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Thailand’s developers struggle with ‘guaranteed returns’ in Covid-19 property crisis

Bill Barnett

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Thailand’s developers struggle with ‘guaranteed returns’ in Covid-19 property crisis | The Thaiger
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by Bill Barnett of c9hotelworks.com

There is one key underlying fundamental for hotel branded residences returns, and the truism that best sums it up is that returns are a function of hotel trading performance and marketplace.

In Asia, the largest branded residences market is Thailand. According to C9 Hotelworks market research, the country represents 29% of regional supply with key markets being Bangkok, Pattaya, Phuket, Hua Hin and Chiang Mai.

In an evolving hotel ownership model that has developers passing on risk to residential property buyers, the question has to be what risks are inherent in this, given the current Covid-19 crisis? The answer is twofold in that some owners of existing units are currently under guaranteed return programs or those who are buying new projects and are expecting contracted returns.

One indication of stress in the market has come out of Australia, where the Quest Group who operate 160 serviced apartment properties in Australia, New Zealand and the Pacific have told investors who own units that have lease-back arrangements that they cannot pay due to the Covid-19 downturn.

Her in Thailand there are a variety of rental programs ranging from top line rental revenue splits to bottom line profit splits between the hotel and unit owner, and the increasingly popular lease-back arrangement. The latter was thought to be beneficial to the operator so that tenure is ensured in the project, and for unit owners who thought the lease amounted to a fixed-rental guarantee.

Commercially in Thailand, these types of contractual obligations are reflected in civil contracts and in the case of guarantees rarely are they backed by corporate undertakings, escrow accounts or bank guarantees. So in the case of a default, the only real remedy is a direct legal action. This sadly is often too costly or time consuming for single unit buyers to pursue.

With Covid-19, if force majeure is considered to be in place, a court action will have to determine who’s right and wrong. So essentially, let’s just say it’s complicated. During this past week we have seen three different projects in Thailand suspend guaranteed returns to buyers, and you can expect the number to jump in coming weeks.

The warning which is important for buyers of branded residences is that they are not purchasing a traditional real estate model, with the likely end game of capital appreciation. They are becoming de facto owners in a hotel, and as such need to carefully understand Thailand’s hotel supply and demand and performance metrics. Hotels are capital intensive and require a different standard of fit-out, operation and reinvestment vs pure residences.

It is still early days in the Covid-19 crisis, and it remains to be seen how developers who have promised guaranteed returns will fulfill these obligations, or look to negotiate a suspension of payments. For buyers of off-plan projects it’s a good time to pay closer attention to guaranteed return returns that are for extended periods of time or at high return percentages. If something looks too good to be true it probably is!

The local Covid-19 crisis will undoubtedly reset the Thai hotel industry and it’s a serious mid-term path to recovery, so expect branded residences to face these same challenges and adjust the investment outlook accordingly.

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Bill Barnett has over 30 years of experience in the Asian hospitality and property markets. He is considered to be a leading authority on real estate trends across Asia, and has sat at almost every seat around the hospitality and real estate table. Bill promotes industry insight through regular conference speaking engagements and is continually gathering market intelligence. Over the past few years he has released four books on Asian property topics.

Thailand

Government is to allow people to use “legal” parts of cannabis in business

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Government is to allow people to use “legal” parts of cannabis in business | The Thaiger
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With intentions to promote cannabis as the country’s potential new cash crop, the government is preparing guideline to allow people to produce, sell or own cannabis and hemp. The permitted businesses, including textile, pharmaceutical, and cosmetics will be able to register to receive FDA permissions from January 29.

According to the FDA secretary-general, leaves, stalks, stems, roots, flowers, and seeds are not in a list of legal parts as they have high drug content (is there anything left?). Individuals are still not allowed to grow both cannabis and hemp without authorisation. Import and export of hemp must seek permission from the FDA Office as well.

Interested applicants in Bangkok can register at the FDA Office, while those in upcountry can contact the provincial public health offices. Courses and training about how to start a business using marijuana plants will be provided under the collaboration of the Education Ministry and Public Health Ministry.

However, a traditional medicine expert with Chaopraya Abhaiphubejhr Hospital, suggests that 6 groups of people should avoid food and drink with marijuana, including those with liver and kidney problems, heart disease patients, people aged below 25, pregnant women, breastfeeding mothers, and those taking stimulant medications.

SOURCE: Bangkok Post

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Myanmar cancels Thai investment in the Dawei Special Economic Zone

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Myanmar cancels Thai investment in the Dawei Special Economic Zone | The Thaiger
PHOTO: Environment Justice Atlas

The Dawei Special Economic Zone Management Committee has announced the cancellation on the deep seaport project contract with Italian-Thai Development (ITD), one of Thailand’s leading industrial firms, by saying that they “lost confidence” in the company after long, controversial issues.

The Dawei Special Economic Zone Management Committee said that the Thai company has caused them “repeated delays, continuing breaches of financial obligations under the contracts and the concessionaires’ failure to confirm their financial capacity to proceed with development”.

They say they will look for new development partners to continue the projects. Currently, there are still no comments from ITD.

The Dawei Special Economic Zone is Myanmar’s initiative to encourage international investments into the country, but the project has been delayed because of funding problems and local opposition.

SOURCE: Thai PBS World

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Future of Thai department stores is being redefined

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Future of Thai department stores is being redefined | The Thaiger

While department stores have been a familiar destination for Thai people for many decades, CBRE, an international property consultant, is witnessing a decline in popularity and stunted growth, particularly in 2020 when Covid-19 adversely impacted the sector. CBRE believes that to adapt to e-commerce disruption and the changing consumer behaviour, department stores in 2021 (and beyond) will have to fine-tune their business model in terms of customer shopping experience, inventive activities and value-added programmes to continue their status as the second home for Thai shoppers.

Jariya Thumtrongkitkul, Head of Advisory and Transaction Services – Retail, CBRE Thailand explained… “While department stores offer shoppers convenience, saving them time with many varieties of goods grouped in different departments and allowing the shoppers to find and compare products and choose what they want, the traditional department store model does not fit the needs, lifestyle and behaviour of its shoppers anymore, especially the new generations.”

According to CBRE Research, the total retail supply in Bangkok as of Q4 2020 increased to 7.8 million square metres, a 1.16% increase year-on-year. Out of this, only approximately 3% was reported within the department store format. The department store market in Thailand is mainly dominated by two domestic retail giants, with Central Group and The Mall Group holding the largest market shares. They do not only concentrate in Bangkok, but have also opened department stores in many major cities throughout the country which allowed them to build bigger networks and grow their customer base.

In the past few decades, Japanese investors had also shown interest in entering the Thai market and offered local features that are well-known in Japanese department stores: simplicity, premium quality and services. However, with strong competition many Japanese department store operators have ceased their expansion plans. Some have exited the country due to the fierce competition against the local players, their performance in Thailand and the shrinking Japanese department store business, especially in overseas countries.

“The department store concept as a one stop shopping place is still in demand for certain groups of customers. However, with the e-commerce disruption and changing consumer behaviour, department store operators need to adapt their models, offerings and value-added services to their customers to cope with the challenging economic and market conditions.”

Adaptability of department stores can be highlighted into 3 main parts: customer shopping experience, inventive sales and marketing activities, and value-added programmes. While more and more younger generations prefer to shop online to save time and money, the brick-and-mortar store is still believed to be the second home for Thai shoppers. Department stores should be more agile in the era of e-commerce and adopt some technological innovations such as in-store automation and mobile payment solutions to reach the younger crowds.

Design is another aspect that plays an important part in customer shopping experience. Department stores can be more creative in remodelling traditional department store space into some ingenious and interactive space with a great design and right product portfolio mix for their customers.

The Mall Group, for example, has launched its first “Lifestore” concept at The Mall Ngamwongwan at the end of 2020 by redesigning and renovating its traditional department store space to enhance customer shopping experience and enjoyment.

The second part to be considered for the adaptability comprises inventive activities related to sales and marketing. The prices of products being sold in a department store are normally set high to cover the higher establishment and operating costs by operators, narrowing their target to only upper- to high-income customers.

Brand offerings may also no longer meet fast-changing customer needs since today’s shoppers have more choices in buying products online, not to mention the declining footfall due to the growth of e-commerce. CBRE Research has seen domestic players pushing hard to drive sales growth via numerous promotions, marketing campaigns and activities and collaboration with credit card companies during seasonal sales.

The third part consists of value-added programmes such as personal shopper, customer loyalty programme, on-demand solution and service personalisation, which have become a new trend as customers, including the aging population, are now more sophisticated and demanding.

The retail landscape has changed drastically in the past few years from various factors like technological advancement, consumer behaviour and preference as well as Covid-19. Cookie-cutter strategy will be a thing of the past, especially for department stores where the format and offerings have remained the same for decades.

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