While the stiff double challenge facing the Thai property market means there will be a drop in demand and pressure on both pricing and rentals in 2009, each sector will react differently to these circumstances, says James Pitchon, executive director of the estate agency CB Richard Ellis Thailand.

Although Thailand is fortunate in that its financial system is in a strong condition relative to those of many other countries, the drawn-out political confrontation and the global recession have led to a downturn in the local housing market.

After being hammered by a combination of high cost, weak demand due to low consumer confidence and conservative bank mortgage lending, housing developers have moved to building smaller units.

Up to the middle of this year the number of single detached houses completed by developers had fallen by 25%. On the other hand, the supply of developer-built townhouses increased by 30% clearly showing a shift to lower-priced products.

The good news, says Mr Pitchon, is that interest rates are falling and construction costs are also sliding in line with falling commodity prices. However, central bank rate cuts do not necessarily lead to significantly lower mortgage rates or increase lending because banks are assessing risk very carefully right now.

"Falling construction costs make the product more affordable. However, buyers may delay their decision to purchase in anticipation of prices falling further, so next year we would expect to see only a limited amount of new housing developments launched," Mr Pitchon said.

It is also noteworthy that Thais mainly buy houses to live in rather than as investments in the hope of appreciating asset values, because there is a very limited resale market for second-hand houses in this country.

CONDOMINIUM MARKET
Unlike the detached-housing sector, new condominium development has been very brisk for almost five years, with rising prices driven by increased construction costs.

Another key difference is that condominiums attract a mixed bag of purchasers including end-users, speculators hoping to resell prior to completion and people buying units to rent out.

However, the current circumstances mean that few new projects are likely to appear next year.

Even so, Mr Pitchon observed there has not been a decline in the pricing of buildings that are being completed and where purchasers have taken transfer of titles. It is noteworthy that foreigners who purchase condominiums rarely borrow money, and Thai luxury unit buyers also lean heavily towards cash.

"We do not expect to see price decline but a very illiquid market with very little resale transactions," he said.

However, the absence of price rises could lead to speculators trying to sell units or recoup downpayments, ranging from booking fees for recently launched projects to an average of 30% of the total price.

Mr Pitchon pointed out that this represents an opportunity for end-users to purchase at prices down from two years ago.

"The challenge for developers will be to sell their inventory and we could see developers cutting prices back to levels that we were looking at one to two years ago. The challenge for developers is also to get people to transfer titles upon completion, so it is the supply that is under construction where the biggest challenges lie."

APARTMENT AND CONDO RENTALS
This market is split between Thai and foreign tenants with Thai rentals usually below 15,000 baht a month and the majority of foreign rentals, which tend to be larger and command higher rentals because of their central locations.

While the total number of expatriates with work permits has grown, many multinationals are reducing their workforces worldwide.

"The current political instability has also affected multinational companies' plans for Thailand whether they be in manufacturing or service industries," said Mr Pitchon.

OFFICES
Rentals in the office sector have been flat for two years despite a rise in other countries with a remarkable doubling of rates in some cases. This drift took place even though there has been limited new supply because demand remains weak.

"A substantial amount of demand for office space in Bangkok comes from multinational companies and almost all of these companies are looking at cutting costs globally. So we see weak demand for office space in Bangkok, which has been made worse by the current political instability."

Mr Pitchon said weak demand would mean increased downward pressure on office rents. It is also unlikely that there would be any new starts over the next 12 months with this limiting future supply.

HOTELS AND SERVICED APARTMENTS
This is the first sector to see the impact of the recent airport closures that have led to a drop in tourist arrivals. The global recession is also affecting travel from North America and western Europe, two important tourist markets.

"We are going to see downward pressure on hotel and serviced apartment rates at a time when we see increased supply in Bangkok of both, and an increase in supply of hotels in Thailand's major resort markets," said Mr Pitchon.

However, he said Thailand still offered tourists a good product and would see a return of tourists. "But the question of 'when' depends on the global economy and how many people can afford to take overseas holidays, as well as a return of some form of political stability in Thailand so that tourists feel comfortable and safe."

INDUSTRIAL SECTOR
Thailand has seen relatively strong industrial land sales up to the third quarter of this year, but this is now affected by a global reduction in foreign direct investment.

"Weak demand and difficulties in the credit markets are going to restrict and reduce investment in manufacturing and the Thai industrial market will not escape from this global downturn. Thailand does need to see a return to a stable political situation that will give manufacturing investors confidence about the long-term viability of establishing a plant in Thailand."

OVERALL MARKET
Mr Pitchon said there was a big difference between the current crisis and the situation the country faced in 1997, which involved multiple failures of financial institutions at a time the rest of the world was in good shape. Today Thailand faces a global economic downturn, and will not be rescued by demand for Thai exports or by foreign companies coming to buy distressed assets.