assumption university of thailand (abac) martin de tours school of management, department of real...

Assumption University of Thailand (ABAC)Martin de Tours School of Management, Department of Real Estate

Capital Strategy of For-Sale Property

Development Companies in Thailand during Economic

Recession

Assoc. Prof. Sonthya Vanichvatana, Ph.D.MRICS, Associate Architect

&Annop Peungchuer

Vanichvatana & Peungchuer 2

ABACIntroduction

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?


ABACResearch 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.


ABACResearch Scope

1) 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.

2) 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).

3) 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.


ABACBackground 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.


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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.


ABAC

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.


ABACResearch Methodology

Research processThe 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.

1) In-Depth Interviews2) Data Synthesis

3) Qualitative Data Analysis

Phase II: Quantitative AnalysisIn 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.1) Primary data collection, Questionnaire Design

2) Quantitative Data Analysis


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Phase I:In-depth Interview Question-Frame

Capital Strategies used during the Economic Crisis 1997 – 2000

Views on the Economic Situation prior to the 1997 Economic CrisisInvestment 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 CrisisInvestment and Debt-Management of Exiting Debt / Lender-Trend for Further Investment-Sources of Capital for Continuing Investment

Table 1: The Frame of Questions for In-depth interview with the Samples in Phase I


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Phase I:Data Synthesis Results

Table 2 (a): The Perception of Macro Economic of Real Estate Developers before 1997 and 2008 Economic Crisis


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Phase I:Data Synthesis Results (Continue)

Table 2 (b): The Management of Liability and Continuing of Investment


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Phase I:Qualitative Analysis ResultsTable 3: The Comparison of Strategies Used between the Two Crises


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Phase I:Qualitative Analysis Results (Cont.)1) Comparison of Strategies between the Two

Crises1) Similarity of Strategies between the two Crises

a) 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

2) Difference in Strategies between the two Crisesa) The approaches for debt concession and debt

restructuringb) Ways to negotiate with original lenders for further finance

for incomplete projectsc) Sources of new finance to increase liquidityd) The investment plan for the following years


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Phase I:Qualitative Analysis Results (Cont.)2) 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 yeara) In 1997 economic crisis, every property developer

stopped investment of any new project for a couple of years.

b) 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.


ABACPhase II: Hypothesis

I. Real estate developers give importance to maintain good credit to lender

II. There are many source of capital during the crisis

III. There is still investment plan for the year after the crisis originating


ABAC

Phase II:Quantitative Data Variables

Abbreviations Meaning

Capital_Cat – Capital Category, capital of the respondents as registered to the Ministry of Commerce, Thailand:1 = Low capital, capital less than 100 million baht[1], 2 = Medium capital, capital between 100 million to 500 million baht3 = High capital, capital more than 500 million baht

ProdType_Cat – Product Type Category, the product type of the respondent:1 = Low rise,2 = High rise,3 = Mixed type (low rise and high rise)

Exp_Cat – Experience Category, experience, in year, of the respondents as checked from the registered information with the Ministry of Commerce, Thailand:1 = Low experience, work less than 5 years,2 = Medium experience, work less between 5 to 12 years,3 = High experience, work more than 13 years.

Credit_Lender97AndCredit_Lender08

– The importance given to maintain a good credit to lenders during the 1997 and 2008 economic crisis, sequentially. Ranking from 1 to 5As 1 = Very least or no importance, while 5 = the most importance

FIN_Source08_X (X = 1 to 7)

– Types of source of finance:1 = Share holders as a source of finance,2 = Foreign alliance,3 = Existing banks/financial institutions,4 = New banks/financial institutions,5 = Pressed sale and transfer of finished units in the stocks,6 = supplier credits, 7 = Change business from for sale to lease.

Inv_new_Pj_next_Yr97andInv_new_Pj_next_Yr08

– The sentiment of investment plan for the following year from the crisis originating of both 1997 and 2008 economic crises1 = Stop and/or suspend2 = Decrease3 = Maintain4 = Growth

[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.


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Phase II: Quantitative ResultsThe analysis focused on three areas:

1. The importance given to maintain a good credit to lenders

2. The source of capital during the crises

3. The size of investment plan for the following year from the crises originating


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Phase II: Quantitative Analysis 1. Maintain Good Credit


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Phase II: Quantitative Analysis 2. Source of Capital during Crisis

26%

4%

23%

14%

22%

4%

7%

28.20%

3.80%

23.10%

14.10%

24.40%

3.80%

2.60%

0%

5%

10%

15%

20%

25%

30%

1.Stockholder 2.Foreign alli 3.Old bank 4.New bank 5.Sale&transfer 6.Supplier(credit) 7,Change bus

Source of Capital

(%)

1997 2008

Figure 4: The Comparison of the Sentiment of Investment Plan of the New Project forthe Following Year from the Crisis Originating Between the Two Crises

(Inv_new_Pj_next_Yr97 and Inv_new_Pj_next_Yr08)


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Phase II: Quantitative Analysis 2. Source of Capital during Crisis


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Phase II: Quantitative Analysis 3. Sentiment for New Investment


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ABACConclusion

The results from the quantitative analysis can be concluded as follows:

1. 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.


ABACConclusion (Cont.)

2. 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.



3. 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.



3. 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.


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Q & A

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