1 HOW THE THAI REAL ESTATE BOOM UNDID FINANCIAL INSTITUTIONS: WHAT CAN BE DONE NOW? Bertrand Renaud, Ming Zhang and Stefan Koeberle, The World Bank Abstract The performance of Thailand’s economy has been truly remarkable during the three decades 1965-1995. * However, the quality of growth deteriorated significantly in the mid-1990s. Eventually, poor credit risk management and excessive lending to the real estate sector have played a major role in the distress of financial institutions in Thailand. They have led to high levels of oversupply and extremely high vacancy rates by international standards in almost all sectors of the real estate industry. How did it happen? What do we need to know about investment in real estate? What actions can assist with immediate crisis management? This paper evaluates the Thai real estate cycle in light of the recent international experience. A modern real estate sector has emerged during the Thai boom but it remains immature. Real estate development is a decentralized and complex process. In Thailand investments were inadequately understood and monitored, as well as often improperly financed. As a result real estate has been a major contributor to financial distress. If real estate was not the proximate cause of the 1997 currency crisis, that crisis has deepened and amplified problems in the sector. The high level of oversupply and vacancy can imply a long and slow recovery. After showing how the boom turned into a bust, the leading concern of this paper is to show why a difficult and painful early recognition of losses is critical to shortening the recovery period. Thailand will recover, and recommendations are made for starting now to strengthen the sector. I. INTRODUCTION: NEED FOR A DIFFERENT PERSPECTIVE ON REAL ESTATE The Thailand financial crisis has many facets: the country has faces a systemic financial crisis, a currency crisis, a banking crisis, and an asset deflation crisis (Sheng 1998). To bolster Thailand’s economic recovery and competitiveness, there are two very good reasons for focusing on the real estate crisis. First, the real estate boom and its collapse have played a major role in the demise of a very large number of Thai financial companies, and also of commercial banks. International experience can throw much needed light on the factors that may now speed up or delay the recovery of this sector. Second, the efficiency and stability of the real estate sector is a major component of Thailand’s competitiveness. In an open economy that is becoming increasingly technology intensive and dependent on services, the real estate sector will keep growing in importance. * Credit for this title goes to the paper by Karl Case (1991) about the Northeast USA. By sharing titles we want to emphasize generic features in the interactions between the real estate sector and the banking system of a large number of countries in the 1980s and 1990s. The field work for this paper was carried out during the brief period of 15-30 April 1998. The authors are very grateful to the numerous professionals of Thailand who generously shared their data, experience and insights, as will be readily apparent. However, we take full responsibility for the analyses, views and recommendations that are presented.
HOW THE THAI REAL ESTATE BOOM UNDID FINANCIAL INSTITUTIONS: WHAT CAN BE DONE NOW?
Jul 05, 2023
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