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Phuket Property Guide: What’s stopping a COVID property crash in Phuket?

Phuket Property Guide: What’s stopping a COVID property crash in Phuket?

This is our third article dealing with the COVID-19 coronavirus, and what we believe its impact will be on the Phuket property sector.

By Thai Residential

Saturday 2 May 2020, 02:10PM

Image: Pirod4D / Pixabay

Image: Pirod4D / Pixabay

A number of potential buyers (as well as people who simply want to share their thoughts) have expressed the opinion that the current economic upheaval will lead to a dramatic fall in Phuket real estate prices. But the kind of “property crash” these bargain hunters are expecting is more typically caused by a liquidity crisis impacting the mortgage sector.

Such a collapse is inextricably linked to people’s ability to afford the loan payments on which their ownership depends. While this is clearly a possibility in a market where money is borrowed to purchase properties, it is highly unlikely in a market like Phuket where foreigners buy condominiums for cash.

We freely admit that some foreign freehold condominiums will be sold by owners who are desperate to raise the cash. What we dispute is the notion that there will be so many people selling that it will cause the bottom to fall out of the market in Phuket.

Our articles thus far have focused on the resale market, which is actually the smallest slice of the Phuket property pie. The vast majority of properties being purchased here in any given year are new builds – condos bought either off-plan, or during the early stages of construction – and if there are deals to be found they will probably be in this sector.

At the time of writing, we know of no developers in Phuket currently promoting discounted condo units. We have seen a project in Bangkok advertising discounts of B100,000 to B300,000 on units priced from B5.1 million. As mentioned in a previous article, one international property specialist forecast no more than a 5% drop in Phuket condo prices. If we assume the lowest priced units are receiving the lowest discounts, this particular Bangkok developer is offering a discount of 1.96%.

We expect similar discounting will reach Phuket, possibly more along the lines of indirect incentives. For example, a free furniture package, or an upgrade in the furnishings and appliances in the unit, would enhance the value to buyers. Also, since most condos are listed at the “Thai freehold” price, a complimentary foreign freehold upgrade might be offered. This is either a fixed amount or a percentage of the purchase price.

Another way a lucky buyer may find a good deal is when financial circumstances force the owner to walk away from their purchase. When someone buys a property in Phuket they are often “buying the dream,” and some people will overextend their finances in pursuit of that dream. Even though a condo is paid in cash, it is paid in tranches at different stages of completion, and a loss of income could result in payments being missed and the property sacrificed.

Mitsu Tiansin Motors

Such units could offer the type of discount bargain hunters are looking for. But these deals are most likely to be found on properties which were already exceptionally cheap to begin with (e.g. budget condominiums) whereby the buyers-turned-sellers had committed a significant percentage of their savings. But even at a 50% discount, it’s hardly the deal of the century when the original purchase price was only B3 million.

As with foreign buyers, very few Phuket developers rely on big bank loans to finance their projects. A new condo is sold off-plan, marketed extensively, and construction tends to commence when sufficient units have been sold to begin construction. Because the cash nature of funding these projects somewhat mirrors the ‘cash only’ purchases by foreign buyers, a developer who has sold out their foreign allocation will not be struggling to complete their development. In fact, we know of Phuket developers who have been given dispensation to complete their projects, provided all their workers test negative for the coronavirus.

Developers who failed to sell enough units to commence construction, and are not capitalised independently of unit sales, will have suspended construction activities and be sitting idle. This will not be an optimal situation for them by any means because their source of income will have dried up, but with no banks haranguing them to repay loans, they are unlikely to be desperate enough to ‘fire sale’ their remaining units for the sake of liquidity.

Even if they have already received deposits or partial payments for developments which are now on hold, the sales contracts almost certainly contain force majeure clauses, indemnifying them against ‘acts of God’. This means they are not forced to return money to buyers if their ability to complete the project is being curtailed by a global pandemic.

Unfortunately for the owners of investment properties on the island, guaranteed return contracts also contain force majeure clauses, and most management companies have already suspended their guaranteed return payments to investors.

None of this means developers are immune to the financial dangers of COVID-19. These companies are clearly far happier and healthier if they building, selling and building some more, but they will not necessarily be forced into steep price discounts.

This article was provided by Thai Residential, creators of the 2018/2019 Phuket Property Guide. To view the 2019/2020 Thai Residential Phuket Property Guide online, visit thairesidential.com/phuket-property-guide. You can also contact Thai Residential directly at Email: phuket@thairesidential.com or Tel: +66 9484 11918.

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Hermann1 | 02 May 2020 - 19:51:56

You are right LALALA . We have see it all. Developer not stick to their promises. 7 percent annual return ? People not even get back their deposit after not start construction. Remember that project in Patong Pfff  !

Christy Sweet | 02 May 2020 - 16:40:39

There's that term "test" again. "Test all the workers..." Please clarify 
 only a temperature measurement is taken ? 

LALALA | 02 May 2020 - 14:37:13

Interest rate in LOS is around 1percent if I am not mistaken, mortgage loan rate at 3-4percent. Property developers promising clients 7 percent annual return. Obviously their business is considered high risk or why else they not take a bank loan for their business....so think twice before buy anything in LOS.


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