Condos play a role as money-making assets amid low rates

More people are buying condominiums to lease out.

Getting the best returns requires detailed knowledge of what drives the rental markets.

There are two types of rental markets: top-end for expatriates and lower-end for Thai tenants who cannot afford to buy. Most Thais want to own rather than rent, so there is almost no mid-range rental market.

The best returns in income and capital growth are in properties that match expat tenant requirements.

Expats want to live in only a very limited number of areas – Lumpini, Sukhumvit up to Ekamai and the streets off |the northern part of Sathorn Road.

There are two submarkets – around the International School of Bangkok at Nichada and around Bangkok Pattana School on Soi LaSalle. There is limited potential to find expat tenants outside of these areas.

Investors need to understand what expats want in size, design and furnishings and what they can afford. Unlike Hong Kong or Singapore, Thailand does not have many tenants with very big budgets.

CBRE’s research based on its own transactions show that expats can pay Bt35,000-Bt50,000 per month for a one-bedroom, Bt50,000-Bt70,000 for a two-bedroom and Bt70,000-Bt100,000 for a three-bedroom apartment.

There are very few people |with budgets of more than Bt100,000.

Expat tenants are constrained by their overall budget and do not think about rent per square metre. They select a place based on overall quality and number of bedrooms rather than size.

Tenants want well-decorated units that are modern and practical with good kitchens and bathrooms. Most expats want their units furnished as they do not bring their own furniture.

Most of the new condos will be one-bedroom units but CBRE’s research shows that much of the expat tenant demand is for two- or three-bedroom units. About 70 per cent of CBRE’s residential leasing transactions last year were for those sizes.

This is where the best potential for rental growth is, as there is limited future supply of two/three bedroom units and some of the existing stock has been poorly maintained. Both the inside of units and common areas are no longer attractive.

Gross yields – annual rent to capital value – range from 3-10 per cent for condos in areas preferred by expats. In some cases, older buildings offer the best rental yields, but less chance of capital appreciation.

Investors need to take into account operating expenses such as common area management fees, insurance premiums, rental agent fees, interior repair charges, maintenance fees and taxes.

Investors need to actively manage their properties because, unlike the UK, there are few managing agents who can take on the role of rent collection and maintenance of the interior of the property.

The expat population in Bangkok is growing, while new supply in the most popular expat locations is limited, especially of two- and three-bedroom units. Rents are likely to rise.

The prospects for residential investment are good, but this market is complex and investors need to understand where tenants want to be, what they want and how much they can pay in order to choose the best investment in property.