Inside the Numbers: The Potential of a Phuket Property Bubble
Currently, real estate in Phuket is experiencing rapid development, evoking associations with well-known financial crises of the past, from the Dutch tulip mania to the dot-com collapse and the collapse of subprime in the USA. Despite this, local real estate agents remain optimistic, attracting more and more non-professional investors, which, however, increases the degree of market instability.
During the Songkran, Thai New Year celebrations, C9 Hotelworks CEO Bill Barnett decided to discuss the sensitive topic of a possible real estate bubble, which usually remains behind the scenes.
Recently, one of the most frequently asked questions has been the potential for a bubble to form in the Phuket real estate market. Many people who ask this question do not always fully understand what is meant by the term “bubble.” on the market.
One of the most famous examples of a real estate bubble in modern history – the mortgage crisis in the United States in 2007, caused by subprime mortgages. In other industries, we can mention the collapse of the dot-com (Internet companies) in 2000 and the collapse of the cryptocurrency market in 2018.
A market bubble refers to a situation when the market value of assets reaches unrealistic values that do not correspond to fundamental growth factors. This usually leads to a market crash, which in the case of real estate means a sharp drop in prices.
In many parts of the world, especially Western economies, the real estate market is prone to bubbles due to liquidity structures. Due to the shortage of cash, buyers are forced to apply for loans, which increases risks and leads to a further increase in liquidity, and then to collapse.
However, the Phuket market, in its main characteristics, differs significantly from others. Its unique features include:
- Most transactions are carried out in cash, without the use of loans.
- The resort real estate market surpasses the entire domestic housing market in Thailand in terms of transaction volume.
- Loans are provided mainly to local buyers, who make up a small proportion of customers in Phuket.
- Developers implement projects in stages, based on sales progress, which minimizes the risk of default.
- The geography of buyers is very wide, which reduces the risks associated with one market.
Based on the above, we can say that current trends in the Phuket market indicate a likely peak in the next natural market cycle, which, as we know, consists of periods of ups and downs. We draw lessons from previous cycles that will help us overcome the challenges of the present.
Life cycle
Just over a decade ago, Phuket witnessed an impressive wave of small, affordable condominium launches from Bangkok-based developers visiting the island. The world economy was then emerging from another financial crisis, and Asia was one of the leaders in recovery. The middle class was growing rapidly, and Thai buyers were turning to such condominiums with interest for investment purposes.
These condominiums, known as "Mickey Mouse apartments", were typical Bangkok housing of small size and low cost. The payment scheme for the apartments was organized in such a way that the main part of the payment was made at the final stage of construction. Investors often purchased several apartments in the early stages, hoping for a profitable resale before the final transfer of ownership and final payment, which might not be available without the use of a mortgage.
Without going into details, it is worth noting that this speculative period ended not with a market crash, but with its leveling out. The constant rise in prices, which speculative buyers were counting on, at some point stopped, since there were no end consumers of housing ready to purchase it at a high price.
At the last stages of the cycle, the level of defaults on the part of buyers could reach 30-40% of the total volume of housing in a particular project. However, this was not a disaster for the market: developers returned to work in Bangkok, and real estate in Phuket gradually found its buyers.
The current situation is both reminiscent and different from that period, and this is due to the fact that we are seeing a peak in activity in two different segments – condominiums and villas
In the condominium segment there is also an increase in speculative transactions, but with changing profile of investors. Over the past ten years, there has been a significant increase in the number of foreign buyers who already have sufficient funds for the transaction, which reduces the likelihood of a repeat of the previous cycle. Thus, we can say that we are now entering a period of high speculative activity in the segment of large residential complexes with affordable apartments.
In the segment of villas and resort-class houses, the situation is completely different, since activity in it is not only driven by speculation. The coronavirus pandemic has led to an increase in demand for suburban housing as opposed to urban housing. Lockdowns have highlighted the importance of quality of life and working from home, fueling mass migration from cities to suburban areas such as Phuket.
The second important factor in migration was the dramatic escalation of the geopolitical crisis in Eastern Europe, which further changed the profile of villa buyers. If previously villas were considered as a retirement home or a second vacation home, then a new wave of buyers – these are mainly end users of housing.
Global migration has changed the world, but has not diminished Phuket's popularity as a wintering destination. The Thai government is implementing targeted programs aimed at meeting the needs of foreign residents. There are visa programs such as Pay and Live, as well as retirement visas for those over 50 and guardianship visas for parents of children enrolling in international schools in Phuket and Thailand.
Safe haven
Returning to the Eastern European clients mentioned above, it is worth noting that over the past two years they have become a key player in the Phuket property market. We are talking not only about Russians, but also about investors from Ukraine, Kazakhstan and Uzbekistan – in the broadest sense of Eastern Europe.
As in tourism, where a person will not visit a resort that is difficult for him to get to, accessibility plays a role in purchasing real estate. Phuket is becoming a place that residents of the region can get to more easily than anywhere else. If you've ever been to Phuket airport during high season, you'll have noticed that airlines from Eastern Europe outstrip any other carrier in the number of flights.
For Russian investors, Phuket was also attracted by Western sanctions that restrict banking operations, investments and business. In the context of the volatility of the Russian economy and the weakening of the national currency, Thailand, and especially Phuket, have become a safe haven for Russians for their savings.
The massive growth of the real estate market in Phuket closely competes with the tourism sector, which is a key segment of the economy. The Greater Bang Tao area, including Cherng Taley, Laguna and Layan, has more than 20 thousand housing units, either under construction or ready for sale.
Although 20 thousand units – this is a huge volume, buyers and investors – These are people with solid financial resources who buy real estate with their own funds, and not with a loan. They view premium properties as long-term investments.
Global geopolitical shifts over the next 3-5 years are difficult to predict, but they will likely lead to a period of widespread instability, making real estate even more attractive to investors.
The absence of a mortgage factor and the low probability of an outflow of foreign capital from the country indicate that the risks of a market collapse are very low.
Another feature of resort real estate – its resistance to large-scale fluctuations. Sales of real estate below market price usually occur due to personal circumstances of the investor, such as financial problems, divorce or death of the owner, rather than due to general market trends.
It is assumed that further development of the situation will be similar to previous cycles. The demand for real estate is leveling out with the growth of the secondary market, the supply of which is becoming competitive with the primary market and new projects. This can be considered as a reasonable forecast already for the low season of 2024.
However, the main thing – Phuket will retain its reputation as a safe haven in an ocean of global turmoil. It is also expected that the customer base will further diversify due to the growth of new markets and China's return to the game after new geopolitical events.
The material presented here is a retelling of an article by Bill Barnett published on c9hotelworks.com entitled Inside the numbers: The potential of a Phuket property bubble