Pruksa looks at diversification for recurring income

Pruksa chief executive officer Thongma Vijitpongpun told The Nation early this week that sales of residential units are poised for strong growth this year and over the next decade, especially in Bangkok and its suburbs.
Demand for residences in Bangkok and its suburbs recorded an average of 100,000 units a year. The demand is mainly from the average 450,000 to half a million people who move every year to Bangkok and its suburbs for work.
The company’s research shows that of the 15.5 million population of the capital, 11 million are registered as owning residences in Bangkok and its suburbs. This means about 4.5 million people have to rent apartments or serviced apartments to stay there for work. They have to pay a rent of more than Bt5,000 a month. Of the 4.5 million outsiders, up to 300,000 have the purchasing power to buy accommodation. They are the main targets for property companies.
Meanwhile, fresh graduates from provinces also head to Bangkok in search of work every year. This has driven strong demand for residences over the last decade, Thongma explained.
The strong demand in the market boosted the company’s growth average to 20 per cent a year over the last decade.
However, the market has since changed. The country is heading towards an ageing society over the next decade. Property market growth will slide from an average of 20 per cent a year to 10 per cent a year or may be single digits in the next 20 years from now, he said.
“We have to restructure our business to maintain sustainable growth over the long term by diversifying so as to generate recurring income to replace the drop in income from the sales of residential units in the next decade,” he said.

Hospital is the first choice
The new business strategy is to create a holding company by separating the property development and the investment arm. The company set aside an investment budget of Bt1 billion to expand its investment in the new business, which will generate recurring income.
Thongma said the company is the studying the possibilities of the entering the hospital business in the next two years.
“Hospital is potential business for the next decade to serve the ageing population of the country. The demand for healthcare will be rising and there will be a shortage of hospitals,” he said.
He added that the company will set up a hospital company in the next two years, investing about Bt1 billion a year.
“We will invest on our own instead of taking over an existing company. This is our strategy to diversify,” he said.
Pruksa also is studying expanding investments in serviced apartments and apartments business.
“We are studying the hospitality business that offer potential for business expansion but we will proceed step-by-step,” he said.

Lower return on investment
Thongma admitted that return on investment of the new business may be lower than from developing residential units for sale, which generate net profit margin of about 15 per cent on average, because of the type of business difference.
He explained that developing residences for sale needed a net profit margin not lower than 15 per cent because the business has to shoulder inventory of undeveloped land as well as ready-to-stay residences that were not yet sold. If the business cannot generate net profit margin more than 15 per cent, the business will have to move out of the industry.
Other businesses can survive when they generate net profit margin lower than 10 per cent because they did not have to shoulder high inventory, such as contractors who have net profit margin five or 10 per cent.
However, when Pruksa expands investment in other businesses, which generate recurring income for the company, it expects net profit margin in double digits but they may be lower than the net profit margin from developing residences, he said.

Sustainable growth
“Our goal for the next decade, after we diversify our business, is to maintain growth of 10 to 15 per cent. We have been successful in maintaining our growth average at 25 per cent a year since we established the business in 1993,” Thongma said.
He added that the business strategy to maintain sustainable growth for the long term is to target recurring income of 20 per cent for the next 10 or 15 years from now, and the rest from developing residential units for sale.