Samui Property Market – March 2008

By Rodney Waller, Business Development Director, Lynx Developments

Imagine the whole of Asia had practically the same investment conditions: political stability, similar taxation structures, similar laws relating to foreign ownership, similar access to financing to leverage investments. In sum, imagine a level investment playing field.  For resort property investment, Thailand – with its beautiful beaches, low cost of living, warm tropical climate and friendly Buddhist culture – would, without doubt, be the destination of choice and Asia’s leading resort investment destination.  So why hasn’t it been for the past 18 months?

The answers are all too familiar – a military coup, political uncertainty, the imposition of capital controls, proposed amendments to the FBA - all have conspired to place a glass ceiling on market and capital growth. However, events over the past few months have gone a long way to redress these issues and the Samui property market has responded positively. In the past two months alone, the Samui property market seems to have jumped back to life.

Thailand has once again returned to a democratically elected government. A government that recognizes Thailand has fallen behind its Asian neighbours – especially Vietnam, Malaysia and Singapore – and is starting to do something about it.

Just a few weeks ago there was the scrapping of the capital controls – the 30% capital reserve requirement implemented in December 2006 to curb Baht speculation and restrict transactions with no underlying trade or investment purpose. While there will be no direct impact on the transfer of funds for individual property purchases (since these were not subject to the reserve requirement rules), this will have an impact on property funds and, more importantly, will improve confidence in the Thai economy.

The cabinet has just endorsed a Baht 40bn economic stimulus programme and tax package, which will significantly boost investor confidence. For starters, taxes will be slashed for small and medium sized businesses. With specific relevance to the property market, Specific Business Tax for property transactions will be cut from 3.3% to 0.1%, property transfer tax from 2% to 0.01% and registration tax from 1% to 0.1%.These tax cuts will cut almost 4% on costs relative to the value of the property transaction, benefitting both buyers and developers since these costs are typically shared.

And during all this, the FBA has hardly been mentioned since the interim government ran out of time before amending it.

More specifically for Koh Samui property market, the majority of village chiefs have voted in favour of ‘City Status’. This should pave the way for increases in budget allocations, which in turn will filter through to significant upgrades and improvements to roads and infrastructure.

On 15th February, THAI Airways started twice daily flights to Samui that connect conveniently with incoming European arrivals to Bangkok. Samui’s success has thus far been shaped by Bangkok Airways. Now it will continue to be shaped also by Thailand’s national carrier.

Further, Bangkok Airways plans to transform Samui Airport from a largely domestic airport into Thailand’s second international air hub, second only to Bangkok’s Suvarnabhumi Airport. As part of the four-year growth plan, in addition to the scheduled direct flights from Singapore and Hong Kong, Bangkok Airways plans to add direct flights from Dubai, Shanghai, Bali and Kuala Lumpur. These plans, combined with the recent Environmental Impact Assessment (EIA) allowing larger aircraft to land at Samui Airport, will have a sizable impact on Samui tourist numbers, and a knock-on effect on sales of luxury vacation homes. The flight from Dubai alone would lead to a surge in the number of European and Arab visitors to the island.

All this positive news cannot fail to have a positive effect on the Samui real estate market and actual transactions seem to be reflecting this. Of just two real estate agents I have spoken with in the past week, one has processed no less than six property reservations in the past month (as opposed to none in the previous month), while in the same month the other real estate agent has, among other deals, sold reportedly the most expensive residential property in Koh Samui to date at almost US$3m.  These are micro-economic reflections of the wider macro-economic environment and demonstrate a clear improvement in investor sentiment.

The entry of international branded resorts – such as Hyatt, Four Seasons, Conrad, W Hotels and Absolute David Lloyd – is also a clear sign of confidence in Samui’s future. At the same time, a difficult past year has removed many of the poorer performing builders and developers.

In addition, mortgage financing –– the ‘holy grail’ for investors –– has properly arrived in Samui. Lynx Developments, Palm Construction and Global Financial Services Australasia (GFS LTD) have united to provide an exclusive mortgage financing solution for property investors in Koh Samui. Thailand resort property has long been known as a ‘cash only’ investment destination, a market that, until now, has been the exclusive preserve for only high net worth individuals. While investors have been able to leverage their investments for capital growth with the use of mortgages in most other Asian countries, such as Malaysia, Singapore and even Vietnam, Thailand has always lacked the requirements for financial institutions to offer simple mortgage solutions.

But not anymore. Working together exclusively, these three companies have created a simple, straightforward investment solution that allows property investors to finance up to 60% of the property value, on a 10 year loan term, at a reasonable 7.6% interest rate that is fixed for the duration of the loan. While most other financing is short-term developer finance, this is real mortgage financing that will allow investors to leverage their investments for capital growth in Thailand.

It would not be a fair market update if I didn’t mention any issues that could have a less positive impact on the market.  The four main issues to watch out for are: First, a rise in raw materials and construction costs. Second, the return of Mr. Thaksin and potential political uncertainty with regard to the Election Commission issue. Third, the impact of the subprime mortgage issue in the United States and Europe, which is now affecting the prime mortgage markets and the ability to borrow money is becoming more difficult. Fourth, a strengthening Baht, due partly to the lifting of the capital reserve requirement, which will make house prices less affordable in the short term, particularly for US denominated purchasers.

Overall, a new lease of life has entered the Samui property market. Buyer confidence is returning. Investor sentiment is improving. To borrow a phrase from an associate, the mood is “cautiously optimistic”.

We are seeing the beginning of the last years pent up demand being released and buyers returning to the market. Investors who have been taking a wait-and-see approach are now starting to act, seeing an opportunity to buy before a general market recovery. As Western markets are looking increasingly shaky, institutional money is looking for a home in Asia, and Thailand. And as one of the leading tourist destinations in Thailand, Koh Samui will be among the top beneficiaries.