The tsunami of late 2004 stopped Phuket's real-estate boom cold. A year later, local real-estate professionals say, the juggernaut rose again. Even a military coup and the military government's tinkering with foreign investment rules couldn't slow the pace of Phuket's prized high-end real-estate market. But a new tsunami has come from across the Pacific Ocean--only this time, instead of hitting beaches, it has struck banks and financial institutions across two continents.
A seismic shift of fortunes in the US housing market triggered a financial crisis in 2007 that sent shock waves around the globe. The New York Times recently reported that many once-hot regions around the British Isles and Europe--even as far away as India and China--have cooled significantly and followed the US pattern of tumbling prices and sharply rising defaults and foreclosures. In Phuket, however, the real-estate market seems unfazed.
"Our first quarter is consistently better this year than last year," says David Simister, chairman of CB Richard Ellis Thailand. "We don't see any significant deterioration in the top end. For transactions below 20 million baht, we'll see some slowing, but the net effect is pretty minor."
How, then, can real estate in Phuket remain resilient in the face of a global financial crisis?
"Credit has got nothing to do with the Phuket market," Simister says.
"The huge difference between Phuket and the rest of the world is there's no finance," echoes David Wade, director of Tropical Homes Real Estate. "So the cash squeeze isn't felt here."
"There are no on-shore loans available to people who want to buy over here," explains Martin Phillips, managing director of Engle & Voelkers Thailand. "Thai banks will not loan to foreign homeowners. You will not get a loan unless you're married to a Thai."
Phillips has noted some fallout from the mortgage crisis that has gripped the US, the UK and Europe. But the local effects are mild by comparison, mostly related to the confidence level of potential investors in vacation properties.
"I suppose there are a couple of ways of looking at it," he says. "One is finance and the other is what it has done to shake confidence in the market. The credit crunch makes a lot of people who are in the mid sector very nervous. I think we're see a little of that. I think we're seeing people err on the side of caution."
But financial problems in other parts of the world do present challenges to local real-estate professionals. Wade notes that one local effect of the mortgage crisis is an overall decrease in the number of buyers coming to Phuket from the UK. Britons have traditionally led most other nationalities in buying second homes, he explains, for the simple reason that they live on a relatively small island with year-round inclement weather. Second-home buyers who come to Phuket typically fall into two categories: people who are cash-rich, and people who take a second mortgage on their first home to finance the second. "They're the ones who are going to be affected by the mortgage crisis," Wade says. "And the only economic effect with the buyers we have here is with the British buyer."
CB Richard Ellis' Simister, however, sees little slackening of interest from UK buyers.
"Compared to America, the effect of the mortgage crisis in the UK is mild," he says. "Interest from the quality UK buyer is as strong now as it was 18 months ago." For Simister, the biggest drag has to do with currency exchange markets and not credit markets. "One of the major effects of the economy is that, since 1998, year-on-year the baht has considerably strengthened on its own," he says. "Properties are more expensive, but I don't see it dampening demand at the top end."
Phillips looks both to the global nature of investment capital and to the baht's performance on currency markets. "America looks cheap right now," he says. "A lot of money is flying across to America. It's cheaper because of the sub-prime crisis, so prices have come down naturally as an effect, and it's cheaper from exchange rates. Thailand has to compete against the rest of the world for investment dollars."
One bright side of a slowing global economy is that many investors see opportunities when markets take a downturn. Wade has noted increased interest in buying in Phuket from many regions.
"We're seeing a definite increase from the Middle East," he says. "Our biggest buyer last year was a gentleman from the Middle East. Many investors who have put money into Dubai think that it's a bubble about to burst, and they're looking for somewhere else to put their money--and they're not afraid of Asia."
The number of buyers from India has also gone up, he says, and "everyone knows" that Russians have swarmed into Phuket. Increasing interest from countries less affected by the mortgage crisis have buoyed Phuket's real-estate market where resort regions like Spain's Costa del Sol, by comparison, have suffered.
Neither, for the most part, has Thailand's financial system felt direct effects of the problems in mortgage markets in the US and elsewhere. In mid-April, international credit-rating agency Fitch Ratings, Ltd., during a conference call for financial professionals and media, detailed some of the fallout in Thailand from the US mortgage crisis. With one exception, explained Vince Milton, a senior director of financial institutions at Fitch, the Thai banking sector has remained relatively insulated from the sub-prime mortgage mess and the credit crunch that followed.
"Fortunately for the Thai banks," he said, "... most of the major banks are essentially funded domestically with very strong domestic deposit franchises. So there's been relatively limited impact from the flight to quality that we've see in some overseas markets."
In short, most Thai banks didn't bet on as many of the risky investments that lured so many US and European financial institution to their current peril. Several Thai banks did buy risky collateralized debt obligations (CDOs) comprised of residential mortgage-backed securities (RMBSs)--but in far smaller proportions of their overall investment portfolios than did the troubled banks half a world away.
CDOs are an investment product created from the aggregation of fixed-income assets such as loans on residential homes made by a bank (also known as RMBSs). Even if a bank doesn't sell the CDOs it owns, the asset value of CDOs changes as the bank reports its holdings to show creditworthiness. The CDO is then "marked-to-market" to state its current value. One effect of the sub-prime mortgage crisis is that banks holding CDOs including sub-prime RMBSs have seen asset values fall as more and more mortgages go into default and foreclosure.
"On CDOs, only three banks have exposure to CDOs in this market," Milton said of Thai banks. "These are Krung Thai Bank, Bangkok Bank and also Bank of Ayudhya, and the exposure is relatively limited, less than six percent of equity. Substantial mark-to-market losses were taken in 2007. From the fallout in structured markets globally we expect further mark-to-market losses to be reported in the first quarter.
"The Thai banks' limited exposure to CDO losses is a function of their risk appetite," Milton added. "They didn't have the risk appetite to invest in them."
Real estate in Phuket experienced steady growth through the late 1990s and into the first years of the new millennium. Every year brought more and more interest from foreign buyers, and every year more and more new vacation-home developments came on line to meet the rising demand. That momentum stalled after the December 2004 Indian Ocean tsunami.
"Clearly the biggest single impediment was the tsunami," Wade says. "The effect was to slow down the market considerably. After 12 months, the market recovered quickly, and then growth was faster in Phuket than in other regions."
Less than a year later, in October 2006, a military coup in Thailand overturned a constitutional government. The succeeding interim military government went on to sow uncertainty in the minds of many investors with what many believed were ham-fisted regulations on foreign investment. The military government eventually withdrew proposed amendments to the Foreign Business Act in October 2007 and scrapped an ill-considered barrier to foreign direct investment. In January of this year, democratic elections empowered a constitutional government, ending more than a year of military rule. But doubts still remain about overall political stability in Thailand, notes James McCormack, Fitch's head of Asia-Pacific sovereign ratings.
"The political situation appears to be settled on the surface, at least to some degree, but the uncertainty surrounding the future of a number of political parties, the possibility of further constitutional change, and the role of the former prime minister all present risks that all could again undermine political stability," he says. "The effects of the last two years of political instability on economic growth are fairly obvious, and the Thai economy underperformed compared to most others in the region."
For Wade, the political machinations of the past 18 months have made little impression.
"The coup had very little effect," he says. "It was virtually unnoticeable. I think we lost one sale, and that was on the day of the coup.