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Floods Won’t Dampen Property Market over Long Term

By on Nov 21, 2011 in Property News

This year’s floods have had a vast impact on the property market, with sectors affected across the board. But the impact varies from sector to sector,from residential to industrial.

The industrial sector will depend on a solid government plan for relief, but the future for other sectors is bright.

This year’s floods have had a vast impact on the property market, with sectors affected across the board. But the impact varies from sector to sector, from residential to industrial.

RESIDENTIAL SALES MARKET
In the short term, residential project sales will slow down while the city is still affected by the floods, but in the medium to long term the crisis will have an impact on multiple levels from location to product and pricing.There will be a change in demand patterns in terms of preferred location and product.Buyers obviously will be hesitant to purchase in areas where heavy floods have occurred.The business areas of Lumpini, Silom, Sathorn and lower Sukhumvit will continue to be the preferred locations; other areas will be assessed once the flooding is over.

In terms of product, buyers will pay more attention to design features and flood protection measures. Housing developers need to ensure that both estate infrastructure and individual houses incorporate flood protection features when launching new projects.

Post-flooding, construction costs are likely to rise on high demand for construction materials and skilled labour, particularly qualified technicians and contractors to rehabilitate damaged properties. Projects under construction in affected areas such as Rangsit and along the MRT purple line are temporarily halted and construction can only restart once the flood subsides.

Affordability and pricing will also be affected, particularly for the entry-level and midmarket. The crisis will directly affect the spending power of those affected who may have lost their income or face additional expenses such as repair or replacement of damaged cars. This will slow down purchase decisions and shift the focus to lower-priced products.

At the higher end of the market, demand for second homes from wealthy Bangkok residents will rise, notably for city or resort condominiums. Resort markets such as Pattaya, Hua Hin and Phuket will benefit.

Overall, the market will likely see a shift toward condominiums and away from houses or townhouses, particularly among younger buyers. The perception will be that even if condominium buildings are inaccessible if flooding occurs, possessions and furniture will still be safe. This is not to say the market will completely turn away from housing developments, but we do expect housing sales to drop in the medium term until buyers’ confidence is restored and until developers can demonstrate effective prevention measures and designs that minimise flood damage.

HOTELS AND APARTMENT RENTALS
The apartment and condominium rental market is benefiting in the short run with a hike in demand for temporary stays from those whose homes have been flooded. Similarly,serviced apartments, despite lost business from reduced tourism, are benefiting not only from local demand but also from demand from foreign engineers who will arrive to repair damaged factories and production lines.

In the medium term the rental market will remain unaffected as most tenants are on one-year leases. However, the impact will be felt in the long term if Thailand cannot restore foreign investor confidence, particularly that of Japanese manufacturers who drive the expatriate rental market.

Thailand’s hospitality sector has once again been hard hit as many countries have issued travel warnings for Bangkok. Hotel occupancy and rates in Bangkok have plunged, but from past experience such as last year’s civil unrest, the tourism sector tends to bounce back quickly. Resort areas unaffected by the floods are also facing the impact, but to a lesser extent.

OFFICE MARKET
The office sector is one of the least affected sectors. While demand has been improving,concerns about the global economy will slow down decisions, but it is unlikely that companies will look to reduce space. In terms of location, it is again too early to say if a particular area will benefit as we do not yet know the full extent of the flood impact. It is,however, certain that direct connection to mass-transit stations will be a requirement as accessibility has been a key issue in the present situation. Mass-transit systems have continued to operate despite the streets above and below them being flooded.

The fundamentals of the office market remain strong. With limited supply coming online in the next three years, we are unlikely to see a dramatic drop in rents even if demand weakens.

RETAIL MARKET
The retail sector is facing multiple impacts,from the closure of main malls including Future Park Rangsit and three Central shopping centres (Pin Klao, Ram Intra and Lat Phrao). The supply chain has been disrupted with many distribution centres damaged or inaccessible. Nevertheless, major retailers such as Tesco Lotus, Big C and 7-Eleven have managed to restock and keep goods on the shelves. While the initial impact will be negative, the retail sector will be boosted after the flooding from reconstruction.

Post-flooding, major beneficiaries will be home improvement stores such as HomePro and the newly opened Ikea, and sales of white goods such as refrigerators and washing machines.

The medium- to long-term prospect for the retail sector will depend on overall economic performance and how quickly Thailand gets back on its feet.

INDUSTRIAL SECTOR
Seven industrial estates have been damaged so far, with more than 891 factories swamped.It is difficult to predict how long the recovery process will take, but in the short term the impact is severe with widespread disruption in the manufacturing and distribution chain.Even factories in unaffected estates face disruptions in production due to shortages of manufacturing parts from flood-damaged suppliers.

Thailand is the world’s second-largest producer of hard disk drives after China and is a major supplier of drive components. Such businesses may reconsider having such a large part of their global production located in Thailand.

The recovery process for the industrial sector will be strongly underpinned by the government’s effectiveness in offering supporting measures, and the individual estate operators’ measures to bring factories back into operation. Going forward, while existing operations will reopen, it is critical for the government to rebuild confidence and take effective steps to prevent similar disasters from occurring in the future. If not, Thailand is at risk of losing its credibility and foreign investment.

The government’s post-flood rehabilitation programme will be essential to the recovery of all sectors of the property market and will have a direct impact on the overall economic outlook and the Kingdom’s direction for the coming year.

This article was published on Bangkok Post dated 20 November 2011 written by James Pitchon, Executive Director of CBRE Research and CBRE Consutling, Thailand.

Aliwassa has been the Managing Director οf CBRE Thailand for a number of years. As a Thai national, Aliwassa is extremely knowledgeable about the sale of property in Thailand, specifically large scale high value condominium developments largely in Bangkok.

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