So far we have examined the resale market in depth, pointing out that the market in Phuket is driven by sales to foreigners. Since these sales are predominantly cash only, a liquidity/banking crisis will not affect Phuket’s foreign owners because there won’t be loans or mortgages on which to foreclose.
Similarly, many Phuket developers finance their projects with advance sales of units (off plan), so these developers will not be pressured into a “fire sale” by bankers calling in their loans. That said, we have concurred that bargain hunters will find the odd good deal throughout the island on both condominiums and villas. However, bargains are more likely to be found in the budget condominium sector where some owners, struggling to pay for an entry-level condo, will be the most susceptible to the economic pressures of COVID-19.
It is crucial to remember that Phuket is not a homogenous real-estate market. This applies to the island as a whole, to the market for units in similar developments, or even within a single project. For condominiums, the two different legal structures – foreign freehold and Thai freehold – represent one reason why these price disparities can exist, but this dynamic should not be misconstrued as a potential source of discounts. Some seemingly low prices may simply be units being offered as leaseholds, rather than the superior freehold.
Only 49% of any condominium complex may be titled in the names of foreign buyers, so the availability of freehold units is already limited to less than half of the total market. The notion of finding a plethora of luxury condominiums at massively discounted prices is therefore a fanciful one.
The legal nature of every condominium project means the majority of the unit area (51%) must be Thai owned, and unlike foreigners, a Thai national is able to finance their purchase with a mortgage. However, a Thai property investor is more likely to be taking out a mortgage on a villa than a condo (more on this below). In fact, unlike Bangkok, very few Thais own west coast Phuket condos (with or without a mortgage). The condo market is instead driven almost exclusively by foreigners, either buying leaseholds or occasionally buying freeholds through a Thai company.
Many of the Thai freehold (foreign leasehold) units are held by the developer or management company (themselves Thai entities) who generate extra income from the rental. Even if they were forced to sell a few condos due to financial pressure, the strict 51:49 ownership dynamic to which all developments must adhere means any foreign bargain hunters would be limited to buying a leasehold, or setting up their own Thai company to purchase freehold units.
But such ownership can be fraught with problems down the line. For starters, the expense of setting up and operating a Thai company can quickly erode any cost savings one of the 51% might offer. Furthermore, if the company is not set up correctly (e.g. by using actual shareholders, as opposed to nominees), the company and with it the ownership could violate the law.
The company must also file and pay income tax and property tax. And if, as a director of the company, you are living in the unit, you will be subject to income tax because the accommodation is legally viewed as a benefit in kind paid to you by the company. This is not only an expense but also an inconvenience.
The fact that doing things properly is not easy can create an opportunity for a savvy investor with an entrepreneurial streak. Thai freehold condos are already less expensive than foreign freehold units, but if additional units become available because desperate owners, management companies, or developers were forced to sell, then those units could possibly be found at bargain basement prices.
We have explained in depth why foreign owners are unlikely to be forced into the sale of their luxury condo, and the same would apply to a villa (i.e. there is no borrowing, so the only pressure to sell would come from personal finances). It is highly debatable that throngs of people who laid out US$500,000 - 1 million in cash for villas in Thailand will be brought to their knees financially by the current downturn.
But what about the Thai national and their mortgaged villa (mentioned above)? If the current financial crisis leaves that individual unable to pay their mortgage, out of financial necessity they may have to put that villa on the market at a discounted price. However, at present, only a small percentage of Thai nationals own villas in tourist areas with a mortgage attached to the property.
There are bargain hunters out there who are convinced that cut-price Phuket properties are just around the corner. They may be right, but if buying that property requires the creation of a Thai company and all of its concomitant responsibilities, it may not be worth it.
This article was provided by Thai Residential, creators of the 2018/2019 Phuket Property Guide. The 2019/2020 is available free online and is a comprehensive guide for anyone looking to buy real estate in Phuket safely. You can also contact Thai Residential directly at Email: email@example.com or Tel: +66 9484 11918.