Political Instability A Major Risk In Thailand Real Estate

Political instability is a concern for Thailand real estate, as the government was overthrown by the military in 2006. As a result, consumer confidence is low, and investment …

Political instability is a concern for Thailand real estate, as the government was overthrown by the military in 2006. As a result, consumer confidence is low, and investment remains a highly risky proposition. For more on this, see the following article from Global Property Guide.

Residential property prices in Thailand dropped further in 2009, because of continuing political tensions and the recession.  House prices fell 3.7% during the year to Q2 2009 (1% in real terms), according to the Bank of Thailand (BOT).

House prices in Thailand reached their highest point in 1992 (adjusted for inflation). Contrary to popular belief, house prices were already on the decline prior to the 1997 Asian Crisis, falling 2.4% p.a. from 1992 to 1997 in inflation-adjusted terms.

Immediately after the Asian crisis, the decline accelerated. Prices fell by an average of 3.9% p.a. in real terms during the years 1998 and 1999. House prices then recovered, and rose by an average of 4.8% p.a. from 2000 to 2006 (2.2% p.a. in real terms). Thailand’s GDP rose by an average of 5.1% p.a. during the same period.

The decline of property prices resumed in 2006 with a 1.4% fall in real terms, due to rising political uncertainty prompted by Prime Minister Thaksin Shinawatra’s corruption.

Price falls accelerated in 2007 to 4.3% (6.4% in real terms), and to 13.9% in 2008 (18.4% in real terms) due to the political unrest, which worsened after Thaksin was ousted in September 2006.

The recession bites

Thailand’s economy entered recession in Q1 2009, and is expected to contract by 3% in 2009. From January 2009 to July 2009, exports fell 23.1%, as compared to the same period last year, and imports plummeted by 35.1%, due to the global credit crunch.  Private investment continued to contract in Q1 2009, as business confidence declined.

Despite government initiatives to boost the real estate sector, including new laws in 2008, and two stimulus packages in 2009, buyers remain wary, and the market is expected to remain weak, according to Knight Frank, a leading property research and consultancy firm.

The political turmoil is discouraging buyers

Political turmoil has made Thailand significantly less attractive to buyers, especially to foreign buyers. CBRE reported that foreign demand for residential properties had dropped by up to 90% by June 2009.  Real house prices in Thailand were 34.2% below their 1992 peak, as of Q2 2009.

Allegations of corruption and tax evasion against Thaksin Shinawatra, who had been elected in 2001 and had won a second term by a landslide in 2005, sparked protests in Bangkok in late 2005 to 2006. In September 2006 while Thaksin was in New York, Thailand’s military leaders staged a bloodless coup. They abolished parliament, and ousted Thaksin from office.

The junta ruled Thailand for most of 2007, and implemented misconceived economic policies that hit the economy hard. For instance, the Central Bank imposed capital controls in December 2006, causing the SET to experience its worst crash in 16 years.

Political tension between pro and anti-Thaksin groups continued after military rule ended in December 2007. Thaksin’s followers, dubbed “red shirts”, are mainly composed of the rural majority, while the anti-Thaksin groups include students, blue-collar workers, the urban elite, royalists and military-connected elements. They are called “yellow shirts,” adopting the traditional royal color.

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Pro-Thaksin parties won the December 2007 elections and nominated the notorious Samak Sundaravej as prime minister. In September 2008, Samak was removed from office by the military-appointed Constitutional Court, and was replaced by Somchai Wongsawat, Thaksin’s brother-in-law. He didn’t last long, as he was disqualified by the military-appointed electoral tribunal in December 2008.

The same electoral tribunal also dissolved Somchai’s People’s Power Party, parliament’s biggest party, with 233 out of a total of 480 seats. Leaders of PPP were banned from politics for 5 years. Several pro-Thaksin lawmakers defected to the opposition, eventually leading to the rise of Abhisit Vejjajiva as prime minister.

Since 2008 massive protests have caused significant damage to the economy. The yellow shirts forced the closure of major airports for one week in November 2008, in protest against Somchai. The red shirts, protesting against Abhisit, compelled the government to cancel the Fourth East Asia Summit in April 2009.

Low interest rates, but small mortgage market

In April 2009, the BOT pushed its key rate down to 1.25%.  As a result the average commercial bank MLR declined to 5.85% in May, down from 7.25% in July 2008.  Commercial banks, whose customer-base is middle to high-income borrowers, ironically offer lower rates than the Government Housing Bank (GHB), which caters mostly to low-income borrowers.  The GHB interest rate fell to 6.75% in May.

However, the ratio of outstanding housing loans to GDP remains small at 11% (2008), despite a rapid increase in housing loans from 2002 to 2008. Outstanding housing loans rose 12% in 2008, according to the BOT, following a similar 12% increase in 2007.

Many local borrowers do not have access to housing loans. No uniform national property registration and titling standard exists, so foreclosure procedures are difficult, making banks reluctant to lend.

Domestic banks began to offer loans to foreigners in 2005. However, foreigners can only apply if they have a work permit and apply jointly with their Thai spouse. Prior to 2005, foreigners had to transfer funds to a domestic bank to purchase condominiums.

Most loans are 25 to 30 year adjustable-rate mortgages (ARMs). However, Thai ARMs have some characteristics of fixed rate mortgages (FRMs), because banks are prohibited from increasing installment payments more than once per year, and cannot increase them more than 10%.

Bangkok’s condominium glut

Construction of new housing in Bangkok peaked in 1996 with around 127,000 units built. It subsequently declined drastically and even in 2008, new residential property construction was 55% below the peak.

Nevertheless, Bangkok is currently experiencing an oversupply of condominiums. The occupancy rate of condominiums sharply dropped to 73.1% in Q1 2009, from 90.9% in Q4 2008, according to Colliers International. Several developers’ projects have either been delayed or canceled due to financial difficulties attributed to the global credit crunch.

Acceptable yields, in a system which favors landlords

The average rental yield in Bangkok is around 7.2% in 2009, down from around 7.6% during the previous year, according to Global Property Guide research. The highest yields come from condominiums measuring between 80 to 120 sq. m., which have yields exceeding 7.5%.

The balance is tilted in favor of landlords in Thailand, due to the lack of formal rental laws. Landlords enjoy protection through rent deposits and the ability to call the police to evict a tenant. Rents are freely negotiated between landlords and tenants, although rents are not adjusted for the duration of the rental contract.

Lots of stimulus, little effect

Thailand’s economy entered recession in Q1 2009, due to the effects of the global credit crunch and the political turmoil.  Unemployment is worsening, increasing to 2.1% in Q1 2009, up from 1.7% in Q1 2008.  The IMF forecasts inflation of 0.5% in 2009, down from 5.8% in 2008.

The government introduced two stimulus packages in 2009 to ease the effects of recession on consumers and slow the contraction of the economy.

The first stimulus package was announced in January 2009. The package includes tax reduction measures in the real estate sector to encourage spending:

  • Payment for new residential properties is tax-deductible until THB300,000 (US$8,884).
  • The property transfer fee, special business tax, and withholding tax, are waived until March 2010.
  • Mortgage interest expense is tax-deductible up to THB100,000 (US$2,961) a year. The tax-deductible amount is likely to be raised to BHT200,000 (US$5,922).

The package also includes an additional THB116.7 (US$3.3) billion budget to support the unemployed and low-wage workers; measures to increase lending by financial institutions; faster disbursement of state budget; and an increase in investment in infrastructure projects such as the “Megaprojects” scheme.

The second stimulus package, announced in June 2009, injects an additional THB 1.4 trillion (US$42 billion) into infrastructure projects, including housing projects. The stimulus package is expected to run until 2012.
Will laws protecting buyers be implemented?

In 2008, new laws and amendments to the existing Condominium Act were passed to offer buyers more confidence, and deter fraudulent activities by developers.

  • The Escrow Act, signed on May 2008, protects buyers against losses due to delayed and canceled projects. An appointed third party escrow agent holds the buyer’s funds in a financial institution, and transfers funds upon the fulfillment of buyers and developers’ obligations.
  • The Consumer Case Procedure Act, signed in August 2008, allows buyers to use any form of advertisement to hold developers liable for any service not provided upon completion. This forces developers to ensure that finished properties represent those presented in advertisements.
  • The New Condominium Act, signed in July 2008, requires standardized Ministry of Interior-prescribed purchase contracts between buyers and developers. Developers are forced to incur maintenance costs for unsold condominiums. Designated areas in a condominium are allotted for business operations, to minimize noise and disturbance to residents.

Effective implementation of the laws is however in doubt. The laws were signed during Samak’s short term, and the current anti-Thaksin government may not implement them. The laws were also enacted hastily, resulting in possible loopholes.

In any case, as the political situation continues to be highly unstable, these new laws are unlikely on their own to increase consumer confidence.

Unless Thailand’s deep political rift is healed, and the economy stops contracting, buyers will continue to defer purchases.

This article has been republished from Global Property Guide. You can also view this article at
Global Property Guide, an international real estate analysis site.


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