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Further Reading:

Commercial Property Rental Rates

This month I will respond to a question from KPMG Peat Marwick (Tourism and Property Consulting division) Malaysia, who write

We would appreciate if you could gives us information about 1) Current retail property rental rates per square meter in Patong and Phuket town. 2) Future projections of the retail rental trends (if any)?

The vast majority of retail (and commercial) property existing and under construction is still to be found in the ubiquitous shop house. With a few exceptions, mainly in department store or hotel complexes, purpose built retail space does not exist in Phuket.

For those who are not familiar with the term, a shop house is a unit within a row of terraced buildings and are typically 4 meters wide, 12 to 16 meters deep and from two to three and a half storeys tall. (the half refers to a mezzanine) While the only part of such a property that can truly be deemed suitable for retail use is the ground floor, it is usually impossible just to lease one floor of the building. With growing affluence fewer and fewer tenants are using the upper floors for the original conceived purpose - a residence for the shopkeeper - and more often than not they will be unused or at the least under utilized. Given this set of circumstances, comparison of retail price per square meter becomes a little distorted.

Again, shop houses are let as a complete units. Lease terms are invariably for three years - options to renew, if given, rarely includes any agreement on the renewal price. The three year term, along with the key money (more about that later) while primarily about avoiding tax (one needs to register a lease longer than three years); also has to do with a never ending local optimism about the future growth of property and rental prices.

With a current glut of shop house properties in secondary locations, both in Phuket town and Patong rental rates are currently quite reasonable - rental rates are in the 10-20,000 Baht per month range and it should be possible to get in with as little as 3 months deposit. This is in strict contrast to prime properties (and times of weaker supply) when typically from 50% to 90% of the determined rent for the full term will usually be required as a lump sum in advance in the form of "key money" (non refundable). Notionally a back hander to the landlord for the special consideration of receiving such a scarce property - key money is in reality a device to evade taxes (since the lease if ultimately registered will show an amount far less than what has actually been paid) It also helps the landlord reduces his worry about default on rent payment or early termination of the tenancy. Rents in prime locations, with large high spending pedestrian volumes, by which I refer mainly to the Beach Road in Patong, and too a much lesser extent to the center of Phuket town, are a very different story. Supply has always been scarce and rents and terms continue to get tougher despite any weaknesses in the general market. Rents in prime areas can run from 30,000 up to as much as 100,000 Baht per month Location is the biggest factor here, floor area has much less to do with determining the rent

As a final comment about rent, but with no precise figures to back this up, I would estimate that the greatest rents (per square inch!!) if you include payoffs and back handers and the best retail sales volume (per square inch of floor space) would actually be from the vendors with their wares displayed on mats on the pavements along the Patong Beach Road, for it is they who probably achieve the best sale per square inch of "floor area".

What does the future hold for rental rates? Without accurate historical information it is very hard to quantify predictions. However for as long as new (secondary location) shop houses continue to be built well in advance of any proven demand, I would expect that there will not be much change in the rates at the low end of the market for the foreseeable future. With no space and tough building codes limiting new construction in prime areas, these areas must continue to strengthen - and spill over into the better located neighboring secondary properties.