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How far are we from a COVID property crash in Phuket?


As we ease into the second year of the coronavirus pandemic, more and more property investors are actively seeking distressed property deals on the island of Phuket. The current environment has seen numerous enquiries from potential buyers who hope to find current owners desperate to dispose of their Phuket real estate at significantly discounted prices.

Despite the slowdown we have seen on the island throughout 2020 – or perhaps because of it - the market for enquiries from buyers has remained surprisingly buoyant. Many potential purchasers seem to believe that the price of Phuket property is guaranteed to plummet at some stage in the future – a sentiment they have been holding onto for quite some time now.

Unfortunately, for those with bottomless faith in finding rock bottom bargain prices, things have not quite panned out that way. This is because the market for luxury villas and condos for sale in Phuket differs somewhat from most other global real estate sectors.

There is every chance that extremely proactive buyers will nevertheless find the bargain they are looking for, but a broad market sell-off seems unlikely. This is because, as we have repeated many times, other global markets around the world are leveraged with mortgage borrowing, and thus subject to the liquidity squeezes and credit crunches which follow. This does not typically impact the foreign buyer driven real estate market here in Phuket.

It is safe to say that the collapses historically experienced in other global markets are tied to the inability of owners to afford their mortgage payments. Any owner’s decision to retain the property or offload it will depend on their ability to either keep up with, or refinance, those payments.

In over ninety percent of tourism driven property markets around the world, foreign investors are allowed some kind of borrowing. The potential for a liquidity upheaval increases the chances of a real estate crash in some of these markets. But nearly every foreign purchase in Thailand is made in cash, mitigating the liquidity risk in the real estate sector, and making a similar broad market sell-off extremely unlikely.

Of course, as we have also mentioned on numerous occasions that there are some desperate sellers, who are currently struggling to pay maintenance and upkeep charges, pool services, gardeners, maids, security guards, utility bills and common area or estate fees. With no rental income to sustain their investment, they may be willing to accept a much lower price on their property, especially if they were already a motivated seller before Covid-19.

At the time of writing, there are numerous properties – including condos, villas, town homes, commercial buildings and hotels – being offered at lower prices than they were this time last year. And owners who overextended their finances from the outset seem to be far more willing to negotiate a lower price than those for whom a Phuket property is a small drop in the ocean of their overall net worth.

Although most condo and villa developers are being relatively stoic with their prices, they continue to offer ‘freebies’ to interested parties. These incentives include
free foreign freehold (for condos), as well as upgraded fixtures and fittings, free furniture packages, or covering taxes and fees for all types of properties.

Given the current environment, potential buyers of off-plan condos should make sure that the developer is well financed, and liquid enough to complete construction. Most condo purchases by foreigners in Phuket are ‘cash only’ (rather than mortgage financed), and we usually see this mirrored by developers. If a developer has sold even half of its units, as the payments they receive from buyers will come at each stage of completion, there are usually no issues with completing the construction process.

However, those developers who have been unlucky with the timing of their project launch, and have been unable to sell enough units to either commence or complete construction, may find themselves undercapitalised. This could force a suspension or postponement in construction until tourism begins to pick up again.

All that being said, it is still unlikely that developers should be forced to ‘fire sale’ their units. If they have no borrowing against their assets, or hefty payments to make with interest, they will not be under any pressure to improve liquidity. Likewise, in the case of units they have already sold, the Sales and Purchase Agreements very likely include a force majeure clause, which indemnifies them against ‘acts of God’. Again, this removes any pressure to immediately return money to investors during the current coronavirus pandemic.

A potential downside of ‘force majeure’ clauses for investors is that any owner who has just received the keys to their property may also have also seen their rental income suspended. Until the country reopens fully for tourism, force majeure protects developers/management companies from paying guaranteed rental income on empty units.

Anyone searching for the deal of a lifetime is unlikely to find one directly from the developer, as most companies seem to be holding their ground. They may find more ‘bang for their buck’, however, as extras and upgrades offer incentives to purchase during the pandemic.

But the bargain-hunting brigade have realised that – for deeper discounts – their focus should be on distressed owners, in a financial predicament due to Covid, who are willing to walk away from a dream property which is simply too expensive for them to maintain without tourists to bring in any rental income.

by Thai Residential Phuket Property Guide
This article is from the Thai Residential Phuket Property Guide.
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