THE “NEW normal” is a popular term that was first used to describe the change in financial and economic situations after the 2008 financial crisis. The term is now applied in a variety of contexts to state that something which was previously abnormal has now become commonplace and is the new normal.
In the Bangkok real estate market, we have seen the new normal begin to take shape since last year and continue to do so into 2017. For the past decade, “normal” has been bull market growth environment in the Bangkok residential sector, which was driven by urbanisation, the changing behaviour of the working generations as well as more and smaller households; however, today developers are operating in a new normal environment characterised 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 ageing 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 per cent presales before construction, 50 per cent during construction and 20 per cent 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 are 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 to 30 per cent, compared with 50 per cent or higher before.
The feasibility equation has also changed for developers. Land cost used to represent around 20 to 30 per cent of the total development cost. As land prices, especially in the CBD, have reached as high as Bt2 million baht per square wah (Bt500,000 per square metre), the cost of land for new projects has significantly increased to 40 to 50 per cent 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 utilise land, product innovation, and marketing. Changing business models and strategies will be necessary to succeed in the new normal environment.