The answer, for developers at least, is simple: profit. Land and construction costs per unit are lower for apartments compared with detached houses, maximising returns. In Cherng Talay alone, a staggering 10,000-plus new units are under construction. These developments all dangle the same enticing carrot – a guaranteed 7% annual rental return.
However, a cursory glance reveals the absurdity of this promise. With such an influx of new supply, basic principles of demand and supply dictate a rental market crash. A glut of apartments will inevitably lead to a race to the bottom in rents, squeezing existing players and potentially jeopardising the entire rental market.
The ramifications extend beyond the immediate rental market. Hotels, a cornerstone of Phuket’s tourism industry, are likely to feel the pinch. An abundance of cheap rental apartments directly competes with hotel rooms, particularly for budget-conscious travellers. This could lead to a decline in hotel occupancy rates, impacting revenue and ultimately, the quality of service offered.
Furthermore, the oversaturation of investment-oriented apartments could inadvertently trigger a stricter enforcement of Thailand’s so-called ban on AirBnB. Hotels, facing increased competition from low-cost rentals, might lobby for stricter regulations to level the playing field. This could further hurt the short-term rental market, a significant source of income for many Phuket residents.
Another cause for concern lies in the sluggish sales of these off-plan developments. Many struggle to meet pre-sale targets, raising anxieties about potential future discounts. In a bid to move units, developers might resort to aggressive price cuts, triggering a domino effect that could drag down the entire market.
The situation is further compounded by the recent depreciation of the Thai baht. Many of these developments are financed with loans in US dollars. A weaker baht translates to higher debt burdens, potentially jeopardising the financial stability of these projects.
Adding to the problem is a fundamental disconnect between what’s being built and what people want. Phuket’s allure lies in its natural beauty and relaxed lifestyle. Most people would prefer to spend their time on the island not cooped up in a small, cramped apartment, especially when there’s an abundance of great-value villas with private pools and gardens readily available.
It’s a scenario ripe for disaster. Oversupply, a rental market crash, unsustainable rental returns, pressure on hotels, and a half-finished development standing as monoliths across the island all paint a concerning picture for Phuket’s future. The island’s charm and tourism potential are at stake.
Ultimately, the answer is hard to find as the cause is greed. Phuket’s future shouldn’t be solely defined by short-term gains in the property market. Sustainable, well-managed growth that prioritises both tourism and a thriving local community is the key to ensuring Phuket’s enduring appeal. The question isn’t just, “Why are we still building apartments?”, it’s, “What kind of future are we building for Phuket?”
Simon Causton is a long-time Phuket resident, founder of Citadel Phuket and author of ‘The Phuket Periodical’ newsletter. X (Twitter): @SimonCauston