Teflon Thailand – how resilient is Bangkok’s office market?

April 9, 2014 / By  

As we enter the second quarter of 2014 here in Bangkok, clients, corporates, the media, academics and colleagues alike are all asking us the same two questions – What is the impact of the current tense political situation on the real estate market and how does it compare to previous disruptions?

In what has become an almost boilerplate response, our answer invariably ends with “it depends.” It depends on the market sector and market segment in question, underlying local, regional, and global trends impacting each sector and segment and so forth. Furthermore, when we are asked to compare the current situation to past periods of disruption, each of these variables and more must be considered.

Since the SARS outbreak in East and Southeast Asia in early 2003, Thailand has experienced natural and man-made disruptions on average once every seven quarters. Overall, both Thailand and Bangkok’s economies have been largely resilient in the face of these events, with various economic sectors rebounding almost instantaneously and others trailing a quarter or two behind, leading the global media to coin the phrase “Teflon Thailand.”

To uncover just how resilient and robust Bangkok’s real estate market is, we scrutinised quarterly demand-side dynamics in the city’s Prime Grade CBD office market. Our analysis encompasses net absorption and gross rents across seven distinct periods of disruption since 2003, and compares the two indicators in the quarter in which a given event occurred or had the most serious impact alongside the subsequent quarter. Figure 1 illustrates net absorption dynamics while Figure 2 describes changes in gross rents.

Figure 1: Net Absorption Dynamics in Bangkok’s Prime Grade CBD Office Market

Source: JLL Research

Figure 2: Gross Rent Dynamics in Bangkok’s Prime Grade CBD Office Market

Source: JLL Research

Looking at the two indicators, certain trends are fairly obvious, such as negative net absorption and declining rents during the Global Financial Crisis. On the other hand, the confluence of other macro and micro trends is less pronounced. For example, between 2003 and 2006, both the Thai and global economies were robust, leading to strong demand for office space. Yet because there was still a large amount of vacant space available in the wake of the 1997 Asian Financial Crisis, strong demand in 2003 led to a negligible increase in rents while in the 2004-2006 period, a dearth of new construction and sustained demand drove rents higher, regardless of the disruptions.

The main difference between the ongoing tense political situation and past events is that previous disruptions were largely short in duration (e.g., Military Coup, Airport Closures) or had an indirect impact (e.g., SARS, Boxing Day Tsunami) on Bangkok. The current Bangkok-centric situation is entering its sixth month with no clear end in sight, leading to sustained and intensifying uncertainty in the market.

With an increasingly strong global economy in recent years, growing demand for Prime office space since 2011 has led developers to bring nearly 100,000 sqm (NLA) of new Grade A space to the market by year-end. Given these trends and the near record demand across Bangkok’s real estate market sectors in 2013, it is reasonable to expect that 2014 should be another healthy year for the market.

Unfortunately, the reality on the ground is that – It Depends.

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