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Saturday, 6 August 2011

As we all know value is a factor of supply and demand although the definition of value can vary – but that is a discussion for another day. Demand for real estate here in Samui has been depressed for many months now and the reasons are well know – world economy, lack of credit, politics etc. But what about the supply side?

Despite the low level of demand there are still developers creating new stock and new properties are coming onto the market all the time. I am aware of at least three developers who have built the first house on their development and quite rightly stopped because it has not sold. There are still individuals building properties with a view to selling and at the lower price levels having some success. The consequence though is that the stock of available properties is increasing faster than they are selling. This has a further knock on effect in that the new modern stock of properties is more attractive than the older properties which inevitably means the old properties will decrease in value faster.

This then begs the question – with the thousands of Rai of developable land in Samui, why have land prices not fallen at the same rate as residential house prices? The main reason of course is that the majority of this land is still held in Thai names and there is generally no pressure on them to reduce the price from what was achieved during the boom days.

What then are factors that would help to maintain values? Apart for increased demand, which cannot be controlled, the obvious answer is to limit supply. It will take some considerable time for the existing supply of properties available to be taken up, so perhaps now is the time for the local authority to look more closely at how the excesses of the past can be controlled in the future. In a small way they have already done this with height restrictions so we do not have masses of multi-storey buildings dotted around the island as can be seen in Pattaya and Phuket. Yes I know we have some, but not many. The zoning restrictions brought in are still very flexible in respect of residential properties so what more can be done?

Take for example San Francisco. In 1986 they passed Proposition M, a quite complex piece of legislation, part of which restricted the total of planning approvals for office space to 950,000 sq ft a year. For a major city this is quite significant and the consequence was that new development was restricted and rental rates stabilized as did consequent capital values. It was more than just a restriction on planning permissions, but was also very detailed as to how development of any kind would be controlled. Washington DC has for years had height limits on buildings and this helped to maintain values. At the other end of the scale Dallas in the same time frame had no zoning laws or restrictions as a consequence of which the real estate market almost died a death with rampant uncontrolled development.

How do we translate this into what would work in Samui. The reason that Proposition M was passed was due to local pressure from the urban population. Do we think that the indigenous population of Samui would support far reaching restrictions on development? Would those restrictions be in the form of number of approvals or a tightening of the zoning laws? Will it be imposed economically due to lack of infrastructure and communications? I wish I had an answer to that.

We will have to wait and see.

There is one aspect though that should have been done and still could be. Many countries have linkage policies. The price for granting planning permission is a contribution to the cost of providing the infrastructure to that development or indeed providing that infrastructure. Many of the islands problems with electricity, water supply and drainage could have been dealt with adequately had this been in place previously. Wise after the fact some will say. Not really, it is any issue I have never understood in the ten years I have been here.

The real estate market is slowly gaining pace but as reported previously mainly in the lower ranges. We have been receiving more serious enquiries recently than for a long time and interest has moved up into the 10-15 million range whereas previously it was almost exclusively under 10 million. However, before everyone starts putting their prices up, the only properties selling in that range are those that have already been discounted. What is also noticeable is that with so many agents having disappeared over the last year or so, there are signs of one or two coming back, unfortunately with little real estate experience. So just be careful who you are dealing with.

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