Property in Thailand brings good returns. So why isn’t the market more vibrant?
Lalaine C. Delmendo | June 30, 2020
Even before Covid-19, property demand was weakening in Thailand. That’s a little strange because rental income yields on luxury condominiums are attractive, and Bangkok is popular as a regional hub. In fact residential property prices continue to rise, yet transactions are down, and new construction has been falling. Could Thailand’s continuing political uncertainty be jinxing the market?
After winning the March 2019 elections, Prime Minister Prayuth Chan-o-cha (who led the military seizure of power from PM YingluckShinawatra in May 2014), declared that the country would now function as a normal democracy. But most powerful cabinet positions are still held by former members of Prayuth’s military government, and the military keeps its power of arbitrary detention, used in the past to silence critics.
Also, the new constitution ensures that members of the National Council for Peace and Order (NCPO), the official name of the military junta, will not be held accountable for any rights violations committed during its rule.
Seemingly ignoring politics, the average price of single-detached houses in Thailand rose by 5.1% (5.3% in real terms) during the year to Q1 2020, according to the Bank of Thailand (BoT). On a quarterly basis, house prices increased 2.3% (3.1% in real terms) in Q1 202o.
By property type:
- Condominium prices rose by 4.4% (4.6% in real terms) during the year to Q1 2020, a sharp improvement from last year’s 1% growth. However quarter-on-quarter, condo prices dropped 1% (-0.3% in real terms) during the latest quarter.
- Townhouse prices rose by 4.9% (5% in real terms) during the year to Q1 2020, following y-o-y increases of 5.8% in Q4 2019, 2.2% in Q3, 3.4% in Q2 and 7.3% in Q1. During the latest quarter, townhouse prices increased 2.8% (3.6% in real terms).
Land prices are also rising. The land price index rose by 3.7% (3.9% in real terms) y-o-y in Q1 2020, up from annual growth of 3% in Q1 2019.
Yet despite these property price rises, the market is in fact lacklustre. Residential construction has been weak, whichpartly explains why house prices continue to rise.
Nationwide condominium registrations plummeted by 30.3% to 70,841 units in 2019 from a year earlier, in sharp contrast to a 40% growth in 2018, according to the BoT. Land and building transactions fell by 11.6% y-o-y to around THB 1.01 trillion (US$32.61 billion), in contrast to 7.7% growth in 2018, according to the BoT.The total number of new housing units in Bangkok Metropolis and vicinity fell 14.7% y-o-y to 111,657 units in 2019, according to the BoT. Over the same period, new apartments and condominium units in the metropolis plummeted by 27.3% to 53,163 units.
In an effort to boost demand, the BoT recently eased loan-to-value (LTV) regulations for mortgage lending. Effective January 2020:
- The maximum LTV ratio for mortgages on first homes valued at less than THB 10 million (US$324,000) was raised to 110% from 100%;
- The maximum LTV ratio for mortgages on a second home is maintained but the minimum pre-servicing period for mortgages on first homes was shortened to 2 years from 3 years;
- The maximum LTV ratio for mortgages on first homes valued at more than THB 10 million (US$324,000) was raised to 90% from 80%.
An additional factor for recent weak demand is certainly that Covid-19 has hit both local and foreign demand, courtesy of harsh lockdowns. The Thai government has barred inbound international commercial flights until the end of June 2020. Tourist arrivals are likely to fall by almost two-thirds to 14 million people, from a record 39.8 million visitors in 2019, according to the Tourism Authority of Thailand.
Investors from Mainland China and Hong Kong make up almost half foreign demand for residential condos. People from the US, Singapore, Taiwan, Japan and the UK are also big investors.
Because of Covid-19, aGDP contraction of 5% to 6% is forecast by the National Economic and Social Development Board (NESDB). There was a contraction of 1.8% in Q1 2020, the deepest decline since Q4 2011. In response, the Bank of Thailand cut its benchmark rate by 25 basis points in May to a record low of 0.5%, the third rate cut this year.
No property bubble
There is certainly no property bubble in Thailand. Real demand, not speculative demand, exists for low-rise housing below THB 3 million (US$97,122), which accounts for 70% of the market, according to Housing Business Association (HBA) president IssaraBoonyong. The remaining 30% of demand comes from investors, who buy homes to generate rental income.
SINGLE-DETACHED HOUSE PRICES, ANNUAL CHANGE (%)
|Sources: Bank of Thailand (BoT), Global Property Guide|
From 2008 to 2018, house prices rose by 39.3% (16.7% in real terms). In 2019, house prices rose by 5.3% (4.9% in real terms) from a year earlier.
Larger apartments yield more
Rental yields in Bangkok are good, ranging from 5.0% to 8.0%, based on a Global Property Guide research conducted in June 2019. Over the past three years, we´ve seen yields on medium-sized apartments (120 sq. m.) rise significantly.The apartments included in our survey are located in Bangkok’s upscale residential areas which includes Sukhumvit Road, Silom, Sathorn, Riverside, Rama III, and Central Lumpini.
In most countries’ major cities, smaller apartments earn higher rental yields than bigger apartments. That’s not true in Bangkok. A 60-square metre (sq.m.) apartment in Bangkok’s central location now earns gross rental yields of around 5.6%, while a 120-sq. m apartment also centrally located, earns gross rental yields of around 8.0%.
Yields have risen at the luxury end of the market, though since last year they have fallen for the very large sizes, such as 250 sq. m.
Sales transactions to fall further, foreign demand wanes
Despite these apparently positive factors land and building transactions fell 11.6% y-o-y in 2019, in contrast to 7.7% growth recorded in 2018.
All the regions of Thailand saw falling transactions last year:
- In the Central region, which make up around two-thirds of demand, transactions fell by 11.9% y-o-y to THB 653.8 billion (US$ 21.17 billion) in 2019
- In the Eastern region,transactions dropped 12.6% y-o-y to THB 118.69 billion (US$ 3.84 billion)
- In the Northeastern region, transactions fell by 12.6% y-o-y to THB 82.54 billion (US$ 2.67 billion)
- In the Northern region, transactions fell by 12.4% y-o-y toTHB 80.98 billion (US$ 2.62 billion)
- In Southern region, transactions fell by a modest 4.2% y-o-y to THB 71.24 billion (US$ 2.31 billion)
Demand is expected to fall further because of COVID-19’s impact on foreign visits.
Residential construction activity weakens
Meanwhile residential construction remains weak. Nationwide condominium registrations plummeted by 30.3% to 70,841 units in 2019 from a year earlier, in sharp contrast to a 40% growth in 2018, according to the BoT.
- In Bangkok Metropolis, condominium registrations fell by almost 26% y-o-y to 42,081 units
- In other provinces, condominium registrations fell by more than 36% y-o-y to 28,760 units
In contrast, land development licenses in the country increased 11.2% to 91,193 units in 2019 from a year earlier. Most of these licenses are located in other provinces. In Bangkok Metropolis, land development licenses fell by 26.8% y-o-y to 13,359 units last year.
The one exception to the fall in new housing units in Bangkok Metropolis was new housing project releases, which increased slightly by 1.4% to 38,251 units. Self-built housing also rose by 1.2% y-o-y to 20,243 units last year.
Q1 2020 brought hope that residential construction sector would pick up, with condo registrations in the whole country rising by a remarkable 47.6% y-o-y. But activity ground to a halt in Q2 due to Covid-19 restrictions and the lockdown.
Mortgage lending up; interest rates falling
Low interest rates have buoyed property demand in recent years. In May 2020, the Bank of Thailand cut its benchmark interest rate by another 25 basis points to a record low of 0.5%, following four rate cuts in the past ten months.
The size of Thailand’s mortgage market grew to about 18.3% of GDP in 2019, slightly up from 18% of GDP in 2018 and 13.8% of GDP a decade ago.Personal housing credits rose by 5.4% y-o-y in 2019, according to the BOT. In Q1 2020, personal housing credits and total property credits outstanding rose further by 3.9% and 5% y-o-y, respectively.
In 2016, the government launched the “Baan PrachaRath” program, mandating state-owned banks, including the Government Housing Bank, Government Savings Bank, and Krungthai Bank, to provide a total of THB 70 billion (US$2.27 billion) of soft loans to both housing developers (pre-finance) and low-to-middle income homebuyers (post-finance).
Of which, THB 30 billion (US$972 million) of loans are offered to property developers while the remaining THB 40 billion (US$1.3 billion) are allocated for citizens who purchase residential units at a price not exceeding THB 1.5 million (US$48,600).
Then in 2018, the Government Housing Bank launched the one million-unit low-cost housing project, giving low-income households the opportunity to buy affordable houses. The project, which was extended until December 2020, had already provided loans worth THB4.3 billion (US$139.2 million) to more than 6,300 people. Additional loans worth THB10 billion (US$323.7 million) were planned to be approved last year.
Foreign homeownership rules
Foreigners cannot buy land in Thailand, only condominium units and apartments. Foreigners cannot make up more than 40% of the condominium’s unit-owners. However, a foreigner can buy a whole building, minus the land on which it is built.
In recent years, minor changes in Thai law have allowed nonresidents to further explore the Thai real estate market. A foreigner can have a 30-year renewable lease, under which the buyer registers at the Land Office an option to renew the lease contract indefinitely, for further 30-year periods.
There are serious drawbacks to this lease arrangement, however. Lease renewals cannot be registered, and are not effective against a purchaser of the property. And the lessee cannot (without the lessor’s consent) sublease, sell or transfer his or her interest.
Another option is to set up a private limited company with mixed Thai and foreign ownership, the foreign ownership being 49% or less. Companies are allowed to own land. The foreign national can control the company by using a legal power of attorney from the Thai shareholders, handing control to the foreign directors, or through assigning greater voting rights to the foreigner partner/s. This is an effective and time-tested route, most commonly taken by foreigners. The help of a lawyer is very important.
Foreigners can also invest at least THB40 million (US$1.3 million) in a Board of Investment approved project. They will then be allowed to purchase up to 1 Rai (1,600 square meters) of land.
Coronavirus pandemic hits Thailand’s economy
As the coronavirus outbreak shuttered borders around the world, Thailand’s tourism-reliant economy contracted by 1.8% in Q1 2020 from a year earlier, the deepest decline since Q4 2011. The National Economic and Social Development Board (NESDB) slashed its forecast for 2020 to a contraction of 5% to 6%, from its earlier projection of a growth of 1.5% to 2.5%. The economy grew by an annual average of 3% from 2013 to 2019.
In addition to the dramatic decline in tourism, exports, another key economic driver, fell sharply by 22.5% in May to US$ 16.28 billion from a year earlier, the steepest y-o-y decline in over a decade, amidst a drop in shipments for cars and computers. In 2019, exports had already fallen by 2.7%, due to the strong Thai baht and the US-China trade war.
Recently, the BoT and the Center for International Trade Studies at the University of the Thai Chamber of Commerce forecast exports to contract by as much as 7.1% this year.
“Under the worst-case scenario in which the coronavirus Covid-19 crisis exceeds 9 months (to September 2020), the University of the Thai Chamber of Commerce is forecasting exports could contract by as much as 7.1% this year, with the actual export value shrinking US$17.42 billion USD, or 557.72 billion baht,” said AatPisanwanich, the director of the Centre for International Trade Studies.
In the past year, the Thai baht weakened slightly against the US dollar by 0.9% to an average exchange rate of THB 32.083 = USD 1 in May 2020, but still not enough to offset the 19.2% gain from 2015 to 2019.
After winning the March 2019 elections, Prime Minister Prayuth Chan-o-cha formally resigned as the head of military government in July 2019 and declared that the country would now function as a normal democracy after five years of military rule.
“Thailand is now fully a democratic country with a constitutional monarchy, with a parliament whose members are elected,” Prayuth said. “All problems will be addressed normally based on a democratic system with no use of special powers.”
But almost a year after the elections, critics argue that Thailand’s political situation has become more complex, with others regard it as a hybrid of democracy and authoritarianism.
The junta, which had given itself sweeping powers without oversight, was dissolved with the inauguration of the new Cabinet. But most of the powerful cabinet positions were held by former members of Prayuth’s military government. In fact, Prayuth also serves as a defense minister in the new government. The military also keeps its power of arbitrary detention, which was used in the past to silence critics.
Prayuth was retained as prime minister with the backing of military-appointed Senate and pro-military parties in the parliament who were elected during the March 2019 general election. The election, which was marred with controversies and irregularities, was held under a new constitution and laws enacted by the junta aimed at disadvantaging established political parties and keeping any single party from winning a clear majority.
Also, the new constitution more or less ensures that members of the National Council for Peace and Order (NCPO), the official name of the military junta that governed the nation, will not be held accountable for any rights violations committed during its rule.
Thailand’s military seized power from an elected government in May 2014, the 12th military coup since the end of absolute monarchy in 1932. Led by the present prime minister, Prayuth, the coup came after several months of protests against the ruling Pheu Thai party and former PM YingluckShinawatra. After dissolving the government and the Senate, the NCPO vested both executive and legislative powers in its leaders, and took control of the judicial branch. A nationwide martial law and curfew were declared; political gatherings were banned; opposition leaders and activists were arrested; and media and internet censorship was imposed.
- Thailand´s condo market sinks as Chinese investment ebbs (Nikkei Asian Review): https://asia.nikkei.com/Economy/Thailand-s-condo-market-sinks-as-Chinese-investment-ebbs
- Economic indices and indicators (Bank of Thailand): https://www.bot.or.th/English/Statistics/EconomicAndFinancial/EconomicIndices/Pages/default.aspx
- Interest Rates in Financial Market (Bank of Thailand): https://www.bot.or.th/English/Statistics/FinancialMarkets/InterestRate/Pages/StatInterestRate.aspx
- Bangkok property - yields on larger apartments moderately good (Global Property Guide): https://www.globalpropertyguide.com/Asia/Thailand/Rental-Yields
- Thailand’s exports to contract by 7% in 2020 (Thailand Business News): https://www.thailand-business-news.com/economics/78645-thailands-export-to-contract-by-7-in-2020.html
- Thailand tourist arrivals may fall by 65% in 2020 due to virus outbreak (Reuters): https://www.reuters.com/article/us-thailand-economy-tourism/thailand-tourist-arrivals-may-fall-by-65-in-2020-due-to-virus-outbreak-idUSKBN22N1SO
- Government Housing Bank (GH Bank) extends low-cost housing project (Thailand Business News): https://www.thailand-business-news.com/banking/72692-government-housing-bank-gh-bank-extends-low-cost-housing-project.html
- World Economic Outlook Databases (International Monetary Fund): https://www.imf.org/en/Publications/SPROLLS/world-economic-outlook-databases#sort=%40imfdate%20descending
- BoT relaxes LTV rule for mortgages (Bangkok Post): https://www.bangkokpost.com/business/1839959/bot-relaxes-ltv-rule-for-mortgages
- Thailand profile – timeline (BBC News): https://www.bbc.com/news/world-asia-15641745
- Thailand Election Results Signal Military’s Continued Grip on Power (The New York Times): https://www.nytimes.com/2019/05/09/world/asia/thailand-election-results.html
- Thai prime minister declares end of military rule (Reuters): https://www.reuters.com/article/us-thailand-/thai-prime-minister-declares-end-of-military-rule-idUSKCN1UA1D4
- Thai parliament elects ex military government chief Prayuth as PM (BBC News): https://www.bbc.com/news/world-asia-48537664?intlink_from_url=&link_location=live-reporting-story
- Thailand’s housing market losing steam - December 27, 2017
- Thailand's economic downturn weighs on property market - August 18, 2016