Turbulence to push down office demand : Slower earnings growth also a factor.
NINA SUEBSUKCHAROEN
The convergence of several factors, culminating in the confidence-shaking New Year's Eve bombings, will lead to far less demand for office space this year as most companies are unlikely to consider relocating, says Robert Collins, managing director of the property management firm Savills (Thailand) Ltd.
While recent tensions are affecting different parts of the market in different ways, the Bangkok office market, which has been a star performer in the last three years, is unlikely to emerge unscathed.
Although Mr Collins ruled out a dramatic slowdown, he did point out that corporate earnings have not been keeping pace with escalation of office rents, which reached a plateau in the second half of 2006.
"This will create a situation where tenants will push landlords quite aggressively now." he said. "Landlords have enjoyed a window of what we would call a landlord's market. It has not become a tenant's market but tenants are applying more pressure. That trend will start immediately following the events of New Year's Eve."
Another key change is that some enterprising entrepreneurs, many of them first-time developers, have built small but acceptable office buildings in the central business district (CBD) to absorb some of the demand that built up starting around mid-2005.
"What we're seeing in the current situation is that typically buildings that were running at 95% to 100% occupancy will probably run closer to 90% to 95%," said Mr Collins.
He expects some companies to hold back on expanding in the short term because their corporate earnings growth locally tends to be lower than that of their parent companies abroad, so it makes sense to keep occupancy costs in check.
"Office rents in some cases have gone up by 50% in this three-year period and office accommodation cost has become a much more significant factor on company balance sheets."
However, the dip in occupancy rates is a boon for other companies that are able to expand at 5% per year because it will be easier for them to find accommodation.
"Basically the trend of rental increment we have experienced in the last three years will slow down," said Mr Collins. "It has already slowed down and it will plateau slightly for the foreseeable future until we get some clarity over the political and economic situation."
The premium end of the office market has been achieving very high rentals or 700 to 800 baht per square metre per month _ up from a range of 500 to 600 baht three years ago _ but further rises will not be as dramatic.
One reason is that Bangkok has gone through a two-year period when almost no new supply came on the market, except small buildings built by new developers, but several new buildings are scheduled to emerge in 2008 and 2009.
"In the interim period in 2007, if there isn't strong demand, if there isn't an environment where there is pent-up demand, that new supply could in fact bring rents down slightly," he said. "This hadn't been predicted so we do face an interesting period in the office market."
Also, while some industry professionals believe that decentralisation outside of CBD is taking place, Mr Collins totally disagrees. Fifteen years ago a few companies moved to the Bang Na area but most of these have started moving back into the heart of the city, he notes. This is chiefly because Bangkok's logistics and transport infrastructure tends to follow and not lead movements.
"What we have in Bangkok are lots of mini-centres _ in the area around Vibhavadi-Rangsit for instance. This is just an extension of the CBD and does not represent decentralisation."
Turning to the residential market, Mr Collins notes that other economies outside Thailand _ both within the region and in Europe _ are doing well, which means foreign demand for condominiums in Thailand should remain as strong as ever.
"Now obviously people at some price point are taking a more of a wait-and-see attitude, but the interest level is definitely there."
On the resort islands of Phuket and Samui, developments that are part of five-star hotel chains or are substantially completed are expected to do better than others being sold off-plan.
"We have seen that the Pattaya market is the most desirable to a broad section of foreign purchasers and this is likely to continue as we move into 2007," Mr Collins said.
However he admitted that the new Bank of Thailand capital controls and amendments to the Foreign Business Act would affect both the office and residential markets. The former could be shaken in terms of corporate growth, which would affect office space demand.
In the residential market, changes affecting foreign investors are less of a factor because some parts of this market, such as Pattaya, have more condominiums than landed property.
However, Mr Collins noted: "We will definitely see a trend away from companies structured with nominees, which isn't viable anymore for ownership by foreigners, to the 30-year lease structure."
It still remains to be seen whether the switch from freehold to leasehold will change capital values. "It's very difficult to tell which way the market will be going. Certainly the demand is there. Thailand remains the preferred destination in the region for a holiday home. And land values are not likely to go down, construction costs aren't going to go down. If anything we will probably see a slowdown in the availability of property, which inherently helps the existing supply."
Foreign buying is strong at some premium Bangkok condominiums that are able to achieve full 49% foreign occupancy limit, while the middle to low end of the market is predominantly Thai.
However Mr Collins cautioned that the lower segment would face rough times if a decline in employment or other economic factors kick in.
"The high price points and the demand created by foreigners in the mid- to high end help stimulate values and growth in the mid- to low-end. The market is linked.
"I think that if we start seeing listed developers having problems selling property at the high end, then that would have an ripple effect down to other listed developers selling to the local market."
Despite the current challenges, no panic-selling has set in. "We are nowhere near the environment of 1997-98. The market is very slow to respond to downturns and even if there is a decline we could face quite a long incubation period before prices actually start coming down."
Among high-end developers still optimistic about the market is Kudu, which is about to launch a new project at Phoenix golf course near Pattaya.
The Lakes at Phoenix will comprise around 100 units in two seven-storey buildings on the golf course. While positioned at the premium end with design the focal point, prices are expected to be more realistic than others in the segment.
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Bangkok Post
Monday January 15, 2007
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