The low interest rates on bank deposit savings accounts
is currently driving investment demand in the residential market where
investors are seeking annual yields as well as capital appreciation.
According to CB Richard Ellis (CBRE) research and leasing transactions data,
the average gross yield of downtown condominiums in Bangkok in 2010 was
6.1%, substantially higher than bank deposit rates, which at best are below
2% for fixed deposits.
The key to maintaining a consistent yield is underpinned
by picking the right properties and an understanding of what the tenant
requirements are and what they can afford. The key factors to take into
consideration when picking properties for your rental portfolio include
location, picking the right building and unit size.
Location is the number one factor for the rental market,
particularly for expatriate tenants which are the key market for downtown
condominiums in Bangkok. Based on analysis of leasing transactions completed
by CBRE in 2010, expatriate tenants continue to be very selective on
location. Developments which offer easy access to mass transit stations and
in close proximity to amenities such as restaurants, shopping centres,
schools and hospitals are much more in demand.
From CBRE’s leasing transactions data, 50% were
concentrated in the Sukhumvit area between Soi 1 to 63 and 2 to 42, followed
by Silom/Sathorn and Central Lumpini. Popular developments amongst
expatriates are Plaza Athenee in Ruam Rudee, Park Chidlom and Domus in
Sukhumvit 16-18. There are generally fewer re-sale units in these
established developments which offer good rental opportunities and investors
need to work with motivated agents to find available units.
Whilst prices may substantially differ by location,
rental yields do not vary significantly between Sukhumvit, Lumpini,
Silom/Sathorn. Property prices per square metre in the Lumpini area are
higher compared to Sukhumvit, but statistics also show that this location
attracts quality expatriate tenants with the highest rental budgets. For
example, recent re-sale transactions in Plaza Athenee achieved nearly THB
160,000 per sq.m., while re-sale transactions in the Sukhumvit area range
from THB 120,000 to THB 130,000 per sq.m.
Picking the right unit sizes is also important. Smaller
1-bedroom units achieve the highest yield of 7.2%, but there is also most
competition in this segment which may cause downward pressure on yields.
Rental demand for this segment is underpinned by the local white collar
market, unlike larger 2 and 3-bedroom units in high-end and luxury buildings
which attract quality expatriate tenants with larger budgets. Whilst average
yield for larger units is lower at 5.6%, the occupancy level is
comparatively better in this segment.
With approximately 11,000 one-bedroom units in the
pipeline under construction in Bangkok alone, investors should also beware
of buying into projects with large numbers of identical units and need to
assess the demand for these units before purchasing.
Another key factor is the efficiency and functionality of
the unit layout, combined with the attractiveness of the location, rather
than the unit size in square metres alone. For example, a modern 150 sq.m.
3-bedroom unit close to a BTS station can achieve the same rent as a larger
3-bedroom unit that is not as attractive in terms of location, unit layout,
design and decoration.
In addition to picking the right location and unit size,
picking the right property is essential to maintaining a consistent yield.
Selecting the right properties can ensure a yield in excess of 5% as well as
medium to long-term capital appreciation. Apart from location, the common
facilities are an important consideration for tenants. Swimming pool, gym,
sauna/steam rooms, recreational and garden areas should be available,
particularly if one is investing in larger units which target expatriate
families with children.
The age of a building is also a factor which directly
affects yield. As a generalisation, newer buildings tend to provide better
yields. There are, however, selected buildings which are older but are
located in very prime locations that are no longer available and have been
well maintained, for example Somkid Gardens; units in such projects should
be considered.
According to CBRE Research, yields were similar across a
range of properties, some of which were completed over 10 years ago. So long
as the location is attractive and the common areas are well maintained and
renovated, older buildings can also maintain good yields as prices of older
buildings are lower and owners can therefore accept lower rents and still
achieve similar yields to new buildings.
However, it is important to note that a consistent yield
can only be achieved for older buildings which are well maintained.
Buildings where common areas had not been renovated or where owners had not
redecorated their units would provide lower yields. Older buildings tend to
also be more costly to maintain and will likely to incur additional capital
requirements for upgrades and renovations if the sinking fund is
insufficient, therefore knowing when to buy and sell the properties in your
portfolio is also the key to maintaining a consistent yield, as well as
maximise the realised capital gain.
Unlike shares or bank deposits, there are operating costs
involved in buy to let properties such as common area management fees,
insurance, unit repairs and maintenance, void periods when the property is
empty between tenants. Taking all these costs into consideration, the
average yield net of expenses before tax is 3.7%, still exceeding bank
deposit rates.
“In the present environment with low interest rates and
bank savings and fears about inflation, the investment characteristics of
residential property with potential for both capital gain and rental income
and a hedge against inflation will continue to attract investors,” said
Aliwassa Pathnadabutr, Managing Director of CBRE Thailand. (Press release
CBRE Thailand)
