What new business is CBRE currently involved in?

SIMISTER: In terms of the newer end of our business, I never know what to say is new because we have done so many things over the last 25 years. But in the last 12 months, we have looked at agrarian projects in Cambodia and, in Bangkok, the new breed of office projects are still quite exciting. Park Ventures, our current sole agency, is the first office development in Bangkok ever to exceed THB1,000 ($32) per square meter. Also, it is a LEED building, so there are a lot of pluses associated with that. It has taken 20 years to get to THB1,000 per square meter, we thought we were going to get there in 1993.

We are also representing some major projects with a new generation of office buildings that will come on-line in 2014 and 2015. The market now accepts pre-leasing. So there are tenants who are looking over 2 years ahead to make commitments, this shows a real strength in the economy. In Cambodia, we are involved in a new resort project called Alila Koh Russey. This is a first for Cambodia in terms of an island resort with an international hotel operator. This will be one of their top brands, Alila Villas and follows on the success of Song Saa Resort, which itself was groundbreaking as it was the first ever resort property.

How is CBRE positioning itself in Myanmar?

SIMISTER: There is some real linkage between Thailand and Myanmar, both in terms of it being a jumping off point and in terms of similarity. I think that the Burmese are probably more akin in terms of their business models and entrepreneurship to the Thais than say the Chinese to the North or the Indians to the West. Geographically, you have the longest active open border. Now I know that China has a substantial interest. They have big road developments, Mandalay is often referred to as a Chinese city, and of course there is a lot of capital coming from all over Asia, but I think Thailand has the skill sets and the knowledge base and is able to draw on what it was doing 20 years ago to help the development of Yangon, and Myanmar. So for CBRE, we are flying over quite frequently, doing major research on all major sectors of the market, office, hotel, residential, industrial, and we are advising quite a number of people. But you have got to take a reality check and when you compare Yangon to even somewhere small like Phnom Penh there is not a great infrastructure for foreigners. There is a lack of accommodation, there is an appalling lack of quality accommodation, and I am going to say that is across the board, residential and commercial, and new supply is only slowly developing. Paradoxically, it is currently developing with Burmese capital but that is not going into grade ‘A’ construction. So it is quite a complex cocktail.

We could say Myanmar is a land of paradox. I think you have to go back and look at the context of Myanmar. When it was a British colony, it was the richest British colony. One of the facts I like to quote is that in the 1930s, British expatriate housewives used to leave Singapore, take a flying boat, and fly to Rangoon to go shopping because it was more developed. There are a lot of natural resources, mining, gems, timber, and it is a very big country. So capital has been made, even under the old regime, that cannot be spent, or certainly not very easily spent, overseas. So there is a lot of capital in country and a lot of it has gone into residential condos. So you will see many people developing condos, actually just 60 year leaseholds, and the buyers will turn up and pay in cash. The notes they use to pay with are 10 or 15 years old but they are brand new and have never been in circulation. So whether they have been under a mattress or in a room or in a safe, it has never been used so it is brand new old money!

To what extent are we in a hot money situation in Bangkok’s real estate market today?

SIMISTER: I’m not a banking expert, but it would appear that maybe the 1997 crash is getting historic, so there are bankers that did not experience it. All those who did learned a very valuable lesson. In 2008, Thailand had immaculate banking performance by comparison to most of the world and certainly the Western world. I see regular portfolios of debt being offered for sale, so there is a regular clearing system.

From a property point of view, I think people could be a lot savvier and they should spend a bit more money getting the right advice on major projects. Banks are probably treating property as a homogeneous product when they lend and perhaps follow the developer rather than the location or the physical merits of the development. On the other hand, that is better than just lending to close cronies or simply lending based on someone’s surname, which is what happened pre-1997. If you look at the property market, people keep buying and there is growth in demand. The banking system is sensible and keeps a loan to property value of 70%, which is quite typical, and that is pretty modest. Lots of Western countries were doing 90% and in some cases even 100% plus. I think there is a disconnect between middle class salaries and property markets, but I think this happens in a lot of capital city markets. People on fixed salaries here do not represent typical wealth. There are a lot of people who run both small and medium business and large business and I think it is that business success that is putting more money into the property market than the banking sector. In fact, if you look at off plan sales, people are not going out to get a mortgage before they make the purchase decision.

How are Thailand’s other real estate markets developing?

SIMISTER: Well, I think there is expansion nationwide. Maybe we shouldn't be looking at the names that foreigners recognize, such as Pattaya or Phuket, we should be looking at Ubon Ratchasima, or Korat, a lot of these middle tier cities all have a Central Plaza, or a comparable air conditioned major retail mall. There is probably a Home Pro and multiplex cinemas, and these are in cities where, when I first drove through them 20 years ago, the principal product displayed on the high-street would have been rotavators, compressors, and agricultural equipment. I think there is a strong argument that Thailand is moving into being a much more middle class country, possibly similar to Korea or Malaysia based on the spread of wealth. Now it’s not a perfect spread of wealth, clearly there are huge differences, but you will come across university graduates that are perfectly happy to work in government positions up-country, earn maybe 1/3 of their Bangkok cousins, but prefer the lifestyle. Looking at the more developed areas like Khao Yai, Chiangmai, Hua Hin, there are changes going on all the time. There is a lot of Bangkok money that is going in, Khoa Yai has probably seen the biggest change. Places like Phuket, Pattaya, and Hua Hin, and maybe I am being controversial, are moving towards a more homogenous product. Because of the density of tourism and affordability, people are shifting towards buying small condominiums. On an analysis of price per square meter, we are not seeing a lot of difference in the Phuket pricing compared to the Pattaya pricing, but lifestyle, character, and essence of the locations are extremely different.

How do you see coming ASEAN Economic Community (AEC) integration impacting regional real estate markets?

SIMISTER: The ASEAN Economic Community will have an impact across the region, but it is not going to have a huge impact. It is almost analogous to a new highway being built and people wanting to develop next to it. The concept is that there will be a breaking down of borders moving towards more of something like an EU. As a cynic, I look at the EU, and see Britain has been flooded with a lot of people not looking for jobs but welfare packages. For ASEAN, I do not think it means we are going to see Filipino dentists practicing in Bangkok or that we will see a great liberation of quality labor moving. But as a feel good factor, in terms of moving forward and creating more commerce because there are less barriers, it has to be a good thing, although it is probably overrated by the politicians.

What do you see as smart real estate investments in Southeast Asia today?

SIMISTER: Myanmar, I probably was not the first person to say it, but it’s the last great adventure or frontier in Asia. There will be developments that, if the right people could do them, will make huge profits. It is similar to Vietnam. The first people in Vietnam to build serviced apartments had a payback period of 3 to 4 years. But can you get the land? Can you get it at the right price? Can you get the resources? There are a lot of barriers to overcome. There are probably good investments in a lot of places people do not expect. I think in Bangkok, where we recently sold Liberty Square (20,000 sq.m. of offices) on Silom road, this is going to be a very good investment for the new owners. The office market is moving upwards, and it is very difficult to find sites for new offices.

Cambodia has a very user-friendly investment structure and a low level of competition provided you can see an opportunity to build and develop. In Vietnam, there should be huge distressed property opportunities, but they do not seem to be publicly available and I think there is still a sense of denial in both the government and the public sector. But maybe there will be an opportunity that will emerge at some stage. There is clearly a wave of people looking around the region and there is also quite serious money in the region looking to spread their international portfolios.

What is the business case where leasehold makes more economic sense than freehold?

SIMISTER: We have actually got some outperforming leasehold properties we are selling, that are outperforming, not direct freehold competitors, but a broader freehold market. Without a doubt, if you can own something in perpetuity, and it is exactly the same as something across the road that you can only own for 30 years, everybody knows which is the more valuable. But there is a sector of property which is leasehold, and it is not the vast majority of leasehold property, where the product on offer is physically superior. That may be down to the developer, it may be down to timing, it may be down to the ongoing operation and management of that property. Maybe the developer selling that leasehold property has it more right, and because he has got it more right, he is actually commanding higher prices, in a free market. Intelligent buyers are not buying because they are ignorant of the differences between freehold and leasehold, they are making a conscious decision. So in Magnolia on Rachadamerie, people are buying because they like the product. The fact that the price per square meter is higher than the average top condominium in central Bangkok and Sukhumvit, they are happy to make that purchase because of all the added benefits of location and the association with the Waldorf Astoria. So Magnolia is a classic case in point, it is performing better in terms of sales and market demand than many surrounding condominiums. If we look further down Rachadamerie, we get to St. Regis, and a little bit further down, 185 Rachadamerie. St. Regis did not have many off plan sales, but on completion, a number of people are more than happy to pay more than THB250,000 ($7,990) per square meter when you could have bought off plan, a freehold condominium in a similar location. The people who bought did so because the St. Regis and the location, to them, was the ultimate in living. If you are buying for your own use and looking at the next 30 years, maybe it does not matter. I also think there is an argument at the bottom end of the market. If you are retiring in your 70s in Koh Samui, maybe it is easier to buy a bungalow for THB3m than buy a better property for THB5m on the basis that maybe the merits of construction and location are average anyway. Then you just as well save the money and look at immediate occupation. There are cases where leasehold will outperform freehold, but it is only exceptional projects.

Where do you see Bangkok’s office market heading?

SIMISTER: The Bangkok office market has now actually shifted to being a landlord’s market, which it has not been since about 1991. Back then, rents had moved up rapidly from 1987. They had gone from THB200 per square meter, and jumped almost overnight to THB400, THB500, and the record rent on one transaction, where the landlord was hostile to the tenant because he was a rival developer, reached THB900. The average was probably no more than THB750. Post 1997, a lot of rents eased and a lot of office development came online when companies contracted, but we have now reached a point, probably in the middle of last year, where there is a shortage of space and a shortage of quality space. So in Q3 and Q4 last year, rents jumped considerably. From an average of maybe THB650 to THB750, we are looking at rents that are now THB800 to THB1,000 per square meter. On completion of buildings, they are still rising. So office investments have come full circle and office investments are going to do very well over the next decade. There is also a further shortage factor because if a good site comes up, almost inevitably it will be bought by a residential developer who will be building condominiums. Therefore the site is denied for the office developer. We sold the Thai Military Bank (TMB) headquarters in Silom last year, and as part of the exercise we had to do, in an advisory capacity to the client, a feasibility study. It showed quite convincingly that the office developers could only bid 70% to 75% of a condominium developer. For the office developments, they need a mass transit station nearby, they need a prominent high-street location, and those sites are really few and far between. So the office developments underway at the moment are set to do very well. For tenants, the answer is move early, think early, renew early.