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The ‘New Normal’ in the Bangkok Real Estate Market

17 Mar 2017

“New Normal” is a term that has become a popular term used to describe a change in financial and economic situations after the 2008 financial crisis. The term is used in a variety of contexts to explain that something which was previously abnormal has now become commonplace and will be the “new normal”.

In the Bangkok real estate market, we have seen the “new normal” begin to take shape since last year and continues in to 2017. For the past decade, “normal” has been a bull market growth environment in the Bangkok residential sector, which was driven by urbanization, the changing behavior of the working generation as well as more and smaller households; however, today developers are operating in a “new normal“ environment which is characterized by a bearish slow-growth market and economy.

The property market must find a new balance between supply and demand in the face of a slow economy and aging population while adjusting to market saturation in certain property sectors. It used to be that you could build just about anything and call yourself a professional real estate developer, but the amount of new supply in recent years is turning the sellers’ market into a solid buyers’ market. Developers have to compete fiercely for the pool of eligible buyers. Purchasers have so many options now that they can afford to be picky and sometimes even the smallest advantage of one project over another can change buying decisions. This means that developers with insufficient experience, cash flow, product innovation, and quality control will be weeded out of the game.

Single day sell-outs are also a thing of the past. Where before developers could sell out a project within one day of public sales, today a more realistic approach is a 30-50-20 model - 30% presales before construction, 50% during construction and 20% after construction completion.

Speculative buyers of Thai real-estate who bought off-plan with low down payments, hoping to resell quickly before completion are also becoming more cautious as they are feeling the impacts of the slower markets and finding it harder to offload their investment properties. A quick resale is not always as easy as before. Today, it is the longer term investor who can afford to buy and hold on to properties without worrying about cash flow and real end user buyers that will make up the bulk of purchasers. End-users and buy to rent investors take more time to make decisions on purchase, which is part of the reason for the slower sales rate for projects. Where speculators used to account for a large percentage of the sales volume, today a more realistic number from our databases is to projected at around 20% - 30% compared to 50% or higher before.  

The feasibility equation has also changed for developers. Land cost used to represent around 20% - 30% of the total development cost. As land prices, especially in the CBD, have reached as high as two million baht per square wah (500,000 baht per square meter), the cost of land for new projects has significantly increased to 40% - 50% percent of total development cost. The effect of this will drive up selling prices which will make the developers’ task harder in a slow growth market where affordability for many purchasers is low. It is not an impossible situation for developers, but will certainly make things much more challenging. The new normal is going to force developers to be creative in the way they utilize land, product innovation, and marketing. Changing business models and strategies will be necessary to succeed in the “new normal” environment.

This is a special article written by Aliwassa Pathnadabutr, Managing Director of CBRE Thailand for The Nation’s Property Scene dated 17 March 2017.