Deals for early birds

Rising inflation and soaring oil prices that push up construction costs have triggered increased activity in the new supply of condominiums reaching the Bangkok market this year, says James Pitchon, executive director of CB Richard Ellis.

As soaring building material prices pushed construction costs up by 20-30% in the first half of this year, end-users and investors are now shopping around for good units among buildings that have been completed or are to be completed this year because they were built from a lower cost base. This is also what gives this new batch of buildings a clear edge over new projects being sold off-plan.

One example Mr Pitchon gave is Athe'ne'e Residence on Wireless Road, where resale units have been sold for as high 150,000 baht a square metre but this is probably cheaper than the price a new project in the same area could be sold today.

"This year I expect we will see increased activity in The Met which will be due for completion in the first quarter of next year. People driving past that side of Sathorn will see very fast construction progress."

Soaring costs have hit Bangkok harder than some other key metropolises. Here, the construction element is as much as 50% of the development cost whereas in cities such as Hong Kong, Singapore and London the land element can be as much as two to three times more than the total construction cost. CB Richard Ellis has observed that building material costs are similar across the globe with the difference being labour charges.

Resale units at Athénée Residence are fetching up to 150,000 baht a square metre, but a new luxury building in the same central Bangkok location would likely cost a lot more.

Mr Pitchon added that while many markets around the world were declining, Bangkok was fortunate to be in a more stable position because price increases here had been closely linked to construction costs rather than land price inflation or abnormally large developers' profit margins.

"In summary, it's not going to be any cheaper to build a new condominium unless there is a fall in construction costs which is unlikely in the next 12 months."

Clearly, developers of condominiums reaching the market this year are sitting pretty, provided their projects are well located and the designs match market requirements. Aside from the price factor, buyers appreciate the fact that they are getting something that has already been built and can be assessed as is.

"Buyers will have the opportunity of having a wide range of projects that are approaching completion. They can see what they get in terms of quality. They significantly reduce risk because it has been built - if the building is finished, it's there and ready. "

Also it is end-users and investors who will drive prices in the new wave of buildings hitting the market this year and not speculators because they are the ones who will be buying. Mr Pitchon expects each building to set its own benchmark price based on what the market thinks the quality of development is.

However, he observed that not all buildings had benefited from this turn in the market. Some of the last generation of buildings, which are around 10 years old, are only able to achieve around half the price of the the product next door.

"One of the main reasons is co-owners have not invested in refurbishment of common areas. In a single ownership property such as an apartment or a hotel it would be normal every five to seven years to significantly remodel the lobby area and the corridors. This has not happened in many residential buildings because they were not able to get agreement from a large enough number of co-owners to contribute to capital improvements. The achievable price of some of these older buildings is the same as it was in 1994, whereas there is a new product selling at double the price."

Mr Pitchon underscored that today's situation was in fact an opportunity for existing building co-owners to substantially increase the value of their property by making their buildings more attractive. If a building's sinking fund has depleted then co-owners should raise the cash required because they should invest in their property.

From the developers' point of view, the challenge this year is managing risks. The biggest risk is the cost of building their projects and in Mr Pichon's view they would be wise to fix these costs with contractors before launching sales.

"In addition, buyers want to see that buildings have all the necessary permits before buying off-plan, so buyers will want to see a building permit and environmental impact assessment if that is required. This is because there have been cases where developers have not been able to transfer units because either they have been in breach of their building permit or they have not received environmental impact assessment."

Despite these market challenges, Mr Pitchon observed that Bangkok had changed significantly over the last 10 years with the biggest change being that condominium living has become more acceptable both for the wealthy and the middle class.

"People want to live in the city centre and the central routes of BTS and MRTA have firmly defined where the city centre is. So Bangkok has become an inward-looking city where people have no choice really but to live in condominiums because single detached houses and townhouses are too expensive in the city centre.

"Despite the challenges of construction costs, I think the concept of living in a condominium is here to stay and the development pattern of Bangkok has changed from a city that is constantly moving outwards to a city that has become far more centrally focused."

Source: BangkokPost