A look at Thailand's and RI's property markets

A look at Thailand's and RI's property markets

By Greg Penn

JAKARTA (JP): The property markets of both Thailand and
Indonesia have been decimated by the economic crisis. In Thailand
it has been a slow sinking feeling since 1996 while the
Indonesian property market has visibly plunged over the past six
months and arguably is in a more critical state than Thailand.

Since the start of the economic turmoil, the property markets
have been characterized by declining rental and capital values,
falling occupancies and project postponements. Both markets now
rely almost exclusively on foreign investment capital to pull
them out of this nosedive.

Property markets during a strong economy act as a sponge
absorbing huge amounts of debt as bankers are attracted to making
simple loans on the basis of identifiable collateral. The banks
have had a major role in the inflation of property values and
ongoing supply and now have both an economic and moral decision
to make to liquidate the property market to play their role in
reviving the economy.

The focus of both owners and investors is on the debt. The
quality of the asset and tenant covenants are ultimately the
primary concern of the investor, but the immediate difficulty is
debt restructuring. In Indonesia, confidence in the stability of
the country in both the economic and social sense will be the
foundation for the inflow of investment capital. The lack of
confidence will be equaled by the lack of incoming capital.

Transparency and stability are high on the agenda of the
government to encourage investment that can generate sustainable
secure long-term yields.

The recovery of the property market relies almost exclusively
on the future inflow of overseas capital and progress made in
liquidating the real estate market will be the primary step to
stabilize the whole economy. The collapse of property values has
inflated the nonperforming loans of most banks while the rapid
increase in interest rates has put further downward pressure on
property prices creating further difficulties for the banks.

While both economies call for help from donor nations, the
International Monetary Fund, World Bank and others, they need to
also focus on the billions of dollars locked up in illiquid
property assets. If banks acknowledge the severity of the problem
and liquidate nonperforming loans at discounted values the
capital can be reemployed into more deserving areas such as low
cost housing where there is an identifiable demand which cannot
be satisfied due to the limited liquidity of banks.

There is no avoiding this issue and continuing delays and
denial will further weaken the economy. Studies have shown that
historically economies could not be revived without liquidating
the huge amount of debt that property development absorbs over
time.

Both economies have an insatiable appetite for foreign
capital. The capital has not yet arrived as there are numerous
barriers and negative influences which if not attended to quickly
may prolong the economic free fall.

Both Thailand and Indonesia have had restrictions on foreign
ownership of property and a system of land certification which is
viewed with caution.

Similarly the levels of taxation payable for the purchase and
sale of property is prohibitive. To make this worse, Indonesia
during the depths of the property crisis introduced an additional
5 percent tax for changing the name of the land certificate. A
further blow when resuscitation is needed.

Thailand has acknowledged these limitations and earlier this
year provided a format to allow the establishment of property
funds which when working with local mutual fund managers can have
up to 100 percent foreign ownership and not be burdened with the
taxation normally required to buy and sell properties.

The government is also considering extending land tenure from
the present 30 years to 99 years for both Thais and foreign
nationals.

The property funds are closely monitored by the Thai
Securities and Exchange Commission and the investment strategy of
the fund is reviewed by the Thai Mutual Fund Public Company which
was established in 1975 and made up of 17 professional investment
fund managers.

The establishment of the property funds has put Thailand
firmly in the sights of foreign fund managers and Indonesia needs
to rethink its foreign investment restrictions as it runs the
risk of accessing only a trickle of the foreign capital making
its way to Asia.

This will no doubt raise concerns with the nationals who
believe this is "selling out" to the foreigners. Indonesia can
gain comfort by looking at other examples in Canada, Australia,
the United Kingdom and the United States where during the
property recession foreign investors were almost the only buyers.

The assets, while owned by foreigners cannot be taken away and
it is only a matter of time when the economy recovers (largely
due to the original foreign investment) and the locals reenter
the market and buy back the same assets sold years earlier.

While Thailand has the jump on Indonesia in dismantling the
barriers to foreign investment it may be quite the opposite when
it comes to forced liquidation of those assets.

Thailand introduced its bankruptcy code earlier this year
which has done little other than to protect debtors under a
Chapter 11 type provision.

The real test will be in November when the foreclosure
provisions are implemented which will allow creditors to
repossess assets. Indonesia will implement its recently written
bankruptcy laws this month and expects to be able to repossess
and liquidate assets in a short time frame.

Analysts and investors alike are taking a wait-and-see
attitude to see if either system is effective in its
implementation. However, investors who are prepared to adopt a
flexible risk/return profile may be the early beneficiaries of
the economic turmoil.

In hard currency there has been a drastic reduction in capital
values. However, there is nevertheless a resistance by vendors to
sell their proper ties into a falling market. As the markets fall
the value of the property becomes substantially less than
replacement cost, restricting new development for a number of
years.

Time potentially is each nation's enemy as the longer the
current status continues banks and the economy generally will
weaken. Decisions which may go against nationalism and culture
are needed and needed urgently as this is not a period to
contemplate, but a period to take a decisive stance and get
things moving in a positive direction.

The writer is head of investment division PT. Procon Indah
Director Asia -- Jones Lang Wootton