An Overview of the Global Real Estate Market - Dissertation Example

?Introduction An Overview of the Global Real E Market Over the past few years, real e has been the focus of investment. This decade has been dominated by the “real estate bubble” all over the world. The boom in the global economy was brought about this very investment and this has indeed been the cause of the prevailing global recession. Many developing and developed countries of the world have encountered the recent property hike. The total size of the world real estate market is approximately $14.5 trillion (Hughes & Arissen, 2005). Most of the developed countries contribute the most to this amount. USA is by far the greatest contributor with a market value of about $5 trillion (Hughes & Arissen, 2005). The main reason being the cosmopolitan nature of the cities like USA where the commercial value of the property is extremely high. Second contributor is Japan than is estimated to have a market share of about $2 trillion (Hughes & Arissen, 2005). With regards to the GDP, Japan remains the second largest economy of the world and hence, the value of the property is quite high. These two major economies are followed by Germany ($1.1 trillion), UK ($1 trillion), France ($800 billion) and Italy ($600 billion). However, it is worth noting that the 88% of the total real estate market is dominated by the top 15 countries (Hughes & Arissen, 2005). It is a well-known fact that the real estate market is cyclical in nature and booms and busts have been noticeable. The booms in the 1980s were followed by busts in the early 1990s. However, the late 1990s or the early 2000s once again experienced a property boom. USA has been the major player in this and the housing market got accelerating demand. Thus, by 2007 this property boom decelerated and the world economy when the global economy was entangled in a global recession marred by a credit crunch. Area of the Study The study focuses upon the property market in Thailand. The main concentration would be on the four leading property companies operating in Thailand namely, Quality House PLC, Land and House PLC, Sansiri PLC and Supalai PLC. The study would incorporate a thorough financial and macro analysis of these companies and the area they are operating. Thus, the dissertation would further try to enhance upon the market value and conditions of the property market in Thailand with regards to these companies and provide a clear picture of the investment possibilities and scenarios. This would be followed up by recommendations. Objectives and Methodology The key objective of the study is to develop a framework through which an investor could gain knowledge about the investment prospects in the Thailand Real Estate Industry. The study aims to provide forecast and conclusion as to whether or not the Thai property sector is attractive from an international investor’s perspective, and also on the companies which will be reviewed. The study would be conducted in a number of steps. 1) The global real estate market would be analyzed. 2) The macro-economic indicators that correspond to the smooth working of the real estate market would be analyzed. 3) Analysis of the Housing Market with respect to the four above mentioned companies. 4) Calculations of their financial ratios. 5) Calculation of the intrinsic values for the four leading companies. 6) Investment decisions and recommendations. The World This focuses upon the changes that have occurred. Light is shed upon the world trend towards economic prosperity. PEST Analysis Political Analysis The political scenario of the world is quite varied. There are free economies prevailing and at the same time social welfare economies are existent as well. Monarchy – one man rule and democracy have become rivals in today’s political world. Countries like USA, France and India are the major democracies in the world. Contrarily, the Middle Eastern side is marred by despotic rule. The recent upsurge in the opponents of dictatorship has raised their voices and the results have concluded by the uprisings against them in Egypt, Libya and Oman. Thus, the world is in need of democracy and some countries have been successful in achieving and others are on their way. The markets however, are free in democratic markets and so the market forces have decided upon the real estate market. Economic Analysis The world is going through the worst recession of all times. The prevailing recession bore its roots from the US economy due to the housing sector boom which led to the credit crunch. All economies in the world have gone through the spillover effects of this. However, 2007-2008 has been the peak of the recession. The greatest set back to the US economy had been the bankruptcy declaration of Lehman Brothers and the General Motors. Thus, the government of the USA has intervened to help these indebted corporations out of bankruptcy. Thus, fiscal stimulus has been considered greatly. Different parts of the world have been affected differently by the financial tsunami. Statistics reveal that the European countries and other Western Countries have been affected much more as compared to the Asia-Pacific. The Asian Tigers have maintained their growth rates but China and India have appeared as great players. In spite of the low international aggregate demand China is expected to have a GDP growth of more than 9% in the year 2011. In the same region, India’s GDP that has been growing at a rate of 5%-6% is expected to grow at about 8% in 2011. The following graphs from the National Bureau of Statistics reveal the persistent growing trends despite the global recession. Source: http://research.stlouisfed.org/publications/iet/euro/euro.pdf Contrarily, the Euro-zone has been deeply affected. The Greek-Crisis and the borrowing from the IMF had attracted deep concern. The overall economic trend has been of declining GDP growth rates. The GDP growth rate is expected to decline by 2.6% and the trade volume is expected to decrease by 3.5% (IMF, 2009). Social Analysis The world population was 6.8 billion in 2009 and expected to be 7 billion in 2012 (Rosenberg, 2011). The growing population is both a blessing and a curse. On one side, there is an upsurge of human power and labor whereas, on the other there is an increased burden on the limited economic resources of the world. The largest population rests with China but an overview of its past economic success is an evidence of the efficient utilization of manpower. The second largest population is in India which has the largest middle class of the world. The Gini coefficient was 36.8 which show the level of inequality. According to a World Bank Report there has been a continuous increasing ternd in the prices of food (Poverty Reduction & Equity). Source: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/0,,menuPK:336998~pagePK:149018~piPK:149093~theSitePK:336992,00.html According to another World Bank finding the number of people living below the poverty line has reduced in the world. However, the risk of falling into poverty has increased (Poverty Reduction & Equity). Source: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/0,,menuPK:336998~pagePK:149018~piPK:149093~theSitePK:336992,00.html Technological Analysis America has gained the power of a super power since long. Thus, undoubtedly its technological innovations have been incredible. The dot com boom and the spread of the internet have woven the world into a canopy of global world. Thus, the Nano technology has been rising on the boom. The whole world is at the boom of technology. Even the people under developed countries like Ghana, Pakistan and Ethiopia have access to internet to facilitate their lives. Computers have become an essential part of lives. Moreover, amenities at homes have increased thus, improving the standard of living of people. Countries like Japan, China and Russia have joined the technological race. They have experimented with space satellites and are coming with newer innovations. India is also a budding star in the queue. Macro-Economic Key Indicators World GDP Source: http://research.stlouisfed.org/publications/iet/euro/euro.pdf Since the 1960s the World GDP has been on an increasing trend. In 2009 the world GDP is estimated to be $58.26 trillion (World Bank Development Indicators). However, the Real GDP has followed a different trend. Looking at the recent statistics, we can conclude that the Real GDP was positive in the years 2006 and 2007. However, 2008 and 2009 faced a negative Real GDP. The main reason being crystal clear that is the recession. The effects of the recession and the trickle down effects have been felt deeply all over the result. One of the byproducts is the recession is the decrease in real GDP. However, in 2010 the economy has become somewhat stable and the real GDP is again on an increasing trend. World Inflation The unemployment rate has been high simultaneously. With respect to macro-economic analysis, it is worth noting that inflation and unemployment both have been rising simultaneously with the global recession. The developing economies have felt the greater effects of recession in the form of inflation. Double digit inflation would have persisted in some countries as the median inflation rate in 2008 is 10.3. This would have been a great blow to many under developed economies, Moreover, in the wake of rising food prices as suggested by a World Bank Report, the projection that more people might fall in the “below poverty line” bracket seems to be true. Projected Median Inflation Rate 92-01 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2015 Advanced Economies 2.4 2.3 2.1 2.0 2.1 2.2 2.1 3.8 0.8 1.8 1.9 2.0 Developing Economies 8.3 3.6 4.4 4.4 6.0 6.0 6.4 10.3 3.7 4.7 4.7 4.0 1In this table, Other Advanced Economies means advanced economies excluding the United States, Euro Area countries, and Japan. Source: http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/tables.pdf Current Account An analysis of the world statistics shows that the current account balances as a percentage of GDP have been negative. However, this has been greatest in 2007-2008 and has been on a declining trend. Looking at the IMF data from the World Economic Outlook: Recovery, Risk, and Rebalancing: we can infer that the exports of the developed countries are expected to increase over the years 2010 and 2011 by 11.0% and 6.0% respectively. Even the developing/emerging countries are expected have an increase in the exports of about 9.1% in 2011. Thus, despite the trickle downs of the recession the global economy is still on the path of recovery. However, the recovery process is expected to be taking its time. Source: http://research.stlouisfed.org/publications/iet/euro/euro.pdf Summary of the World Economy The world economy has been marred by a deep recession of all times. After the Great Depression of 1930s, this has been the far greatest blow to the world economy, however, it is ironic that no country has faced hyperinflation or have declared bankruptcy. However, many big industrial names such as Lehman Brothers and General Motors filed bankruptcy but the government of USA has bailed them out. After a period of economic devastation 2010 has proved more successful as real GDP has shown signs of improvement and has the world trade. The confidence of people is still low but lower inflation than before is a good omen for them. Asia-Pacific Economy This part focuses upon the Asian Pacific markets and their external effects on the property market in Thailand. Political Analysis The countries in the Asian region have emerged as economic tigers. The Singapore, South Korea, Japan, Thailand, Malaysia, Bangkok, China and now India are all on the roads of prosperity. It is a fact that the Asian side seems to be the least effected from the economic disorder. China’s and India’s growth rate continue to increase. Thus, their trade liberalization policies accompanied with participation in WTO and UN Conferences have been quite beneficial. India and China seem to be the most dominant players that are playing their cards economically as well as politically. Economic Analysis Asia has been one of the sources of cheap labor for the Western Economies. This has resulted in high remittance for the Asian countries. India receives the highest of foreign remittances. However, in the period of recession, the demand for labor has declined and foreign labor is not being preferred in Western Countries. According to the ADB, the Asian Pacific region was to grow 7.5% this year as compared to 5.2% in the previous year. Moreover, India is expected to grow 8.7% in 2011. Thus, fruitful results of the region are expected. Social Analysis According to ILO (2009) one third of the population of the Asia Pacific still lives under the poverty line. According to a UN report Singapore which is one of the developed countries and an Asian Tiger have a Gini Coefficient of 42.5, Hong Kong 43.5, China 41.5, India 36.8, South Korea 31.6 and Japan 24.9. In spite of the high economic growth, the income inequalities remain quite high. There are several social and cultural taboos pertaining to these regions. Moreover, administrative system remains weak. Technology Analysis Japan has been a great technological leader. Moreover, the true Asian Tigers Taiwan, Singapore, Hong Kong and Korea have gained expertise in technology and electronics. The exports have been on an increasing trend. The IT industry of India is also excelling exceptionally. However, due to the “developing nature” of these economies, the investment in R&D as a percentage of GDP is very low. Moreover, educational and vocational facilities are poor. Thus, economies of scale have not been achieved but there is a great scope and potential for future growth. Key Macro Economic Indicators GDP Growth Rates All the Asian economies are heavily reliant on trade for the growth prospects. The real GDP growth of most of the Asian Pacific countries is expected to decline namely Singapore, Taiwan and Korea: the main reason being the low rates of aggregate demand for their exports. However, India and China would be growing persistently. Source: http://www.bbvaresearch.com/KETD/ketd/ing/nav/eagles.jsp Inflation The peak recession period encountered a high rate of inflation of 4.91%. This decreased in 2010 but the projections for 2011, 2012 and 2013 reveal growing trends. Thus, it can be inferred that the trickle-down effect of the recession is being felt in later years. Source: http://myinsight.ihsglobalinsight.com/servlet/pub?pageContent=authform&WMRCSession=A30F449F-3259-4168-AE92-9E0364C29E50 Current Account The current account of China remains positively high. This is mainly due to the fact that China is the major contributor of world exports. India has been on an improving trend as well. However, some of the economies like Pakistan, Sri Lanka and Bangladesh continue to have highly negative balances. Summary of Asia Pacific Economy The Asia Pacific economy seems to be less vulnerable to the on-going conditions in the world. It is a fact that Asia Pacific region has a huge amount of people living below the poverty line. Not only this, but the income inequalities quite wide. Additionally the region is marred social and cultural taboos. Above all this, it has been endowed with natural resources as well as human resource. The labor is cheap comparative to the West and the people are generally hard working. This has increased migration and hence, the remittances to their countries. Asia Pacific includes the Asian Tigers that have emerged as real pioneers of technology and trade over the past decade. Moreover, the most economically successful country China falls in the region. India is also a budding economy. Thus, the region as a whole has high growth rates and chances of prosperity, Moreover, these countries have been open to foreign direct investment especially in India, Thailand, Bangkok and Malaysia. Overall the region is growing positively with the exception of few countries like Pakistan, Bangladesh and Sri Lanka. However, the future prospects of the region seem bright. Thailand The PEST and macro-economic analysis would provide a very clear picture of the investment prospects with respect to Thailand. PEST Analysis Political Analysis The Thai economy is an emerging economy marred by political instabilities. The former Prime Minister Thaksin adopted a dual strategy for the economic growth of Thailand. It combined domestic stimulus programs with the promotion of open markets and foreign investment. Real GDP growth increased sharply from 2.2% in 2001 to 7.1% in 2003 and 6.3% in 2004. In 2005-2007, real GDP growth averaged to 4.9%. This was mainly due to the domestic political uncertainty and rising violence in Thailand's three southernmost provinces, and the devastation from the tsunami of 2004. The economy further weakened in 2008 due to political uncertainties and the global recession. Economic Analysis The Thai economy majorly relies upon export oriented growth. The exports include petro chemicals, automobiles and electronics goods. Tourism industry is a great contributor towards the GDP. It recovered from the Asian Financial Crisis in the early 2000s and continued to have persistent growth rates. The political uncertainties and the natural calamity led to decrease in the annual growth rate from 4% to 3% in 2005-2008. Many sectors of the economy faced declining exports which slowed down the whole economic process of Thailand. However, the economy is being boosted up by the government through investments in infrastructure and fiscal stimuli. Thus, with global recession and political uncertainties, the FDI in Thailand also has bleak prospects. Social Analysis According to the CIA Factbook, the majority of the labor force is occupied in the agriculture sector that is 42.6% of the labor force. The unemployment rate in 2009 has been 2.7%. However, the population below the poverty line is 10% and the Gini coefficient remains quite high at 42. The highest earning 10% of the population consume 33.7% of the income. Thus, with political turmoil and wide income inequalities there is a room for much social improvement. Technology Analysis Thailand spends only 0.2% of its GDP on R&D as compared to 1% of GDP of China and South Korea (Limsamarnphun). In the 1970s, Thailand and South Korea were comparable economies but due to the industrialization process in Korea it became prosperous. In comparison, Thailand due to the short-sightedness of the politicians has lacked to be technologically very robust (Limsamarnphun). Key Macro-Economic Indicators Real GDP Growth Thailand relies on its agricultural sector and on its exports for the GDP. Tourism is another very crucial sector for GDP growth. The ups and downs in the GDP are mainly attributed to the financial crisis and political instabilities. The economic crunch resulted in a negative real GDP growth in 2010 which was about -2.2%. However, 2011 is expected to have a real GDP growth of 7.6% that would surpass the previous growth rates. Source: http://www.indexmundi.com/thailand/gdp_real_growth_rate.html Inflation The inflation rates show a mixed trend. However, the inflation has been under control most of the time. In 2004-2006 although, the economy was recovering from the Asian crisis the inflation seems to be growing rapidly. 2007 and 2009 resulted in very high inflation 5.1% and 5.5% respectively, mainly due to the global recession and political instability. 2011 is projected to have an inflation rate of 3.3%. As compared to other countries of the region the inflation has been strictly single-digit. Source: http://www.indexmundi.com/thailand/inflation_rate_(consumer_prices).html Current Account Due to the fact that the Thai economy is export oriented, the current account has had several twists and turns. 2006 and 2007 have resulted in negative current account balances due to the low demand of the goods. However, 2011 is expected to have positive results. Source: http://www.indexmundi.com/thailand/current_account_balance.html Summary of Thailand Economy The economy of Thailand was once comparable to Korea but due to its technological advance and increase in exports, the economy of Korea grew incredibly. Thailand is one of the emerging economies of Asia. However, political turmoil and the global recession has deeply affected it. The main source of revenue for Thailand is the tourism industry which is growing rapidly. Moreover, foreigners seem quite optimistic about the real estate and hotel industry development. Thus, evidence suggests that the economy is on the path of growth which would mainly be achieved through the tourism industry. Moreover, the year 2011 seems to be an improvement with Real GDP raising as well the current account balance. Industry Competition The Thailand economy has faced a property boom in the 1980s which came to an end in the 1990s. It was the time when many skyscrapers, offices and buildings emerged on the scene. However, with the end of the boom many construction companies and contractors became out of work when the banks when the banks foreclosed and many projects were left incomplete. In 2000s the property market again attracted investment of about $2 billion in the wake of the rising tourist industry. The industry as a whole is very competitive due to its position as a “tourism hot spot.” The Foreign Investment in the property market in Thailand is gaining popularity due to the very low costs and also because the future prospects seem very bright. The holiday concept of “Truly Asian Countries” has added to the competitiveness in the industry where not only raw land is in demand but also finished properties such as houses, condominiums, villas and hotels. Threat of New Entrants The economy of Thailand is a free-enterprise. Thus, there are no barriers to entry and exit in the real-estate market. Due to the fact that there is readily available information on the market, new entrants would definitely come into the market in hope of profits. But there is a natural barrier that is the heavy investment in monetary terms that would be required to enter the market. Thus, although there would be new entrants but the market would mainly be of an oligopoly structure and not a perfectly competitive one. The assessment is that there would be a few entrants. Threat of Substitute Products The substitutes for property/real estate investment are various other saving and investing prospects. A high rate of interest may attract the people to save in banks rather than investing in real estate. Moreover, capital intensive products are also a source of investment. Thus, the real estate investment prospects do not seem to be fruitful than, people might switch to other long-term plans. Therefore, the real estate companies need to maintain a good repute and remind the investor of the long-term benefits that could be reaped. However, substitutes in this case are low. Bargaining Power of Suppliers There are different kinds of suppliers. There are the suppliers of the raw property that is the land alone. Then there are contractors and companies that primarily deal in finished properties such as houses and condominiums. There could be sellers of commercial properties such as hotels, villas and other luxury apartments. The residential prices may be kept as the supplier want to since, a single buyer cannot exercise much power. Since, there are several companies operating, there is not a monopsony prevailing so, prices are not set. There may be room for bargain. But the commercial and finished property has chances of price bargain as compared to residential and raw plots. Therefore, the supplier can use his bargaining power but to a certain extent. Bargaining Power of Buyers There are groups of consumers with different market powers. People that are interested in residential housing may not have very much power to bargain over the price. However, the commercial buyers of hotels and luxury housing may have greater strength to bargain a price. This is due to the high competition among different companies to sell their products. Moreover, it is a fact that finished products have greater elasticity than raw ones. Therefore, the buyers of the commercial areas have a greater flexibility of bargaining. Thus, bargain can take place with residential customers as well but the success is greater with commercial ones. References Hughes, F. & Arissen, J. (2005), Global Real Estate securities – Where do they fit in the broader market? Available from: http://www.epra.com/media/Size_of_the_Total_Real_Estate_Markets.pdf [Accessed: April 22, 2011]. Thailand Property Market. Available from: http://www.investorsprovident.com/asia/thailand/thailand-property-market.html [Accessed: April 22, 2011]. Pelletier, D., Global GDP trends predict strong economy future ahead. Available from: http://positivefuturist.com/archive/271.html [Accessed: April 22, 2011]. Chhibber, A. (2009), GLOBAL FINANCIAL TSUNAMI: CRISIS OR AN OPPORTUNITY FOR ASIA-PACIFIC. 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