As discussed last week, the upper end of the luxury villa market has outperformed the Phuket property market as a whole, with many successful property launches despite political turmoil and global economic woes. In last week's column we drew upon recent market research to outline some trends in the luxury villa segment, defined as projects with units priced at 65 million baht and above. This week, we will take an in-depth look at some of the factors affecting supply and demand for luxury villas.
It is evident from the luxury villa pipeline that upcoming supply is expected to be limited in the next 12 to 24 months. This is due in part to global economic pressures that are likely to result in some projects being put on hold.
From the lending side, banks are withdrawing commitments to fund projects. Also, buyers are unable or unwilling to fulfill their obligations. In some cases, certain developers may be under cash pressure. While liquidity remains tight, we may see a slowdown in new project launches and progress on developments already underway.
We will likely see more Thai-based developers with access to debt servicing entering the market as opposed to institutional investment vehicles, which are temporarily squeezed. For those with capital (purchasers, investors or developers), there will be opportunities to benefit from any temporary softening.
Inflationary pressures on construction costs are easing due to decreasing energy costs and expected price stabilization for construction materials in the face of weaker demand. It is likely that well-capitalized developers could benefit from lower development costs and associated risks. As such, projects already launched or about to launch would appear to have a favorable jump start over the next 12 to 24 months.
Another supply issue relates to the availability and pricing of land in Phuket. The scarcity of prime beach front and sea view property, as well as robust land pricing levels, could also be a contributing factor to the slowdown in upcoming supply.
The shift to less costly parts of Greater Phuket is evident in the location of upcoming supply, with the bulk of announced luxury villa projects to be situated along Phuket's east coast, as well as Mai Khao and Phang Nga. Examples of this trend include new entrants to the Greater Phuket market such as Taj Exotica on Koh Lone and Raffles in Phang Nga.
In terms of demand, when all of the figures are in, it is likely that we will see a softening in the second half of 2008 luxury villa sales and a weak start in the first half of 2009. This is mainly due to a "wait and see" attitude on the part of potential purchasers, who may be affected by the global financial shakeout.
While Thai political instability is often considered as a factor in reduced demand, we do not see this being a significant or longterm deterrent to potential buyers in the upper end of the luxury villa market. Discussions with real estate professionals in Phuket indicate that while sales are being completed and the top-tier market continues to do relatively well, lower tiered product is facing more of a challenge in today's environment. This is largely due to over-supply and lower quality products at the lower price points. Conversely, the strength of the top tier segment can be attributed to demand drivers such as a shortage of prime sea view or beach front property in Phuket, high quality concepts and finishes, and a small but exclusive supply of new developments.
Another valid reason for the continuing purchaser interest- in the high-end villa sector is that luxury buyers in Phuket are