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Business matterS:A fear of retail property collapse
Looking around Bangkok, you might think that the Thai national bird was the crane. Sometimes, it seems that there are massive property developments everywhere, and the boom has been going on for about four or five years now – a few years longer than the bust following the last crash.
It is true that we are not yet at the levels of construction that we had before the crash, but is that really the benchmark we should be using? After all, the levels of construction before the crash led to... the crash. But you always hear people in property development industry talking about “pre-crisis” levels, as if anything below that is just fine. Of course, that’s to be expected – they’re trying to sell their developments, and talking about impending crashes isn’t the best way to do excite customers.
As for the buyers, decision-making is very different for housing, office space or retail. Housing is a far more personal decision; very few people make rental-yield calculations before making a house purchase. Office space rental is usually a small matter in the overall business of the renter. Retail property, however, is different. Retail is a business, and the retail business success hinges on an effective use of its space for sales. Retail property development should follow consumer spending patterns and behaviors. Does it?
Generally speaking, the supportable retail space for a particular category of goods should be equal to the total demand for those goods multiplied by the share of sales allocated to rents divided by the rental per square meter. For example, if the market for shoes was 10 million baht, and 30 percent of sales could be spent on rents, that would mean a total of 3 million baht available for rent payments. If retail rents are 1,000 baht/sqm, then the market would support 3,000sqm of shoe stores. If there were less than that, you would expect more shoe stores to enter the market, retail rents to increase and nice profits for shoe sellers. If there were more than that, you would expect the reverse.
Even though data are scarce in Thailand and what do exist are of questionable reliability, we can make some broad estimates based on recent and current activities in the market. The NESDB provides GDP data for Thailand. The World Bank’s Gini Index gives some idea of how this wealth is distributed. The National Statistics Office (NSO) provides similar numbers for Bangkok, as well as periodic Socioeconomic Surveys that give savings rates and spending for different categories of purchases. Tourism Authority of Thailand data provide information on tourist arrivals and spending patterns. These can all be corroborated and specified through some simple well-designed in-mall intercept surveys.
In 2003, this analysis showed approximately 2.0 billion baht spending potential in the so-called “upscale” shopping malls from Siam Square along Sukhumvit to around the Thong Lor area. With prevailing retail rental rates of around 1,200-1,500 baht/sqm, the resulting demand curve implied a 20-30 percent under-supply of high-end retail space in that area. The curve predicted a combination of rising rents and increased development – both of which have come to pass.
The problem is that the amount of increased retail development is over double the existing capacity, far more than the 20-30 percent under-supply. Consumer consumption would need to grow 20 percent a year for three years straight to take up all this new capacity. With current rates of consumer spending and tourism growth, a more likely scenario is a 30 percent over-capacity of retail space around this time next year.
The impact of this, though, may not be exactly the reverse of what we saw in 2003. The key question is consumer behaviour. If Thai consumers dissipate among all the new malls, then all retailers and malls will suffer and rents will come down. If Thai consumers congregate to specific malls, then those malls with sufficient traffic will survive, and others are likely to go out of business. No one will come close to meeting their financial projections, so ultimately investors in these projects will be the big losers – but they should have done their homework so they have no excuse.
Eventually, there will be big cries and moans about high gas prices or the lingering after-effects of the tsunami, or bird flu, SARS and perhaps the boogie-man and hungry ghosts for their failed business decisions and then they will go and beg the government for help. You can believe all of that if you like, or you can pick up any basic microeconomics textbook, crunch a few numbers and see what’s really going on.
Looking around Bangkok, you might think that the Thai national bird was the crane. Sometimes, it seems that there are massive property developments everywhere, and the boom has been going on for about four or five years now – a few years longer than the bust following the last crash.
It is true that we are not yet at the levels of construction that we had before the crash, but is that really the benchmark we should be using? After all, the levels of construction before the crash led to... the crash. But you always hear people in property development industry talking about “pre-crisis” levels, as if anything below that is just fine. Of course, that’s to be expected – they’re trying to sell their developments, and talking about impending crashes isn’t the best way to do excite customers.
As for the buyers, decision-making is very different for housing, office space or retail. Housing is a far more personal decision; very few people make rental-yield calculations before making a house purchase. Office space rental is usually a small matter in the overall business of the renter. Retail property, however, is different. Retail is a business, and the retail business success hinges on an effective use of its space for sales. Retail property development should follow consumer spending patterns and behaviors. Does it?
Generally speaking, the supportable retail space for a particular category of goods should be equal to the total demand for those goods multiplied by the share of sales allocated to rents divided by the rental per square meter. For example, if the market for shoes was 10 million baht, and 30 percent of sales could be spent on rents, that would mean a total of 3 million baht available for rent payments. If retail rents are 1,000 baht/sqm, then the market would support 3,000sqm of shoe stores. If there were less than that, you would expect more shoe stores to enter the market, retail rents to increase and nice profits for shoe sellers. If there were more than that, you would expect the reverse.
Even though data are scarce in Thailand and what do exist are of questionable reliability, we can make some broad estimates based on recent and current activities in the market. The NESDB provides GDP data for Thailand. The World Bank’s Gini Index gives some idea of how this wealth is distributed. The National Statistics Office (NSO) provides similar numbers for Bangkok, as well as periodic Socioeconomic Surveys that give savings rates and spending for different categories of purchases. Tourism Authority of Thailand data provide information on tourist arrivals and spending patterns. These can all be corroborated and specified through some simple well-designed in-mall intercept surveys.
In 2003, this analysis showed approximately 2.0 billion baht spending potential in the so-called “upscale” shopping malls from Siam Square along Sukhumvit to around the Thong Lor area. With prevailing retail rental rates of around 1,200-1,500 baht/sqm, the resulting demand curve implied a 20-30 percent under-supply of high-end retail space in that area. The curve predicted a combination of rising rents and increased development – both of which have come to pass.
The problem is that the amount of increased retail development is over double the existing capacity, far more than the 20-30 percent under-supply. Consumer consumption would need to grow 20 percent a year for three years straight to take up all this new capacity. With current rates of consumer spending and tourism growth, a more likely scenario is a 30 percent over-capacity of retail space around this time next year.
The impact of this, though, may not be exactly the reverse of what we saw in 2003. The key question is consumer behaviour. If Thai consumers dissipate among all the new malls, then all retailers and malls will suffer and rents will come down. If Thai consumers congregate to specific malls, then those malls with sufficient traffic will survive, and others are likely to go out of business. No one will come close to meeting their financial projections, so ultimately investors in these projects will be the big losers – but they should have done their homework so they have no excuse.
Eventually, there will be big cries and moans about high gas prices or the lingering after-effects of the tsunami, or bird flu, SARS and perhaps the boogie-man and hungry ghosts for their failed business decisions and then they will go and beg the government for help. You can believe all of that if you like, or you can pick up any basic microeconomics textbook, crunch a few numbers and see what’s really going on.
