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Landed homes look a better bet than condos on Thai market

Low interest rates fuel demand for houses; flats suffer from supply glut

(BANGKOK) For those looking to invest in Thai construction, housebuilders look a better bet than companies putting up high-rise condominiums.

Housebuilders like Land & House and Preuksa Real Estate are set to benefit next year as low interest rates fuel demand, while condo builders suffer from a glut of high-rise residential buildings.

Analysts say Bangkok has a relative shortage of detached housing, while overbuilding of low-priced city condos means a rally in the share prices of firms like Asian Property and LPN Development is fizzling out. ‘We prefer lowrise developers due to the more favourable supply outlook,’ Bualuang Securities senior analyst Chaiyaporn Nompitakcharoen said. The number of single detached houses built in Bangkok fell to about 16,700 last year from 24,000 in 2005 and 26,600 in 2004.

But plans to extend Bangkok’s ‘Skytrain’ and underground railway networks should boost demand for houses in the city’s suburbs, and analysts say low mortgage rates will spur middle-income buyers of homes in the 2 million to 5 million baht (S$94,000- S$236,000) range, even though economic growth is set to slow this year.

In the last two years, housebuilders have sacrificed profitability for sales, eating into earnings. But big firms with economies of scale, like Land & House, are benefiting as smaller rivals succumb to rising fuel and construction costs.

Since a credit crunch froze global debt markets in August, Thai banks have become cautious, favouring mortgages for homes built by bigger firms. The rate of rejections for home loans has risen to 25-30 per cent from 10-15 per cent a couple of years ago.

Land & House, rare among Thai developers because it sells completed rather than off-plan homes, has seen its gross profit margin creep back up to 31 per cent this year, having dropped to 30 per cent from 35 per cent between 2004 and 2006.

Some analysts believe a Dec 23 general election could help revive consumer confidence, which has fallen from a peak in 2004 to a five-year low.

After a battering during the 1997-98 Asian economic crisis, which put thousands of developers out of business, Bangkok’s residential market has thrived since 2001, with house prices up 25 per cent on average in the last six years. The recovery has also played out in rival Southeast Asian capitals Manila and Kuala Lumpur, but laggard Singapore has seen a 21 per cent jump in home prices in January-September.

While Bangkok’s housebuilding sector is perking up, developers expect city condo sales to slow after a period of frenzied buying.

‘Buyers should be more selective,’ Asian Property chief executive Anuphong Asavabhokin said. ‘Overall, I don’t expect these hot sales to be repeated anytime soon.’ Asian Property, which sold out three condo projects recently, plans fewer similar projects next year, but wants to build more terraced ‘townhouses’ and detached houses.

About 30,000 new condos were put on the market in 2006 and another 24,227 in the first eight months of this year – or 60 per cent of new residential projects – according to Thailand’s Agency for Real Estate Affairs.

But the take-up rate – sales as a proportion of new units for sale – dropped to 51 per cent in January-September from 70 per cent last year.

The oversupply was stoked by the emergence of several small developers seeking to tap demand for city homes, as residents baulk at soaring oil prices and Bangkok’s traffic jams.

Condominium developers are spending heavily on marketing campaigns, triggering concerns about their costs and margins.

Shares in condominium firms are losing their lustre. Sector leader LPN has fallen nearly 13 per cent from a peak in July, following a 43 per cent rise in the first half. The Thai property and construction sector sub-index has dropped 15 per cent since a July 26 peak, while the benchmark stock index is down just 5.4 per cent.

‘It’s riskier now,’ a Finansa Securities analyst said. ‘Sales are slowing. The condo boom in the past two years is fizzling out and some developers will be hurt by slowing cash flow.’ In contrast, Macquarie Research analyst Patti Tormaitrichitr said shares in townhouse developer Preuksa could rise by a third over the next year, while Land & House, valued at more than US$2 billion, had a potential upside of 24 per cent.


Source: Reuters (Business Times 4 Dec 07)


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