces pushing up the bubble-prices of condominiums in Bangkok and in the rest of Thailand. As the demand grows and the prices swell, construction moves farther from the business areas to locales such as On Nut or Bearing.

In just a few years On Nut has transformed from a local neighbourhood into a thickening cluster of condominium towers reaching for the sky. One of the most recently opened is selling at a minimum of THB103,391 per square meter for a room where you can’t avoid the sound of the BTS or the eyes of its passengers. A full unit is THB3.17 million for 31 square meters.

All the new condominiums in On Nut arrived during these last three or four years, but the area hasn’t expanded much. There’s still the same Tesco Lotus and Big C, and most of the old local restaurants and shops. The neighborhood can’t keep pace with the condominium boom, and local residents say the traffic and congestion are getting out of hand.

The same is happening in Bearing, where the BTS Skytrain’s Sukhumvit line now ends. Projected condominiums there start just under THB2 million.

Hanging over this sizzle is the big question of what would happen if foreign investment cools due to the conservative economic policies in America, Europe or Asia? Just as happened back in 1997?

 

It can only go up, right?

For Som, the investor who trusts every property will always gain value in its first five years, she’ll continue believing in the market and her ability to flip her units for a profit without worrying about long-term profitability.

But the average profitability value of the market in Thailand started taking a hit some months ago, according to investor Daniel Sobrado, who’s lived in Tokyo and London and  worked for banks as J.P. Morgan and Morgan Stanley.

As he explains, attractive profitability for international investors is 12 percent or higher. This number explains which part of the investment you can regain after one year. Ten percent is the minimum for him, but Thailand is now around 7 percent.

For a new condo on On Nut at a THB2.4 million price point and average rental of THB14,000, this profitability means, all things constant, it would take about 14 years to recoup the initial investment. That’s ignoring regular maintenance, taxes and other expenses.

Sobrado declares Thailand an unsound market for foreign investors right now. But that will change, he said, if the bubble bursts and prices go down, and especially if the baht crashes.

But that scenario would be hell for all the people that entered mortgages in the hope of further flipping.

For Som, who does every deal in cash from the previous flip, it would be the end of the line.

More complicated could be for normal workers like Pui, who contracted a 25-year mortgage.

If prices dive, she may not be able to cover the cost of her mortgage.

For now, she remains optimistic about her investment.

“If one day I can’t keep on with my work, I’ll sell my condominium before expected, and at least I’ll make some earnings,” she said.

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