Condo Investors Look for Capital Gains Rather than Rental Yields

The condominium market in Bangkok has seen lower rental yields in the past few years as prices of condos have increased faster than rentals.   However, luxury condominiums in prime Bangkok locations continue to attract both Thai and foreign buyers who expect long term capital gains, according to international property consultant JLL.

Rental yields in high-end Bangkok condos are now averaging 3% a year, half than five years ago.   During the past five years selling prices have grown 30% while rentals have risen only 10%, leading to yield compression.

A yield, generally, is the actual rental conveyed as a percentage of the capital value. For example, a new 150-square-metre luxury condominium priced at 30 million baht (200,000 baht per square metre) with the annual rent at 1.2 million baht (100,000 baht per month) would yield 4% a year.

This type of yield calculation could be misleading, even if the purchase was a cash sale with no borrowing costs, as there maybe some deductible expenses from the annual rent such as initial investment spending including maintenance costs, common area management (CAM) and furniture.

Example, a standard CAM fee for luxury condominiums is approximately 840 baht per sqm per year. If the CAM fee were the only expense to add up (annual rent of 1.2 million baht minus the annual CAM fee of 126,000 baht), net yield on the condo unit would be 3% a year, and only if the property is constantly rented.  

This trend is also been repeated in older luxury condominiums. For instance, 150-sq-m units in well-maintained 10-year-old developments are now trading at 22.5 million baht (150,000 baht per sq m), producing monthly rents at 80,000 baht and yielding a net 3%. Although there are cases where investors can purchase used condos at lower prices and therefore appreciate higher yields.

"The 3% yield does not seem attractive but many people have continued to buy luxury condominiums in Bangkok as an investment, particularly in prime locations", says Bunthoon Damrongrak, head of residential property, at JLL.

"A lot of buyers of luxury condos whom we have recently represented were Thais buying for their own use and as an investment. Those who purchased as an investment focus more on a potential capital appreciation in the long term than rental yields," says Bunthoon.  

"Investors have become better informed than in the past. They are aware that prime sites or land plots that are suitable for luxury condominium development have become increasingly scarce and expect future condo projects to offer higher prices as development costs, particularly the cost of land, will continue to rise," he adds.

Not only Thais but also many overseas investors have increased the demand for luxury condos in Bangkok.   They have been tempted by the more affordable investment opportunities available. Asia, particularly Singapore and Hong Kong, have been leading the foreign buyers in the Bangkok luxury condo market.

"Excluding the ultra-luxury segment, luxury condo prices in Bangkok have remained very competitive. Products of similar quality in Bangkok are twice cheaper than in Singapore and five times cheaper than in Hong Kong.  In addition, though the rental yields in Bangkok are generally low, they remain competitive, compared to many more mature markets such as Singapore, where yields are less than 2%," says Mr Bunthoon.

"When it comes to property investment decision-making, rental yields are an important factor to consider but not everything.  Long-term capital appreciation is among a few other factors of no less importance," he concludes.