Even though Thailand was one of the hardest hit economies in Asia there is still much interest in the Thai economy and the Thai property market in particular. As with the vast majority of countries around the world, the credit crunch brought a short sharp shock to the country and the economy collapsed as business dried up and visitors to the region disappeared. However, over the last few months there have been signs of a recovery in the Thailand economy and indeed many experts are now pinpointing the Thai property market as a potential source of significant investment return in the medium to longer term.
The Thai economy
The turnaround in the Thailand economy has been fairly sharp over the last few months after a very difficult first quarter and first half of 2009. Indeed the economy fell year on year by 7.1% in the first quarter of 2009 and by a far more impressive 4.9% in the second quarter of 2009. As we await news of the third-quarter figures, which are due at the end of November, many people are already predicting growth in the Thai economy of around 4% in the second half of 2009.
This massive swing in the performance of the economy has many plus points, but it also highlights some points of caution.
Thai interest rates
Thai interest rates are currently 1.25% which is the lowest level since July 2004 and one which offers an interesting investment opportunity for investors looking towards Asia. When you consider that rates have fallen from a high of 4.75% back in January 2007 to the current level, it is easy to see, as we have seen in places such as the UK, the impact which the ongoing worldwide recession has had on economies such as Thailand.
However, while there appears to be scope for optimism with regards to the Thai economy and the Thai property market, many people believe that interest rates will remain at around 1.25% until at least the second half of 2010 because inflation is at the moment not an issue. However, the government will be keen to keep tight control of the Thai economy because if inflation starts to grow then we could see a short-term spike and then a collapse in economy towards the latter part of 2010.
Property in Thailand
Property investors in Thailand, and many other countries in the region, suddenly disappeared as the credit crunch hit home and investors looked to repatriate and consolidate their funds for the future. The lack of credit in the worldwide money market, falling interest rates, falling rents and falling property prices led to a short sharp shock in many of the world’s economies and Thailand did not escape.
However, with Thai interest rates now steady at 1.25%, many overseas investors are now looking towards the Thailand property market where rental yields are still relatively low at around 3% to 4% but offer an interesting premium on interest rates. The reduction in property rent yields obviously saw property prices fall back sharply and while there is still overcapacity to a certain extent there are signs of improvement.
The future of Thai rent rates
As we touched on above, rental yields are historically linked closely to interest rates in the region because ultimately they offer a premium over the savings rate at the time. As a consequence, while rates will remain relatively low for the foreseeable future, there is every chance they will improve in the medium to longer term as interest rates finally start to tick-up in 2010.
There are some investors in the region who argue that higher interest rates will lead to a withdrawal of short-term investment money in the Thailand property market, but in reality if interest rates are rising then this is purely and simply to cap any rise in the economy and rein in consumer and investor demand. As a consequence, before Thailand interest rates are able to rise we should see a recovery in liquidity in the money markets and indeed an increase in investor interest in the region. In this particular instance, interest rates could be seen as a double edged sword.
Property prices in Thailand
The obvious key to the Thailand property market is the Thai economy which has recovered significantly in the short term. As long as the recovery can be controlled and the economy does not slip back into recession, which is a possibility when you consider the current worldwide economic background, there is every chance we will see investors return to the region and expats once again look towards Asia. Even though the Thai authorities have again confirmed they are not looking to increase interest rates before the latter part of 2010 there are some economists who believe the economy may well require higher rates in the short term, although this is currently a matter of great debate.
Interestingly, while there are very few new property projects ongoing in Thailand, there are a number of developments which began before the recession which developers are now looking to complete. As a consequence, some property experts believe there could be a short-term window during which supply could swamp demand prior to an increase in overseas investment and ultimately growth in the property development sector.
Like so many popular destinations for expats around the world, Thailand was one of a set of dominoes which collapsed when the worldwide economy hit the buffers and credit in the worldwide money markets dried up. However, with signs of improvement in some areas of Europe, the Far East, Asia and even America (even though this is on a smaller scale) it looks as though Thailand is back in favour.
While it is always risky to re-enter relatively small property markets such as Thailand, before a full-blown worldwide economic recovery, the signs and the figures suggest that Thailand is recovering much quicker than most. The government, at the moment at least, appears to have control of the economy and if the ongoing recovery can be stage-managed and controlled there is no reason why overseas investors will not flock back to the region in the short to medium term.
Obviously, any improvement in the Thai economy will be fully reflected in the Thai property market which as with so many other countries around the world is the focal point of the economy. Many investors are already putting Thailand back on their “watch list” and it will be interesting to see how this particular story develops in the short, medium and longer term.