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The challenges that faced the property market in 2005 included the rising cost of construction materials, increasing interest rates and weaker consumer confidence due to rises in inflation and oil prices. This upward trend caused a slowdown, but in 2006 the market is expected to grow. However, there are more challenges ahead.

Anant Asavabhokin, the president and chief executive of Land & Houses Plc, the country's largest developer, said obstacles for developers in 2006 would include a further rise in the cost of construction materials.

``They [developers] need to control overhead costs in order to maintain gross margin and sales growth as other costs cannot be squeezed,'' he said.

One problem is that developers cannot raise housing prices due to higher competition.

The market in 2006 will be challenging although it is growing at 14% with the registration of 70,000 housing units.

``If gross domestic product is at 5-6% in 2006, housing registration will total 75,000 to 80,000 units, rising by 15-20% from 2005. But if it is below 4%, the number will be equal to that in 2005,'' he estimated.

He said there would still be demand for residential property due to a 1% increase in the population of Greater Bangkok, and a drop in the unemployment rate.

Anuphong Asavabhokin, the chief executive of Asian Property Development Plc, an LH affiliate, said that every segment of the market was facing a lot of competition. Some listed developers had even shifted to budget condominiums in the face of high demand.

``The budget condominium market provided an opportunity that many developers jumped into,'' he says. ``Surviving developers must diversify their developments, locations and product segments.''

Mr Anuphong said developers would have to play to their strengths and diversify product offerings to reduce risks.

``Considering the number of new construction permits this year, there will be fewer developments next year, so it pays to be a stronger developer.''

He added that many developers had focused their developments in areas served by mass transit, while in areas far from transit lines, such as Rama III, land rices had not risen very mich.

According to Lalin Property Plc chief executive Chaiyant Chakarakul, figures show the amount of new supply in 2006 will be stable or may even decrease.

This would be a good sign for the property industry as the market would strike a balance between supply and demand, he said.

``People will become accustomed to high oil prices sooner or later so market sentiment next year will be good due to improved consumer confidence.''

He added that growth drivers for the economy in 2006 would be the government's planned megaprojects, exports and income from tourism recovery.

Sopon Pornchokchai, managing director of the property consultancy Agency for Real Estate Affairs (AREA) said 2006 bodes well for the lower-priced segment, which includes condominiums and townhouses priced between one million and three million baht, and single houses priced between three million and five million baht.

Meanwhile, the golden locations will be the areas surrounding existing mass transit lines, new roads and the Suvarnabhumi Airport.

Aliwassa: 'Steady growth
According to AREA's market survey, a drop in the number of new houses was expected for 2005, by 28% to 48,997 units from 68,052 units in 2004.

Total value was also estimated to have dropped sharply by 41% from 254.39 billion baht in 2004 to 149.52 billion baht in 2005, as most new supply will be in the low-end segment with an average price of 3.052 million baht a unit, dropping from 3.738 million baht in 2004.

``The housing market in 2005 was very competitive as developers tried to accelerate housing sales in face of a decline in purchasing power. They also needed to have cash flow in hand and some listed companies had to generate sales as targeted,'' Mr Sopon said.

However, he added that total new supply in 2006 would decline slightly by 10-20% from 2005.

Mr.Sopon's expectation may be right. According to the Lands Department, the number of acquisitions during the first eight months of 2005 totalled 122, decreasing by 34% from 185 in the same period of 2004.

Meanwhile, the number of housing permits in Bangkok rose by only 2% during the first eight months of the year with permits for single houses down by 11% while those for townhouses went up by 17%.

Thawatchai Suthikijpisan, the president of Kiatnakin Bank, said that new project finance extended in 2005 was lower than in 2004. Banks' new loan releases fell from 16 billion baht in 2004 to 10 billion baht in 2005.

But this could be seen as a good sign if there is indeed a market bubble.

Overall, the property market has not slowed down. Townhouses priced between one and two million baht still enjoy strong sales, for example.

The industry's average margin, however, has fallen sharply from 26% in 2003 to 16% in 2005 due to high construction costs and missed sales targets.

``In the past, many developers enjoyed a high margin, brushing up their existing land plots for development, which had a lower cost. But now the cost of land plots is extremely higher,'' Mr Thawatchai said.

``The developers of housing units priced between 5-10 million baht will be exhausted, while units priced below three million baht will have a good sales next year.''

The availability of less financing for projects slowed the pace of development activity in 2005, said Aliwassa Pathnadabutr, managing director of the property agency CB Richard Ellis (Thailand) Co Ltd.

``The biggest single factor affecting the market has been lenders' cautious attitude to providing project finance,'' she said. ``This has resulted in a reduction in the number of active developers.''

In 2005, there was a general move by developers to focus on the mid-market sector, single detached house sector and townhouses. There was larger potential demand but this market was price-sensitive.

``Many developers were focusing on mid-market condominium developments situated close to mass-transit stations. Both L.P.N. and Supalai launched several successful mid-market condominium projects in 2005.''

Assuming reasonable economic growth in 2006, most sectors have reasonable prospects and some, such as the office building sector, will see another year of substantial rental increases.

Challenges to developers in 2006 are controlling construction costs and quality, and maintaining customer satisfaction, as well as project financing while opportunities continue to exist in every property sector.

``We anticipate steady growth in the property sector in 2006,'' Ms Aliwassa said.

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