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Undervalued market waits for signal from government

Mark Armsden

Despite a year of political turmoil and uncertainty, Thailand remains a solid performing market for foreign property investors, with a 5 per cent year-on-year increase in floor-space prices by the square metre.

However, many in the sector believe outside investment will be at much greater levels if the existing and future governments could communicate clearly to the international community its strategy and stance on international investment.

With a military junta now calling the shots from Bangkok, there remains confusion in Thailand and abroad as to just how welcome foreign investment is. Many businesses in the kingdom said next month's elections could not come soon enough.

A consensus is that many of the older generation of military powerbrokers are not comfortable with cash-rich foreigners coming to Thailand and making significant gains at the expense of Thais.

This stance is the opposite to Singapore and Macau that have welcomed billions of dollars in foreign investment.

A clear indication of the next government's policy platform on foreign investment - particularly in the property sector - will be a welcome step forward and a clear indicator that Thailand can maintain the competitive advantages it has for luxury homes and condominiums over many of its regional rivals.

'A democratically elected government is the first step. Any softening by the new administration on currency controls and extending long lease title beyond 30 years would make a significant impact in the short term as demand remains high,' said Robert Collins, managing director of Savills (Thailand).

'Thai property values are artificially held down by the legal structures and currency controls. The demand for well conceived property is sufficiently high to support the existing levels of supply.'

Foreigners can only own up to 49 per cent of a company, but cannot buy land and all condo developments must be at least 51 per cent Thai-owned.

'While there is not an oversupply situation at present, there is a steady volume of new supply coming online which will require buying trends to remain positive over the next 12 months to avoid an oversupply scenario forming.'

Other key indicators foreign investors looking at Thailand should consider is a broad risk evaluation assessment, said Dan Tantisunthorn, head of research, Jones Lang LaSalle Thailand.

'International investors should consider their own required returns and their tolerance for risk, in addition to the time horizon. Given the rise in prices over the past few years, yields have generally been compressed, while several risks [such as political and market via greater supply] to real estate would seem to have risen,' Mr Dan said.

Prices have risen from 63,000 baht (HK$15,600) per square metre in 2003 to 85,666 baht this year. 'Property funds [similar to reits in other markets] are another vehicle by which individual investors can acquire exposure to various real estate segments in Thailand. But similar to any other real estate purchases, these funds require a thorough understanding and evaluation of the acquired assets, pricing, relative liquidity and the associated risk.'

Mr Collins added that foreign investors should carefully take into account risk assessments for individual developments - compared to property funds.

'Legal structures for foreigners have become an increasingly important factor that buyers need to be prepared to explore,' Mr Collins said.

'The need for professional legal advice is critical. When buying off-plan outside of Thailand, buyers should take time to visit the development site and investigate what other developments the developer has previously been involved with.'

Like with many new property markets around the world, dealing with a developer without a track record can mean risking not seeing the finished unit or the quality promised. You may not get a warranty or insurance.

'Low pricing and guaranteed income returns are often the first red flags to watch for, particularly from first time developers,' Mr Collins said.

Mr Dan said he believed property investment in Thailand remained a long-term play because 'its fundamentals remain sound' and clearer indications of stability next year should drive further growth.

'Elections are scheduled for December 23 , which should help clear up some of the political uncertainty which has persisted over the past year and a half,' Mr Dan added.

'Whether or not excess supply in certain segments develops in the near term, factors such as location, maintenance and management, and overall economic growth will ensure that specific properties sustain the increasing value they have already achieved.'

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