It had to happen with land prices for ocean front parcels in Phuket, Phang Nga, Krabi, Koh Lanta and Koh Samui now reaching the ozone, developers are keen to find the next big thing. Over the past few years transactions in southern Surat Thani mainly Don Sak have seen considerable interest from institutional and Thai investors.
Now just over the provincial border Nakhon Si Thammarat is being viewed as a long term area of growth for ocean front hospitality and residential property. The Khanom area recently saw the launch of a high end project 'Thai Royal Residences' with prices ranging from THB 15-25 million Baht.
With its proximity to a major north-south highway, near to Koh Samui by boat and to the north is Surat Thani, the area is in the midst of a beach front land play similar to what was seen when Phuket buyers spun off to Phang Nga because of its unique offering of waterfront real estate.
Bill Barnett of thephuketinsider.com will speak at the upcoming Land & Property Law & Market Update Conference in Bangkok. Set to be held on September 3-4 at Swissotel Nai Lert Park and is being organized by Asia Business Forum. Details can be obtained at http://www.abf-asia.com.
There will be a number of high profile industry experts from the tax, legal, property and private sectors along with Government participation by the Bank of Thailand and Bangkok Metropolitan Administration. Shared/fractional ownership, the escrow act, revised condominium juristic act and update on Vietnam are also part of the two day sessions.
The high profile property launch of the 256 unit luxury lifestyle apartment offering at yooPhuket looks to test the state of play for real estate in what is considering a static playing field. Back of a high profile star driven design firm yoo, which was formed by John Hitchcox and includes celebrated personalities Philippe Starck and Jade Jagger (daughter of Rolling Stones lead singer Mick); the company has been targeting trendy branded developments from London, New York, Dubai, Barcelona and Melbourne to name only a few. All carrying the yoo name and now Phuket is one of the first resort developments for the growing concern.
Set to open in 2011, with a lakeside golf course aspect in Kathu overlooking the 9 hole executive course at Phuket Country Club the property is targeting investors back of rental yields and offering full interior fit out and furnishings from the world class resource. Full ownership and fractional ownership is available; with the later becoming a growing trend to attract buyers at lower entry points. It will be interesting to see the market reaction to the launch and could well be a barometer for gauging renewed interest from overseas buyers.
One of Phuket's highest profile land parcels, the oceanfront 150 rai Laem Ka site in Rawai which was planned to be a Four Seasons resort has reportedly been taken off the market. The property which was a partnership between the defunct Lehman's financial institution and Singapore listed firm Hotel Properties Limited had considerable interest in the marketplace. While 12-18 months ago land valuations were looking at THB 15-18 million baht per rai for similar sites, it was widely speculated that recent offers were in the range of THB 8-10 million baht range.
Industry watchers have been keenly following the intended transaction due to its significance on effectively resetting land prices. A turn for the better in the global economic situation may be coming into play and investors now looking at a broadening horizon for holding land rather then cutting prices.
Ongoing litigation between wealth management giant UBS and the US Justice Department who are demanding the Swiss institution release data on 52,000 names of US taxpayers holding offshore accounts is set to become a landmark legal case. Tax avoidance remains the issue and if UBS ultimately releases the information it sets a president for a multitude of other overseas banks who cater to high end private banking such as HSBC will be in a position to comply.
The US Government is taking a hard line on offshore sheltering of wealth both through this and spearheading a drive with the UK though the OECD in effectively shutting down offshore tax free havens. Singapore in the past few years has become a global leader in wealth management offering little transparency in terms of foreign residents holding account; though this looks to be under international scrutiny back of the OECD and money laundering concerns.
In Phuket a large portion of high end real estate is held by foreign nationals or controlled by tax haven offshore entities such as the BVI. Many industry watchers are eyes these issues with interest to view an impact on the struggling property market.
Well known property management expert Peter Tkac who co-founded Shibumi has now turned his attention full time to expand Chateau Sabai. Initially operating in the design landscape space the firm is pursuing luxury villa management and high end rentals. With an impressive background in such projects as Trisara and Samsara, Peter and the team continue working out of the Plaza Del Mar offices at the entrance of Laguna Phuket.
John Chadwick is running Shibumi with their focus on Samsara and the lucrative villa rental segment. A great deal of the current development market and construction is in the upper end of the property segment; hence the pipeline is continuing to see new entries despite the wider real estate downturn.
Space ran tight in this weeks Phuket Gazette and the Condohotel story in my Property Watch Column had to be edited in size. Considering the relevant nature of the subject here is a copy of the story in full….
Condohotels Growing Old Gracefully?
The old adage that there are only two things in life you can be sure of, death and taxes rings incredibly true. Despite a relatively recent boom market for real estate on the island there are many existing projects now moving on in age in the region of 10-15 years old. While in dog years this for the most part exceeds a life and death cycle, in property that precepts along the lines of long term stability and value it's but a blip on the computer screen.
From the existing purchasers pool of owners in Phuket there are two distinct grouping being either those end users who reside full time, or part term in their units and those who bought for investment viewing a combination of capital appreciation and rental yields. The picture blurs though when you see an increasing amount firmly planting a foot in both camps and shift investment strategies depending on evolving life situations and financial necessities.
More recently we've seen hotel managed products which offer short term rental guarantees, letting returns and usage by owners. With the increasing softening of the market more and more pure residential projects have turned to offering these type of schemes in order to differentiate their product and spur sales, while installing hotel management companies or developer management.
At the same time we now are starting to see projects which have operated for a number of years as condohotels being hit but an increasing number of new hotels, with shrinking demand, they have not continued to modernize nor invest back into the property and are quickly becoming uncompetitive. Fundamentally hotels as an asset class are capital intensive. While hotel management companies typically reserve 3% of revenue for replacement and capital work; typically over a 10 year period, the developers total expense ranges from 5-8% of total turnover that has to be plowed back into the property in order to maintain not only the asset but keep it viable in the marketplace.
Take a typical condohotel wherein a residential structure has been put in put together and one of the key touch points for owners is keeping maintenance and assessments at a reasonable level. Most projects have used the straight resico market to compare these fees and in reality estate management companies are continually under the gun to contain expenditure. For capital item the premise for residential with it's sinking fund is counteractive to the way hotels operate and as such reserving funds for replacement of furnitures, fixtures and equipment together with shared facilities and technology is more then often put onto the back burner given most owners do not reside in these properties full time and want the lowest possible out of pocket spend.
All is all it's a recipe for disaster, and the impact is now being felt at many condo and apartment projects here. What might have passed as suitable hotel fit out furniture packages in an undersupplied market is not applicable today, and capital infrastructure which is expensive to upgrade cannot be covered by maintenance fees or sinking funds. Hotel information technology is another key component and we see new reservations and front and back office software being used and updated in a similar style to how often consumers change mobile phones.
So where does the money come from? The reality of condohotels is that hotel management acts as an agency set up whereas and they operate, employ and essentially do all work on behalf of the owner/s. In most cases there is limited financial downside and operators endeavor to perform though fees coming from a combination of revenue and bottom line gross operating profit. So once a developer has sold off a project and exited, it's up to the group of unit owners to fund capital infusions, operating cashflow including losses and upgrade the property for the life of the project.
We now are seeing residential projects which want to convert to hotel operations that are not geared to this. They lack specific equipment such as hotel computers, vehicles, back of the house and service areas. More importantly is that the expectation of many is that once you sign a hotel brand that customers starting showing up immediately with no financial investment. . Hotels take time to gear sales and marketing, for new projects in most cases this is done 6 months to a year in advance and with considerable expense. For conversions, property owners need to dip into their pockets and retro fit standard furniture packages, operating equipment and provide working capital along with sales and marketing money. It's not an investment in their units, it's a yield based investment in order to spur rental returns.
More interesting is when you try to marry the two different sets of owners in a project who have entirely different objectives. The ones who live or reside there part time want to contain ongoing fees or additional investment; while the second group who look to returns need to view rentals with growing significance. Disputes arise and we are aware of more then one project on the island which has been paralyzed by ongoing differences of option that ultimately has seen capital appreciation decline along with resale market potential.
None of these are issues which are going to go anywhere soon and will continue to provide content for this column over the near future without a doubt. It's important to understand and work with estate management companies and hotel operators in order to ensure long term capital budgets and forecasts are prepared. Yardsticks of performance continue to be there, but there is no practical approach to thinking if you buy into a lifestyle property that revenue will always cover costs. Upside and downside risk always are present in any investment and truly for fundamentals capital appreciation growth is the best objective of any property owner.
A new Vietnamese Government resolution issued June 3 has set out guidelines and implementing rule for foreign organizations and individuals to purchase apartment units. The new scheme is limited to foreign individuals who invest in Vietnam or have a senior role in an operating company or are married to a Vietnamese citizen. For companies the requirement specifies that there are local operations and an official investment certificate.
In the past the emerging Vietnamese property market has struggled with the issue of foreign ownership but this latest move is clearly meant to stimulate its real estate sector. Many counties in the region are recognizing the need to boost overseas investment; while here in Thailand the current Democrat led Government has yet to target this as a priority issue.
In talks with developers on the island there is an emerging trend of buyer defaults in the property sector back of the current economic downturn. A number of resale units have been placed back on the market recently including high profile projects in Bangtao/Laguna, Kamala and Nai Thon. Tracking sales pace in various projects the numbers are bearing out the "for sale inventory' is on the rise.
Developments which had either been fully sold out or showing a good number of confirmed sales; now have inventory placed for sale. A combination of buyers who have some progress payments down, or those still in the due diligence phase and are walking away from reservation payments. Recently some projects which had a good percentage of progress payments in and buyers walked away have simply remarketed the units well below existing retail pricing; with the logic that the end revenue combining the default amount retained and low resale equals the current retail level.
What the trend does demonstrate is twofold in that retail pricing is under the gun with new buyers expected deep discounting and that the resale market is becoming a larger segment of the total real estate market. As not only business cash flow but personal finances get crunched, the expectation is this situation will be carried over into the coming high season.
