What factors influence the prices of Phuket real estate? Here we discuss the factors that determine what happens to Phuket property prices today, and what is likely to drive them in the years ahead.
A Buoyant Phuket Property Market
Over the last three or four decades Phuket has grown from a beautiful but underdeveloped tropical island into a major global holiday destination, attracting billions in tourism revenue and international investment.
Increasing numbers of potential investors have taken note of this growth, and latched onto the earning potential from Phuket’s economic expansion. As the island continues to develop and prosper, so too will the market for real estate.
Year-on-year increases in tourist numbers and a greatly improved infrastructure have combined to attract buyers from all over the world. The last decade of buoyant growth served to underline a longer-term upward trend in the Phuket property sector.
But while the industry may be off and running, there are plenty of signs that it has not even started to hit its stride.
Phuket Property Prices versus Thailand Prices
A Rising Tide Lifts All Boats
In most countries, the prices of property in any given region will move in tandem with the country as a whole. Occasionally one area may be less volatile than another, but they ultimately share the same peaks and troughs (although Chernobyl might be an exception to that rule).
The nationwide statistics suggest that the Thai property market has slowed slightly over the last two years, making steady gains over the 10 years up until January 2016. The house price index stumbled until mid-way through 2017, then continued rising until early 2018. At the time of writing, it is slightly off its recent highs.
Over the past decade, Thailand’s house price index is up 48.91%. (Impact of the current pull back has only been -0.65%.)
In simple terms, this represents a 4.89% rise in prices per year. If you are an investor who looks at the capital appreciation in terms of compounded gains, it is a compound annual rate of return (CARR) of 3.7%.
Phuket is a Different Animal
Although Phuket prices also move with the rest of Thailand, including the capital, it does have different dynamics in many ways.
While prices may ebb and flow with the nation as a whole, the strong demand from foreign buyers in Phuket does have a tendency to move the real estate sector independently of the national numbers.
This means that certain domestic economic factors that may impact the Thai market as a whole, do not necessarily have the same effect on Phuket.
No Easy Credit for Foreigners
Analysts and forecasters are always worried about booms and busts, especially in property markets. Most booms are driven by the availability of easy credit, and the resulting busts happen because the easy money dries up. (Case in point: the 2008 financial crisis was rooted in the collapse of mortgage-backed securities, financial instruments that had pumped the market higher to begin with.)
Bubbles normally occur when developers try to take advantage of the boom and continue to build more houses, villas and condominiums than can realistically be sold. It all goes wrong when there is a glut of properties on the market with no one willing or able to buy them. That inevitably puts downward pressure on prices.
Further downward pressure comes if simultaneous macro-economic events in a country result in mass foreclosures, because people could not pay their mortgages. This also happened in 2008.
But most of the money used to purchase Phuket property is transferred from abroad, including some money coming from the developers themselves. All this money comes in as cash, and does not rely on any credit from Thai banks.
While some developers may borrow to construct new projects, in a buoyant market this is hopefully repaid by sales. A development that attracts Thai buyers may also see individuals seeking financing from local banks for their purchase.
But there is virtually no borrowing – or very little financing at all – in the foreign market in Phuket. This limits the potential for a boom-bust scenario in the island’s property market.
It is worth pointing out that, while Thailand has a much higher than average level of household or consumer credit, there are no visible signs that home borrowing levels are anywhere close to boom or bubble territory. The foreign market is on an even more solid footing.
Phuket’s Current Price Points
Phuket has a broad range of properties available for the discerning buyer or investors.
The island offers freehold condominium units at entry levels of around THB 2 million, up to super villas for ultra-high net worths that fetch as much as THB 400 million.
Phuket is not a massive island (570km²), but it is only about 20% smaller than Singapore, or roughly one-third the size of Greater London. Even so, some find it amazing that you often find two properties at such extreme ends of the price range located only a short distance from one another.
If you own a THB 7 million condo, your local pub, restaurant, supermarket and beach will be same as the owners of THB 40 million villas. In other words, there really is no bad location.
What Determines Property Price Points?
Some of the main factors which affect price points are:
- Land Value
- Location in Phuket
- Distance from the Coast/Beach
- Views (sea or mountain or none)
- Build Quality/Structural Engineering
- Architectural Design Qualities
- Reputability of the Developer (especially if new build)
- Reputability/Reliability of Condo Management Company
- Target Buyers (foreigners, Thais, a mix)
- Marketing Strategy (regional, international)
- Supply/Demand Factors
- Current Market Sentiment
- First Impressions/Cognitive Bias
- Other Unique Features
To help understand the impact of the above, let us use an apples for apples comparison. Why would two comparable condominiums from the same developer with a similar build quality cost THB 5.5 million and THB 3 million, respectively. If the first is on the west coast (closer to the beaches), and the second in the centre of the island, that pricing would make perfect sense.
With villas, you normally find that beauty is in the eye of the beholder. A buyer will pay what he thinks the property is worth. As long as the seller agrees to that price, the deal is done. Always remember the old adage: Location, Location, Location. Properties in a prime area always tend to sell well, even in a soft market.
What is a Good Price Per Square Meter?
Finding the ideal property may be a different experience for everyone. If price is paramount, and you don’t care how close you are to the beach, then you would probably look inland or at Phuket Town. When the sea is not in sight, the price per square metre goes down considerably. In fact, there are some very attractive developments fetching around THB 50,000/m2, or even less.
But if you love the beach, or you are looking at buying a unit with maximum rental potential, then expect to pay more. You will have to look closer to the west coast where prices rise to approximately THB 100,000/m2. Beachside or sea view properties, whether condominiums or villas, will sell for even more.
It varies depending on the quality of the development, but as a general rule centrally located properties are THB 50,000/m2 or below, while west coast properties are generally THB 100,000/m2 and above.
The cost of the land is the main determinant, although the build quality also impacts the final price. Some developers specialize in offering low entry-point pricing, while others actively seek out higher-cost land, in more desirable areas, and promise better build quality.
We are curious to see how future developments in the proximity of the New Central Festival price their units. The new attractions in the centre if the island, and the influx of residents (mainly Chinese) who don’t necessarily care about proximity to the beach, may push prices in those areas higher. We would not anticipate seeing the prices reach “west coast levels”, but certainly the gap could narrow in some areas.
If you are thinking of selling your property it would be worth noting price/m2 of similar properties in your area before deciding on your sale price.
The Limited Land Island Story
The increasing cost of land, more specifically the finite supply of land in Phuket, will also be a driver in the years ahead.
Scarcity certainly drives prices higher, and areas with a large population, but limited space for development, tend to be more expensive.
The west coast is where the laws of scarcity are already being put to the test. Villas on large land plots already sell at a premium over most of the island, but some developers have managed to keep prices down for lower-end villas. There are even resales still available for very attractive prices.
Our long-term view on Phuket property is that the west coast represents the best potential ROI for any property investor. Not only can you anticipate long-term capital appreciation, but the areas near the beach are generally the easiest to rent.
The last few years have seen an increase in studio and one-bedroom units aimed at foreigners. The trend for many developers seems to have shifted toward offering smaller units for less money to more buyers, rather than trying to sell a hand full of larger condos to a few high net worth buyers.
This trend may be a direct result of low interest rates in the West. Fifteen years ago the average punter was content to leave his money in the bank and watch it grow. Today, cash earns nothing, and in some currencies (e.g. Swiss Franc and Euros) depositors are actually paying the bank to hold their money.
Even a small property investment in Phuket is better than earning nothing in a deposit account.
The Inevitability of Inflationary Pressure
Inflation is a fact of life. The cost of bricks and mortar, roof tiles, household appliances and even garden shrubs never goes down, nor does the labour cost for constructing new villas and condominiums.
Wage inflation is also inevitable. If the cost of living rises across Phuket, so will the salaries of the workers. The Burmese make up the bulk of construction workers on the island. While they still work for lower wages than Thai labourers, their wages have still gone up, and are likely to increase further in the years ahead.
As all the costs to build housing in Phuket continue to rise, the price of the properties themselves will also increase accordingly. And those properties in the areas of highest demand will obviously see the greatest capital appreciation.
External and Internal Influences
One way to preserve the value of your home is obviously to look after it. Consider the following:
- keep the interior modern and well-maintained
- think about a new kitchen
- don’t put off the necessary DIY jobs
- invest in landscaping for the garden
- build a new covered patio, sun deck or a stylish gazebo
Sometimes, however, there are factors completely outside of your control.
Macro-economic factors tend to have at least some influence on the property sector. For example, slow GDP growth tends to lead to higher unemployment or a slowdown in wage growth. This tends to have a knock on effect on property.
Interest rates also affect property prices. When governments wants to give the economy a shot in the arm, they will lower rates. This makes borrowing cheaper, and helps to fuel growth in the economy. Low interest rates also help the local property sector.
Another factor which affects property prices (and Phuket is not immune from this one) is a shift in demographics. When people move out of an area (usually due to a major employer closing), properties go up for sale across the board, which usually lowers the price.
But the opposite is also true, and the population of Phuket is growing faster than the average rates for the rest of Thailand. This is not just locals moving to Phuket in search of a better life, but also foreigners arriving to live on the island.
Other Factors Affecting Prices
We all know what would happen to the value of your house should the local authority decide to open a waste dump behind your back garden. Heaven forbid that would ever happen, but if it did, home prices in the area would certainly fall.
There are many factors that conspire to edge the price of land, condos or houses up or down, many of which you may not have considered.
Here are a few:
- New Hotels Opening on Your Doorstep – in some areas, the arrival of new luxury hotels improves the overall perception, driving prices up across the board.
- The General Appearance of the Area – sometimes a drab area gets a total makeover, and takes on a completely new look. Sometimes it is only the aesthetic, but sometimes the new-found civic pride among residents leads to brand new houses being built in that area. All of this obviously makes a huge difference to potential buyers, and has a positive knock-on effect for the price of existing properties.
- Change the Name of Your Villa – this may be a surprising one, but studies have shown that a name can make a difference. If you bought a villa, but weren’t necessarily keen on its name, chances are future buyers won’t be either. Just change it! The official address doesn’t change, so can decide on a new name whenever you like.
- New Local Facilities – if you are lucky enough to have new developments open close by, with modern shops, restaurants, or recreational and leisure facilities, this could very well send prices in your area higher.
- The New Rail System – although this is still in the tender and design stage, any properties close to the new stations will almost certainly go up in price. Studies in most other countries show that accessibility to new transport development programs causes property prices to rise. (The same thing continues to happen in Bangkok, as their BTS system expands outward.)
- New Road Access and Links – new road access is also beneficial. Phuket is constantly creating new roads, mostly providing access to the centre of the island. Some owners will find that this increases the value of their home.
Time and Timing is Everything
No matter what property you own or are looking to buy in Phuket, it pays to think long term.
Prices in Phuket have been constantly rising over the last 30 years, but there have been brief slow-downs along the way. Some people will have panic-sold when the Asia Crisis hit in 1997; others will have thought Phuket would never recover from the Tsunami, and unloaded their property holdings then; others may have been forced to do so by the circumstances of the 2008 financial crisis.
As with any other global real estate market, if you buy at the wrong time, or don’t hold the property long enough, or decide to sell at the completely wrong time, you may not see the profit you would like.
With any property investment, patience is absolutely a virtue.
So Where to with Phuket Property Prices?
This is really what everyone wants to know.
Historically, no matter what economic pressure Thailand or its tourism industry has faced, the Phuket property sector has continued to move forward. In the last 20 years, Thailand has dealt with:
- The Asia Crisis
- SARS Virus Outbreak
- Bird Flu Outbreak
- The Indian Ocean Tsunami
- 2006 Coup d’Etat
- The Global Financial Crisis
- 2014 Coup d’Etat
That is an average of almost one event every two years which had the potential to cause damage to the economy or property market. No matter what the obstacles, the Phuket property sector has always emerged stronger.
Looking at some simple fundamentals (e.g. supply and demand), there is an increasing population in Thailand, and one which is also growing increasingly wealthy. The demand from foreigners also remains strong, but developers on the island are not building to excess.
Global inflationary pressures will only push prices up over the long term. For anyone with patience and a long-term investment horizon, Phuket will provide significant capital gains in the years ahead.
Let us be very clear: there will be bumps in the road because there always are. Real Estate is cyclical, and part of that cycle is a period of stagnating or even falling prices. Investors and home owners who are not prepared for this should think twice about investing into the Phuket property sector.
Phuket is becoming one of the world’s most desirable and sought after property sectors. The island continues to impress with its ability to change and adapt, offering more and more to new residents.
We expect growth to move steadily upward over the next decade with, but still anticipate some bumps in the road along the way. Given what Phuket (and Thailand) has endured over the last decade-and-a-half, it would take catastrophic economic circumstances to derail the existing growth trends.
As long as you are looking to the long term, not trying to make a quick buck, Phuket property should prove to be a great investment. At some stage land availability on the island will reach a tipping point. When that happens property prices will accelerate significantly (especially on the west coast), and you will feel like you bought in on the ground floor.