A mixed-use solution?
With oversupply in the condominium market whipping up fears of another bubble, blended residential developments could offer a key to project-hungry players eager for high returns. By Kanana Katharangsiporn and Somruedi Banchongduang
Thailand is no stranger to a glut of real estate projects, even after the bursting property bubble of the mid-90s, which brought the economy down with it, sending shock waves through every strata of society.
While some do not see history repeating itself this time around, a continuous rise in mortgage loans propelled by intense competition among financial institutions offering a high loan-to-value (LTV) ratio to homebuyers, along with numerous mixed-used projects in the pipeline, have stirred uneasiness for financial regulators.
LTV is a lending risk assessment that indicates the ratio of a loan to the value of the asset purchased. Typically, a loan with a lower LTV ratio bears less risks for both lenders and borrowers, as less capital is being borrowed.
Meanwhile, strong competition in certain property sectors and rising development costs, driven by escalating land prices, have made it more difficult to execute a single-use property project, which is easy to market and offers high returns on investment.
To cope with this challenge, mixed-use developments are likely to become a popular solution, not only for large-scale complexes, but also single-building developments, said property consultancy JLL.
One Bangkok, The Icon Siam, The Parq, Samyan Mitrtown and Singha Complex are familiar names flying the mixed-use flag.
“Mixed-use projects are not on the verge of oversupply, but condominium projects outside of the central business district warrant concern because there is a glut, with many units remaining unsold,” said Termporn Tantivivat, vice-president at Maybank Kim Eng Securities Thailand.
Many property developers have switched their strategy to target the medium to high-end segments because of mounting risks related to oversupply and buyers’ debt-servicing ability, said Ms Termporn.
PERILOUS LOW-END
Phanom Kanchanathiemthao, managing director of property consultant Knight Frank Chartered Thailand, said the low-end market has many financial institutions concerned when considering mortgage loan applications.
“This segment has a lot of non-performing loans [NPLs],” said Mr Phanom. “Buyers of residential units priced lower than 2 million baht are the most risky as their profiles are not good.”
Most of them have unstable or irregular income. Their financial statements are not strong enough to secure mortgage loan approval. As a result, this segment has a high mortgage loan rejection rate.
“Some of them need to cancel a unit booking as they cannot have their unit transferred,” he said.
The absorption rate of residential supply in the low-end segment is thus slower.
Suchada Pantu, senior executive vice-president of Tris Rating, said an oversupply of condominium projects along the Purple Line and in Bang Wa has been detected, and these projects need some time before they are absorbed.
“The economy recovered not long ago and consumer purchasing power is still not that high,” said Ms Suchada.
Knight Frank said the outstanding supply in this segment is not worrying as the quantity of being launched is not large.
This stems from a shift to the middle to upper-end segments from the lower-end market by major developers, which began last year. Big players in the lower-end market such as L.P.N. Development and Pruksa Real Estate have also made the big shift.
“Developers today are quick learners. They adjust their strategies abruptly when their core market is sluggish,” said Mr Phanom. “They can learn from customer behaviour and market data.”
Last year, L.P.N. shifted to middle to upperend condominium projects after they found more than half of the buyers at Lumpini Township Rangsit Klong 1, its gigantic low-end condo project with over 10,000 units, faced mortgage rejections.
The company recently launched a luxury single detached house and townhouse project with units priced from 18 million baht — its highest starting price ever.
L.P.N. also turned an unsold condominium tower with 200 units at Lumpini Township Rangsit Klong 1 into apartments for rent, and it is fully rented out. If any tenant wants to buy a unit, the developer is ready to help them to obtain a mortgage.
“Large developers rarely wait for a warning on property issues from the Bank of Thailand, which usually comes six months later than what they are experiencing in the market. Most of them have already solved the problems themselves before such a warning arises,” said Mr Phanom.
In the upper-end segment, units priced from 3 million baht, concerns about NPLs or returned units from those who are unwilling to receive unit transfers are minimal, as buyers in this segment have good profiles and ample purchasing power, he said.
“There are speculators for condo projects, but the ratio is not as high as previously seen,” he said. “Most of today’s speculators are able to get units transferred if they cannot be re-sold.”
PRIME LOCATIONS
Even though there are a number of condo units returned by buyers who decided to cancel their purchases or halt down payment, the quantity is not concerning for developers as it rarely exceeds 20-30%.
A condominium project with 70-80% units sold is considered the break-even point for developers. With their strong financial status, they can handle those remaining unsold units or offer campaigns to re-sell them.
Condo units priced from 3-7 million baht in attractive locations such as near mass transit stations have a secondary market to help absorb them, for which foreigners, in particular, are prospective buyers, said Mr Phanom.
He said many developers have embarked on road shows or carried out marketing campaigns abroad to introduce condominium projects in attractive locations. Those efforts have enticed foreign buyers over the past two years.
Popular locations among foreign buyers are Sukhumvit Road, the Rama IX area and Ratchadaphisek Road. This year, Samrong, Tao Poon and Bang Sue also jumped on foreign buyers’ radar, particularly the Chinese, as property prices have a tendency to rise, said Mr Phanom.
“Foreign buyers use cash and rarely dump the unit they booked as the down payment rate can be as high as 30%,” he said.
Nattavuth Mathayomchan, chief of residential development for SET-listed developer Singha Estate Plc, said the number of buyers who have halted down payment or cancelled their purchase after booking a condominium unit averages less than 5% per project.
“This amount is not a problem as we have new buyers on a waiting list to replace them,” he said. “Buyers that changed their mind or stopped making payments mostly do so within the first six months. They are speculators.”
Mr Nattavuth said the company’s condominium projects have a minimal number of units where purchases are cancelled because the projects are situated in prime locations where property prices gradually rise each year.
Capital gain buyers targeting higher property prices also continue holding onto their units, he said.
Thanakorn Thanawarith, chief executive of condominium developer All Inspire Development Co, said the company collects a large down payment — 15% of the unit price — to screen out short-term speculators.
“When we plan to build a condominium project, we need to consider all factors to avoid risks,” he said. “Locations should be in highdemand areas and/or those with employment opportunities as there will be new buyers to replace those whose mortgage applications are rejected or have discontinued down payment.”
Large developers rarely wait for a warning on property issues from the Bank of Thailand, which usually comes six months later than what they are experiencing in the market. PHANOM KAN CHANATHIEMTHAO Managing director, Knight Frank Chartered Thailand
ACCEPTABLE RISKS
Nathapol Luepromchai, executive vicepresident and head of the mortgage division at Bank of Ayudhya (BAY), said the bank generally provides a maximum 90% LTV ratio for housing loans, but selected borrowers can take out mortgage loans without making a down payment.
Even though some of the bank’s borrowers can obtain a 100% LTV mortgage, BAY said they are a minimal portion of the bank’s housing loan portfolio and all of them have solid capacity to service debt, as measured by a credit scoring system, he said.
“A customer’s debt-service ratio is the bank’s key condition in approving mortgage loans. We manage to keep a lid on non-performing housing loans thanks to our strong risk management,” said Mr Nathapol.
BAY’s bad mortgage loans have hovered at 2.4-2.6% since last year, a level the bank looks to maintain throughout the year.
A recent joint statement by the Bank of Thailand’s Monetary Policy Committee and Financial Institutions Policy Committee sounded the alarm over the fragility of the residential property market, with new mortgages often exceeding 90% LTV ratio, an increasing loan-to-income proportion and deteriorating bad mortgage rates.
Both committees urged commercial banks to be prudent in their lending practices. This is because laxity in loan assessment could lead to higher household debt and affect banks’ ability to cushion risks incurred from the household sector going forward, even if their financial positions are solid.
Onanong Udomkantrong, executive vice-president of CIMB Thai Bank (CIMBT), said a 100% LTV ratio on housing loans is available at the bank for borrowers with sound debt-servicing ability, as measured by the credit scoring system.
Some homebuyers have seen an increase in their LTV ratio as they demand additional loans for home decorations and take out fire insurance policies.
As a measure to safeguard against systemic risks, CIMBT has shifted its focus to upper-income earners in the retail loan segment, with a minimum income of 30,000 baht per month over the past few years, said Ms Onanong.
These customers typically buy homes priced over 2 million baht, while the Bank of Thailand has raised concerns over condominium projects, particularly those whose units are priced below 2 million.
“We also provide loans for homes with prices lower than 2 million baht to select customers, based on their debt-servicing ratio, to allow them to access loans and buy their own homes,” she said.
To control its asset quality, CIMBT’s mortgage criteria typically requires home loan applicants to have a debt-servicing ratio of 40-50% to ensure they can repay debt, said Ms Onanong.
Sunanta Vasapinyokul, banking analyst at Finansia Syrus Securities, said a rise in mortgage loans does not warrant any significant concern and no signs of a property bubble have bene detected.
Commercial banks are prudent in their housing loan approvals given fragile economic conditions, while the loan rejection rate is normal, said Ms Sunanta.
POSSIBLE LEVERAGE
Debt funding, such as bond issuance from commercial developers, is expected to increase in the medium term because of several large mixed-use projects in the
pipeline, which could cause higher leverage and oversupply if economic growth weakens, said Fitch Ratings.
Bond financing has become one of the key instruments for property firms, especially residential developers, to raise capital over the past five years, driven by growing residential supply.
Total bond issuance for property firms, property funds and real estate investment trusts grew by 425 billion baht between 2013 and 2017, said Nichaya Seamnontaprinya, associate director for corporate ratings at Fitch Ratings.
According to CBRE and Fitch Ratings, at least 900,000 square metres of new supply
is in the pipeline, including several large mixed-use projects with retail space of 10,000-100,000 sq m, as well as the renovation of existing retail spaces.
An oversupply in mixed-use projects is possible the next few years as the completion time (2020-2021) for these projects are aligned with one another, said Ms Suchada.
But major mixed-use project developers are expected to assess the absorption rate before completing them, with a rate below 20% likely to compel them to put a project on hold, she said.