Capital Strategy of For-Sale Property Development Companies in Thailand during Economic Recession

1. Capital Strategy of For-Sale Property Development Companies in Thailand during Economic Recession Assoc. Prof. Sonthya Vanichvatana, Ph.D. MRICS, Associate Architect & Annop Peungchuer

2. Introduction Many questions arise including the following: • What kinds of business management, strategy, and/or activity should be employed during such critical time? • Are there any similarity and/or difference between the economic recession situation during A.D. 1997 – 2000 and 2008 for real estate developers? • Are there any similarity and/or difference between management, strategy, and/or activity implemented during the expansion phase and recession phase? Vanichvatana & Peungchuer

3. Research Objectives • To study the business management, concentrating on capital strategy, technique, and action employed to survive during economic recession by real estate developers. • The aim is to formulate the body of knowledge that will be beneficial to many parties and especially to the society as the whole. Vanichvatana & Peungchuer

4. Research Scope • Focus on the surviving strategy applied during the 2 economic crises: (1) during A.D. 1997 – 2000 and (2) during A.D. 2008 – 2009 and beyond. • The survey will focus on residential real estate development companies for sale, covering both low-rise (single detached house, duplex, and townhouse) and high-rise (condominium). • The survey will cover the real estate development companies that have the memberships of the three main real estate professional associations in Thailand. The members of these three associations cover the majority of the market share, especially Bangkok and Metropolitan. Vanichvatana & Peungchuer

5. Background Reviews • Vanichvatana (2004, 2007) • Survived companies found ways to manage their cash flows and their liquidity problems through: • Restructuring their loans. • Turned their lenders into partners and completed partially-finished housing projects. • After the crisis, developers began paying much more attention to building design and product strategy, including using energy saving solutions. • Michael E. Porter (1989) • Explained about the competitive strategy for real estate development in terms of competitive advantages from: (1) lower cost (2) differentiation (in unique skills or resources for commanding a premium price), and (3) the scope of business (geographic location or a particular type of tenant.) • About how to deintegrate: the key was to avoid outsource in the work process where the company had an advantage, and did so in some other activities where the company did not have an advantage. Vanichvatana & Peungchuer

6. Background Reviews (Cont.) • Lussier (2005) • Reviewed many academic works about success and failure variables for the real estate industry. There were the total of 15 variables which supported the success and failure including: (1) Capital, (2) Record keeping and financial control, (3) Industry experience, (4) Management experience, (5) Planning (for specific business plans), (6) Professional advisors, (7) Education (college level and above), (8) Staffing (quality employees), (9) Product/service timing (that were too new or too old have a greater chance of failure), (10) Economic timing, (11) Age (of the developer), (12) Partners (a business started by one person has a greater chance of failure than older people starting by more than one person), (13) Parents (business owners whose parents did not own a business had a greater change of failure than whose parents did own a business), (14) Minority (minority had a greater change of failure than non-minorities), and (15) Marketing Skill. • However, this research did not mention whether these variables will be crucial during the economic crisis. Vanichvatana & Peungchuer

7. Background Reviews (Cont.) • Leinberger (1993) and Hewlett and Kaufmann (2008) • Leinberger gathered strategy for real estate companies, based on his experiences, for many segment of a company, including customer satisfaction, finance, and organization. The information provides good cases to survive through many phases of real estate cycles, especially during the growth and the bottom. His work, however, focused on income property real estate. • Hewlett et al updated and extend Leinberger’s work by provided cases in general business situation. • Keller et al, (2009) • Provide techniques and cases to survive through economic crisis specifically for real estate business, including real estate agents. Vanichvatana & Peungchuer

8. Research Methodology Research process The process of this research will be divided in to two phases: Phase I: Qualitative Analysis Because there are very limited literatures on the strategy for real estate companies during economic crisis, especially for the scope of residential development. • In-Depth Interviews • Data Synthesis • Qualitative Data Analysis Phase II: Quantitative Analysis In order to envision to norm conduct of the real estate industry in Thailand, it is essential to conduct quantitative analysis through questionnaire survey. This phase proceeded by designing the questionnaire based on the knowledge gain from Phase I. • Primary data collection, Questionnaire Design • Quantitative Data Analysis Vanichvatana & Peungchuer

9. Phase I:In-depth Interview Question-Frame Table1:The Frame of Questions for In-depth interview with the Samples in Phase I • Capital Strategies used during the Economic Crisis 1997 – 2000 • Views on the Economic Situation prior to the 1997 Economic Crisis • Investment and Debt • Management of Debt / Lender • Sources of Capital for Continuing Investment • Capital Strategies used during the Economic Crisis 2008 – 2009 and beyond • Views on the Economic Situation prior to the 2008 Economic Crisis • Investment and Debt • Management of Exiting Debt / Lender • Trend for Further Investment • Sources of Capital for Continuing Investment Vanichvatana & Peungchuer

10. Phase I:Data Synthesis Results Table2 (a): The Perception of Macro Economic of Real Estate Developers before 1997 and 2008 Economic Crisis Vanichvatana & Peungchuer

11. Phase I:Data Synthesis Results (Continue) Table2 (b): The Management of Liability and Continuing of Investment Vanichvatana & Peungchuer

12. Phase I:Qualitative Analysis Results Table3: The Comparison of StrategiesUsed between the Two Crises Vanichvatana & Peungchuer

13. Phase I:Qualitative Analysis Results (Cont.) • Comparison of Strategies between the Two Crises • Similarity of Strategies between the two Crises • The importance to maintain good credit with the project stakeholders • maintain of good financial credit with lenders, debtors, including suppliers, contractors, sub-contractors, and to individual labor, in particularly • Difference in Strategies between the two Crises • The approaches for debt concession and debt restructuring • Ways to negotiate with original lenders for further finance for incomplete projects • Sources of new finance to increase liquidity • The investment plan for the following years Vanichvatana & Peungchuer

14. Phase I:Qualitative Analysis Results (Cont.) • Comparable Strategies among Companies with three Groups of Products (1) Low-rise housing, (2) High-rise (condominium), and (3) Mixed of both low-rise and high-rise. • The investment plan for the following year • In 1997 economic crisis, every property developer stopped investment of any new project for a couple of years. • In contrast, for the current 2008 economic crisis, half of the samples plan to keep the similar size of investment in 2009, as comparing to 2008. • All low-rise developers plan to suspend all new project investment. • All mixed project developers, in contrast plan to similar or more investment growth in comparing to 2008. Vanichvatana & Peungchuer

15. Phase II: Hypothesis • Real estate developers give importance to maintain good credit to lender • There are many source of capital during the crisis • There is still investment plan for the year after the crisis originating Vanichvatana & Peungchuer

16. Phase II:Quantitative Data Variables [1] The current currency exchange rates are as following: 1 USD = 34.5 Baht, 1 AUD = 27.3 Baht, 1 GBP = 56.5 Baht, and 1 EU = 45 Baht. Vanichvatana & Peungchuer

17. Phase II: Quantitative Results The analysis focused on three areas: • The importance given to maintain a good credit to lenders • The source of capital during the crises • The size of investment plan for the following year from the crises originating Vanichvatana & Peungchuer

18. Phase II: Quantitative Analysis 1. Maintain Good Credit Vanichvatana & Peungchuer

19. Phase II: Quantitative Analysis 2. Source of Capital during Crisis Figure 4: The Comparison of the Sentiment of Investment Plan of the New Project for the Following Year from the Crisis Originating Between the Two Crises (Inv_new_Pj_next_Yr97 and Inv_new_Pj_next_Yr08) Vanichvatana & Peungchuer

20. Phase II: Quantitative Analysis 2. Source of Capital during Crisis Vanichvatana & Peungchuer

21. Phase II: Quantitative Analysis 3. Sentiment for New Investment Vanichvatana & Peungchuer

22. Phase II: Quantitative Analysis 3. Sentiment for New Investment Vanichvatana & Peungchuer

23. Phase II: Quantitative Analysis 3. Sentiment for New Investment Vanichvatana & Peungchuer

24. Phase II: Quantitative Analysis 3. Sentiment for New Investment Vanichvatana & Peungchuer

25. Conclusion The results from the quantitative analysis can be concluded as follows: • The importance to maintain good credit with lenders • the quantitative data surveyed does not similar to the qualitative analysis results that almost all interviewees care very much on this issue. • However, the quantitative results shows more in-depth results of relationship between the different levels of the importance given and the different product types the companies developed. Vanichvatana & Peungchuer

26. Conclusion (Cont.) • For the type of source of capital • The in-depth findings show the preferred proportion to select each type of capital source. • ‘Stockholders’ is the ‘mode’ or popular source of capital for small and medium size registered capital companies • While, ‘Pressed sale and transfer the complete unit in stocks’ is the popular source of capital for large size registered capital companies. Vanichvatana & Peungchuer

27. Conclusion (Cont.) • For the sentiment levels of investment plan for the following year from the crises originating • Quantitative results do not totally synchronize to the qualitative ones. • In the qualitative analysis, low-rise developers were all planned to suspend any new investment, as mixed product developers were all planned to proceed. Vanichvatana & Peungchuer

28. Conclusion (Cont.) • For the sentiment levels of investment plan for the following year from the crises originating (Continue) • In quantitative analysis inquired detail levels of the sentiment for the investment plan: • There is a variety of sentiment levels regardless of the type of products developed. • In contrast, the levels of sentiment of the investment plan have relationship with the size of the registered capital and the level of experience in the business instead. Vanichvatana & Peungchuer

29. Q & A Vanichvatana & Peungchuer