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Prospective investors in the market must understand the basics of demographics and what appeals to renters while also taking into account the trends that are likely to dictate its future. Rental yields remained largely unchanged in the first quarter of this year in the downtown Bangkok condominium market, ranging from 3% to 9%, despite prices for new properties rising and no significant growth in the number of expatriate tenants. The findings appear in CBRE’s quarterly survey based on all of the company’s letting transactions for the last quarter.
Gross yield is the annual rental return compared to the capital value of the property before deducting operating costs and allowing for taxation. The average gross yield of letting transactions was 6% in the first quarter, but there was a wide range from 3% up to 9%.
Buyers looking to invest in residential property need to understand what drives yields if they want to maximise their return on investment. To get the best yield, investors have to find a property with the best combination of both achievable rent per square metre and capital cost per square metre, and in a building where it will be easy to find a tenant.
Location is one of the most important drivers of yield
Investors need to understand which locations expatriate tenants prefer. Yields have remained steady in the downtown market, with the most popular expatriate rental areas being Sukhumvit up to Soi 63 (Ekamai), Lumpini and Sathorn.
The downtown rental market is mainly driven by expatriates.
Based on our rental transactions in the first quarter of this year, there were virtually no Thai lettings at this market level. Within the expatriate market, certain nationalities have specific preferences in terms of facilities and unit features.
Japanese tenants are by far the largest expatriate tenant market, making up 30% of CBRE‘s transactions, followed by Americans (15%), Germans (13%) and Australians (8%). In terms of unit type, some of the best yields that have been achieved recently are in new one-bedroom units that are well furnished and located right next to skytrain stations on Sukhumvit. But this trend may not continue as the supply of new one-bedroom units will grow significantly over the next two years. The survey also showed that the most active rental markets are in the two- and three-bedroom sector in the preferred downtown locations.
39% of CBRE’s first-quarter condominium rental deals were for two-bedroom units and 25% for three-bedroom units.
Investors need to understand the level of demand for each unit type – one, two or three bedrooms – and what is the optimum size of each unit that will maximise the rent per square metre but not exceed a tenant’s fixed monthly budget. Investors should also understand what the level of new supply is for each unit type as new supply may push down rents as competition increases to rent out a specific unit type in a specific location.
Expatriate housing rental budgets have remained largely unchanged, while prices have been rising for new property and also for selected older properties. To maximise yield, investors need to look for buildings that are most likely to attract expatriate tenants.
Vacancy rates in condominium buildings varies
Some buildings have vacancy rates of less than 10% of available units while others, usually older, poorly maintained buildings, more than 50% of available rental units are vacant. There are, however, some older buildings in popular locations where the owners have redecorated their units to make them attractive with well managed and upgraded common areas that continue to attract tenants.
For example, as tenants have a fixed monthly lump-sum budget, some would rather spend their budget on a larger unit in an older building than a small unit in a new building. Let’s take an example of a tenant with a 50,000 baht budget who needs a two-bedroom unit. He may choose a 130 sq m unit in an older building where the unit can be bought at 60,000 baht per sq m, providing investors with a gross yield of 7.7%.
Alternatively, the same tenant might choose to spend 50,000 baht on a more modern and better-located unit of, say, 80 sq m. The price of the new unit could be around 100,000 baht per sq m, providing a gross yield of 7.5%. Knowledge Essential to Rental Riches | Thailand Property News