At Bali

One on one with James R. Pitchon,
Executive Director, CB Richard Ellis Thailand

The sub prime mortgage crisis in the US seems to be widening and deepening as more lending institutes reveal loses in their portfolios. As interest rates reset again, an even wider group of companies are sure to find bad debt on their books. In all likelihood, we are looking at the bursting of the real estate bubble in the US. The result could mean that the US economy dips into a recession in the first or second quarter of 2008. In any event, we are witnessing a slow down as the real estate crisis seeps into other sectors of the economy.

The mortgage crisis isn’t only a domestic issue in United States. Japanese banks are also finding bad debt, causing tightening credit there as well. In fact, it seems as if they U.S. sub prime crisis has finger in nearly every major developed and developing country. The result has been a restricted of lending practices and worldwide shrinking of available credit.

What does that mean for countries like Thailand and others in the Asia Pacific? Hotel Management Magazine caught up with Mr. James R. Pitchon, Executive Director of CB Richard Ellis Thailand to get his feelings on the crisis as well as changes in the Thai tourism and hotel markets.

Do you feel that the sub prime crisis in the U.S. will have an effect on the investment climate for the hotel industry here in Asia?
I think sub prime is a misnomer. There is a tightening of finance globally and that has been brought on by banks suddenly realizing that they have problems with lots of their structured financial products, whether its sub prime or other collateralized debt. We can see now that banks are hesitant to lend to each other in the U.S. and in the U.K. and the cost of borrowing is rising. It’s a global trend where money is becoming more expensive and it is certainly much harder to get. However, Thailand has almost zero exposure to this collateralized market.

So you feel that Thailand won’t be affected?
Very little! I think there is global fall out from the western banking challenge in the U.S., the U.K. and Europe that is making money tighter around the world. That will have some impact but most of the development in Thailand is funded locally.

How have Thai lending institutes been reacting?
Thai banks have been very conservative about lending, particularly with regards to property. The memories of the problems of 1997 are still very strong in the Thai bankers mind. So Thailand has been doing exactly the opposite of many countries in the rest of the world and there is under exposure to real estate. Even mortgage lending in the residential sector has not been growing with rejection rates being very high.

What about lending institutes in other countries, Japan for example?
There is minimal exposure. The far bigger impact will be if the US has a recession. That will affect the number of travelers coming to Asia from the US.

Are there any markets that are more exposed to a global credit crunch?
Not in Asia. The biggest risk is a recession in the US that will reduce US visitors.

Just US visitors?
Well, if there isn’t a recession in Europe, it won’t affect visitors from Europe.

But isn’t there the famous saying that if Uncle Sam sneezes, the world gets a cold?
If I could predict that then I’d become a central banker. What I’m saying is that there is very little linkage between the US lending problems and hotel development in Asia apart from on a macro economic scale. If the world economy slows down, then everybody will be affected in every property sector, including hotels.

So most of the hotel industry here in locally owned?
Yes, but the Asian market has become more international so you have, for example, Morgan Stanley acquiring a group of hotels from ANA. There are some interesting funds that have been created and there is an awful lot of money chasing real estate around the world. A lot of it focuses on prime grade A offices but there are specific hospitality funds as well.

Turning to tourism, it appears that the leisure travel numbers are good, but there are some problems with business travel and MICE. Doesn’t that tie into the global economy which, in turn, ties into the US economy.
The effect has not been due to the sub prime lending though, it’s because there was a coup and the bombings. Now what we face in the future is different.

What have you seen changing in the Thai tourism market?
We’re not just looking at growth from the European markets, we’re looking at a domestic Asian market. The Indian market in Thailand has done quite well (it was up in the second quarter by 16%). It’s cheaper for someone to go on holiday from India to Thailand than it is to go on holiday in India. That’s because when it comes to room rates, India is suffering from room shortages.

If we’re looking at where Thailand has done well we can look at places like the Middle East market. There has been a 15% growth of visitors from the UAE and 34% from Saudi Arabia. These are year-on-year for the half year so that’s very positive. Then you’ve got Russia (and the former CIS states). Eastern Europe is up 35% year-on-year and Russia is up 41%.

Where Thailand scores poorly is in the Chinese market which is down 12%. I believe there will be about 40 million outbound Chinese tourists this year and Thailand gets less than 2%. That’s been very poor. The Japanese market is down 7% as well.

Where do you see the hotel market going here in Thailand?
What’s been happening in Thailand is that there has been a broadening of the Thai market. You’ve seen a lot of new product being built and I think just about every international hotel management company in the world wants a presence here. Not just a single presence but multiple locations. So the managers want to be here.

If you’re looking at the future of the Thai market, there will be a greater product offering. At the high end you’ve got some very interesting product coming on with things like W in Bangkok and Shangri La in Phuket. But then at the lower level I think Holiday Inn Express will be rolling out a mid-range brand as well. So it’s really something for everybody. And they are all going to be managed by international companies,… just about. Thailand’s marketing power is going to significantly increase because all these brands are going to be pushing the product into the global market place.

And we’re not just looking at Phuket! The opening of the Sheraton in Pattaya has proven that if you build up a good product, then people will pay the rate. That has created more interest in Pattaya helping people realize that it’s not just going to be a two or three star market. If we build the right product, we can get people coming.

There is a good range of product in Hua Hin and there are new hotels opening in Chiang Mai. So it’s not just a single destination like Indonesia for example, which is really Bali and not much else.

Do you see any difficulties other than a world wide recession?
There are challenges such as airlift in to Bangkok. The capacity of the new airport and what will happen to overcome that, for example. Luckily Thailand does have a lot of airports. Phuket and Krabi can both take more capacity and maybe Krabi can take the overspill from Phuket as a separate destination.

CB Richard Ellis is the largest commercial real estate company in the world. The Thailand branch is also the largest property consultant, offering strategic advice and execution for sales and leasing for luxury residential, office, retail, industrial, investment properties, and land, property and facilities management, valuation and advisory, and research and consulting. With more than 600 professionals throughout Thailand, CB Richard Ellis has four offices in Bangkok, Pattaya, Phuket, and Samui. To learn more log on to their website at www.cbre.co.th.