Reset in Phuket

Sales in the island's luxury residential market remain slow but an inevitable slowdown in future supply should help to boost projects.

Sales in the Phuket luxury residential market have slowed down in recent years as demand has grown at a slower pace. An adverse reaction to this is that the number of new residential project launches has started declining in response to slower sales.

There is an upside, however. New infrastructure should help improve the attractiveness of the Phuket residential market, while the slower growth in future supply should allow for an improvement of sales rates in existing projects in the coming years.

Impact of external factors: The luxury residential market in Phuket has relied heavily on demand from foreign individuals for investment or a second home away from their primary home. Key demand source markets have been hit by a series of events including the global financial crisis, European sovereign debt crisis, collapse of the Russian ruble, plunging oil prices and the Brexit vote in Britain.

Most foreign investors are less keen to purchase property abroad when their own country is in an economic downturn. On the other hand, many investors take advantage of currency volatility in other markets by acquiring properties there. The increased interest of foreign investors in the British property market following the Brexit vote is a good example. This has partially contributed to slower sales in the Phuket residential market.

Investors more cautious: The political crises that Thailand endured between 2008 and 2014 had a limited impact on Phuket. However, other factors made investors more cautious about investing in the island's residential market.

Aside from the increased availability of supply, Phuket has experienced events creating unfavourable sentiment towards the property market. These include a crackdown on encroachment, land ownership disputes and, just recently, the bombings that affected seven southern provinces.

Coupled with this is more stringent enforcement of the Hotel Act, which prevents owners from renting out a condominium or villa for less than one month if the development does not have a hotel licence. This has meant that developments without a hotel licence that had previously marketed rental yields as part of their sales campaigns can no longer do so if the intention is to allow owners to enter a short-term rental pool system.

Another side of the coin: Slower sales in Phuket have discouraged developers from launching new projects, particularly in the past two years. The slower growth in new supply should allow sales rates of existing projects to improve as unsold units will be gradually absorbed.

On the legislative side, the general consensus is that stricter enforcement of legal compliance in the island's property industry has undoubtedly dampened investment sentiment. But many players have agreed that it is a necessity which should make the market more regulated, controlled, transparent and clear. They believe clearer legal ownership of land should protect consumers, investors and the wider market in the long term.

Demand will pick up: Slower sales do not mean that demand has dried up. One of the world's best-known holiday destinations, Phuket is expected to continue to draw foreign buyers for many years to come. Property that is well located, designed, constructed and managed continues to offer attractive returns.

Though demand from most European countries has not yet recovered, buyers from other traditional buying markets including Hong Kong and Singapore have shown continued interest in Phuket. There are also signs that the Russian market is moving towards recovery.

In addition, as Chinese tourists are visiting Phuket in huge numbers, mainland China has strong potential to become a new source market for residential properties in Phuket. Experience shows that most foreigners who bought a villa or condominium in Phuket had visited the island as tourists before.

Moreover, more wealthy Thai individuals have purchased luxury condominiums on the island. A high-profile beachfront development in Kamala on the west coast recently reported that its buyers were 50% Thai and 50% foreign, which is something not seen in Phuket's luxury condominium segment before. Thai investors, just like foreigners, are attracted to the rental returns.

Phuket also has a lot going for it with excellent new infrastructure on the island including a new international airport terminal, multiple underpasses to help ease traffic congestion, and a programme to place all overhead cabling underground. This obviously will increase Phuket's aesthetic qualities and help maintain the island's reputation as one of the best destinations for tourism in the world.

Looking forward: As we have pointed out, the luxury residential market in Phuket relies a lot on demand from foreign buyers. The old discussion of zoning for certain areas to be able to offer 100% foreign freehold ownership in condominiums, therefore, would help the market dramatically. So would longer lease terms. Leasehold ownership could be converted to a direct 90-year lease instead of offering 30+30+30 leases, which require a renewal every 30 years. A number of real estate markets in Asean are offering this long lease term to attract foreign investors.

Bangkok Post-  Dexter Norville is a national director of property and asset management at JLL, 16th Dec 2016