Recently, there have been warnings from the Bank of Thailand governor to commercial banks on their lending practices about the ongoing high loan-to-value (LTV) rates as well as risk from unsold inventory and oversupply.
Lessons learned from the 1997 Thailand financial crisis has led to more cautious approaches from both commercial banks and developers during the past two decades. There are certain indicators we could use as guidelines to ensure market stability.
Developers can gauge whether an oversupply is occurring by determining if there are more speculators/investors than end-user buyers and buy- to- hold investors. A prudent developer will keep track and analyse buyer and potential buyer’s profiles and purposes for purchases. One measure they can do to monitor the risk of having too many speculators is to set a higher percentage of down payment. With more money invested up front, investors and speculative buyers would be less likely to cut loss on their property investment and hold on to it longer to recoup the investment in the event of market uncertainties.
Another question that is worth asking when determining market conditions is to measure whether the prices of property have increased to a price beyond the affordability of local end-user buyers. Today competition for developable land has driven land prices up substantially. Land cost has become the highest component in development cost. Prices for even mid-market products in Bangkok has gone beyond the purchasing power of most blue-collar workers and has led to high unsold supply.
Banks have been careful since 1997 to ensure they do not repeat the mistake of over lending with high LTV ratios which greatly increases the risk of non-performing loans (NPL’s). Availability of mortgages is one of the drivers for the growth of the property market; however, it could be a double-edged sword if the loans issued are low quality and results in higher NPL’s. Banks could consider lowering LTV ratios and impose stricter lending policies to reduce risks of underperforming loans. Another measure that could mitigate risk is for the developer to implement a pre-approval process for mortgages as a condition before selling the properties.
Due to the ever-higher prices, developers are now taking their projects to foreign buyers in hopes to unload unsold inventory. In the past three years, foreign buyers, especially Chinese and other Asian buyers have helped to reduce the unsold supply in the Thai condominium market. This trend will continue as Thailand is one of the few countries that does not charge foreign or second home buyers additional stamp duties. Apart from being a popular tourist destination, other factors include affordable prices, ability for foreigners to own condominiums, proximity to a city centre, convenient transportation, and good amenities.
The real issue in selling greater percentages of units to foreigners is that most foreign buyers, whether end-users or investment driven, are much more sensitive to any negative sentiment, political or economic, that may arise. This increases the risks for developers if there were negative news to provoke foreign investors to pull out and cut losses. Keeping the ratio of foreign buyers lower per project and increasing down payments on units could be a prudent approach to minimize risk.
Appropriate government stimulus policies could also help to boost the property development sector. For example, using stimulus policies that are focused on completed projects with attention given to end user demand could help lower the level of unsold inventory and strengthen the market while keeping demand less speculative and more buy-for-use focused.
Risk management policies can be implemented at every level from government, developers to financial institutions working together to create a clear and realistic forecast of supply and demand to safeguard a country from real estate bubbles. It requires diligence in monitoring the market and a level of market transparency to ensure that bubbles do not occur. Land costs is a crucial part of the development process as, today, it represents the largest cost of any project. Developers should cautious to ensure that land prices they purchased are going to be affordable to their target segments and study their target customer group to ensure that enough real demand exists as compared to supply. As land prices continue to rise, especially in prime locations, the land price to product price value proposition will need to be more scrutinised.
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