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