A look back at the Asian Financial Crisis, and the ghosts that remain.
by Karla Cripps (property-report.com)
It has been exactly 10 years since the Asian Financial Crisis hit the region, leaving economies crippled and dependent on foreign intervention. Thailand, which has the dubious distinction of igniting the crash by allowing its currency to float freely, was brought to its knees, its real estate industry left in shambles.
Construction finances evaporated, but the steel and concrete skeletons of more than 300 abandoned buildings remained, many dotting the city skyline to provide eerie reminders of a time most real estate players would rather forget.
Over the years though, many have been bought and redeveloped. Office towers became condo developments and vice versa. Today less than 30% of these buildings remain, dubbed by many as “ghost towers,” including a dramatic few that line the banks of the Chao Phraya river, once promising buyers a lifestyle of luxury and prestige.
‘A horrendous time’
James Pitchon, executive director of CB Richard Ellis Thailand, says the financial crisis hit Thailand during an era of easy credit. Massive development was happening throughout the city, from speculative condominiums to shopping centres and office buildings. Then the baht collapsed, finance companies crashed and credit was effectively cut off.
“It was a horrendous time for property developers,” said Pitchon. “The effect was far more significant than the tsunami in Phuket, not in terms of human life of course but in terms of the financial impact. So as things got worse throughout 1998 construction on a lot of buildings just stopped. Contractors weren’t getting paid, so they stopped working.”
This led to an ugly chain of events. Because many of the original lenders had shut their doors, the enforcement process of the loans, in terms of the clearance process, took a long time, making it very difficult for the bank to repossess collateral.
“So for a number of years, through to about 2003, the Bangkok skyline was dotted with partially complete buildings, anywhere from just the piling being completed up to the developments that were 90% complete but just had no money left to finish them off,” said Pitchon.
Compounding the problem was a massive oversupply of existing buildings. In 1999, condominiums were looking at a vacancy rate of almost 50%, so out of everything built, half of it was empty. The situation for the city’s office market was similar, with a vacancy rate of up to38%.
“Then two things happened. One, the overall market was looking better because we cleared existing inventory. Secondly, the various resolution processes were slowly going forward so we started to see the clearance of some of these [abandoned buildings] progress.”
A success story
Raimon Land was the first Thai company to successfully rebuild on an asset following the crisis. Henri Young, head of marketing at the publicly-listed firm, explains how they managed to rise again.
“Leading up to the crisis we were somewhat exposed,” he said. “We did not have a significant land bank, but we had some sites that we just couldn’t develop once the crisis kicked in, for various reasons…Raimon Land was placed into a sort of rehabilitation fund and as part of the fund you have the option to buy back some of the properties when you’re in a position to do so.”
Young says Raimon Land first decided to buy back what would become The Lakes, which at the time was earmarked to be an office development called ‘Raimon Tower’ on the corner of Sukhumvit Road and Ratchadaphisek.
“Obviously the market changed when we re-emerged [from the rehabilitation sector] in 2003. We identified that there was a gap in terms of residential projects because everything had been put on hold. The business environment didn’t justify doing the office development so we asked [architecture and design firm] Woods Bagot to come in and reconfigure the building as a condominium.
“Fortunately it was a single loaded structure, so the core of the building was at the back. It didn’t inhibit the views in any way and actually lent itself to having a lot of frontage overlooking Benjakiri Park and the Tobacco Monopoly’s lakes. We retained that existing central core…then what we did is put the facilities on the top floors, because there were no provisions on the ground floor, which was actually quite a bonus for buyers giving them rooftop views over Bangkok.”
Development of The Lakes began in 2003. It went onto the market in 2004 and was sold out by 2005. When first launched, units were priced at Bt65,000 per square metre, and today they sell for Bt110,000psm.
Young says they were fortunate the building had generous floor to ceiling heights and a very marketable location, unlike some abandoned towers in Bangkok.
“The fundamentals of some of the other ghost structures around town don’t lend themselves to today’s market. Some of those dome buildings down by the river have small unit sizes, dysfunctional layouts and low floor to ceiling heights. We hadn’t gone far enough, so we could play around with a revised layout that met the more progressive expectations of the new market.”
As for other abandoned buildings that were rebuilt and found success, CBRE’s Pitchon points further up the road to Exchange Tower.
“That was stuck until about two years ago and finally the original owners sold the project to a new investor who finished the building off. The building was completed just over a year ago it’s now substantially leased. In terms of rentals achieved, it’s one of Bangkok’s leading office buildings.”
The same thing happened for the recently finished Q House Lumpini, which was halted when construction got up to about the third floor. Q House was able to resolve their financial issues, had sufficient funds to finish it off and today it’s also a leading office building.
Other buildings that were later ‘brought back to life’ include Column Tower, which now features offices and an Oakwood serviced apartment, leasehold apartment complex Urbana Langsuan, and the Athenee office tower, which is near completion. Two other office buildings coming up for completion in the next six months that had originally been halted are Cyber World on Ratchadaphisek, which was acquired by property giant TCC, and a building formerly known as Chula High-Tech on Rama IV that is now called Chamjuri Square.
The ghosts that remain
Of the developments still unfinished, some may be stuck in the debt process, while others in certain locations, particularly in suburban Bangkok, still aren’t marketable.
Of these, several notable projects stand out. These include the massive SC Garden project on Rama III, Sathorn Unique, which is a giant domed high-rise next to Saphan Taksin bridge, and a long stretch of condominium towers at Muang Thong Thani, near the popular Impact Arena concert and conference complex.
Engineering firm Meinhardt Thailand has a great deal of experience in dealing with Bangkok’s ‘ghost towers,’ having carried out due diligence work on 30-40 of them, including Raimon Land’s The Lakes project. Meinhardt Managing Director John Pollard, who has been working in Thailand for over 18 years, says his firm is now conducting due diligence on Sathorn Unique for a foreign investor who is trying to buy it.
Pollard explained to Property Report that these buildings aren’t as difficult to re-develop as one might think, however there are some issues that need to be addressed.
“We can expect the structural deterioration to become critical after some 15 to 20 years of exposure to the elements,” he said. “This means that even if the building is completed, the reinforcing may corrode inside and cause concrete spalling, making it likely that demolition would be more cost effective then repair.”
Pollard says old office buildings can be converted for residential use with no problems because office buildings have a higher floor to ceiling height, but old residential buildings are notoriously designed very small with low ceilings that can be ugly.
“Technically, the hard part is finding out what is there. It’s very hard to get information on a 10 year old building. The owners probably didn’t keep it, the contractor won’t release it because he hasn’t been paid…so finding out exactly what was built is very difficult and if you can’t get drawings you have to do detailed inspections.”
But when it comes to the safety of these buildings, Pollard dismisses the need for concern.
“I’ve been here 18 years and I’ve always been impressed because Thailand’s inspection procedures are very strict,” he says. “My opinion is that the quality of Bangkok’s buildings has always been very good - and it’s even better now.”
The future
Today’s market might be slowing, due to the ongoing political and economic certainty, but there’s a slim chance of 1997’s crash ever happening again.
“I think now real estate is more market driven,” said Raimon Land’s Young. “You have to do your research and your homework because the banks will want to see that you’ve got an existing market in place and they won’t lend until you’ve got at least 35% sales for construction financing. They’ve taken a more conservative approach to lending. What else has happened is the market has become a lot more segmented. There are a variety of projects in different areas to suit different budgets. The problem back then was there was a lot of currency exposure to offshore loans.”
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Building on a shell
In recent years, the number of abandoned towers in Bangkok has decreased dramatically, as they are redeveloped into shiny new sky-rises, from residential condominiums and hotels to office towers.
Engineering firm Meinhardt Thailand has been involved in the redevelopment of many of Bangkok’s so-called “ghost” towers, providing due diligence on dozens of sites throughout the city. The company’s managing director, John Pollard, explained how they determine any risks a new developer might be exposed to.
“Each aspect actually involves extensive engineering calculations and analysis before solid findings and recommendations can be made,” said Pollard. “In this way we are able to identify any shortcomings in a building and estimate the cost of putting these right, which can often be quite significant, so that the developer can use this information in negotiating the purchase price, or in establishing the feasibility of completing the project.”
The following are three key areas Pollard says need to be considered:
Permits
Confirming permits are in place is an obvious legal requirement, but many of these buildings were designed to the old BMA regulations and do not comply with the current set-back, fire safety and green areas requirements, to name just a few, says Pollard.
“This isn’t a problem if the original permit is followed, but many developers want to change the use of the building, such as converting an unfinished office building in to a residential condominium project or serviced apartment…Close liaison with the BMA is required to identify how to deal with these permit issues, but our experience shows that they will generally help with this as they have an interest in seeing these unfinished buildings completed and occupied.”
Physical condition
Abandoned projects have often had absolutely nothing done to them since the day the original contractor left the site. Pollard says for starters, this means that water damage to partly installed ducting and insulation is common, as well as the basement completely filling up with water, however that doesn’t mean they aren’t salvageable.
“Our site due diligence involves two parts, visual inspection and mapping of cracks and deterioration, plus physical testing and surveying. In general, we have found that the type of deterioration that occurs over 10 years exposure to the elements can be repaired fairly easily and that deep-seated deterioration has not yet occurred,” he said.
“The exposed rusting reinforcement visible at the top of these structures gives a misleading impression that the building is beginning to crumble away, whereas in reality all that is needed is to cut back the concrete to expose uncontaminated reinforcing steel, clean back or replace the exposed rusted steel and then recommence construction.”
Design issues
The original design needs to be checked thoroughly to confirm its compliance with codes and engineering design standards, says Pollard. While most buildings are found to be generally acceptable, some have severe deficiencies. “These include inadequate piled foundation capacity, which could cause excessive long-term settlement, insufficient core walls giving rise to excessive lateral sway under wind loading and damage to the façade. Other cases have involved under designed individual members and many cases of cracked beams and slabs due to heavy plant and equipment being installed that greatly exceeds the weight allowed for by the structural designer.”