Feb 17, 2009

Thailand Property 2008 Outlook

  * Desription: Bangkok skytrain at Asoke...Image via Wikipedia

Tax incentives lift everyone's mood

Kanana Katharangsiporn from Bangkokpost

Amid concerns about higher costs of construction materials, the tax incentives announced in early March have come as good news to the property market this year. Analysts expect it to improve significantly from 2007, a sluggish year due to lower confidence.

The Finance Ministry led by minister Surapong Suebwonglee has essentially revived the tax incentives that proved successful in spurring the property market in 2003 when they were used by former prime minister Thaksin Shinawatra.

The property sector, according to the National Economic and Social Development Board, contributes 7% of the country's gross domestic product. It serves as an important economic multiplier, leading to consumption of construction materials, employment of labour and the creation of general consumption ranging from furniture to appliances. Significantly, 90% of property spending involves local content.

Prior to the effective date of the tax incentives on March 29, many developers had been concerned that unit transfers slated for March would be delayed as buyers would wait to take advantage of the breaks.

Some decided to reduce transfer fees from 2% and mortgage registration fees from 1% to 0.01%. These two major reductions would allow developers to prevent a drop in earnings during the first quarter.

Even so, firms expect profits to improve for the rest of the year as unit transfers accelerate on pent-up demand. Developers' profits will also improve as they benefit from a reduction of the special business tax to 0.1% from 3.3%.

The result could be a windfall for developers that have housing to sell and transfer before the tax incentives expire in one year. This will include pre-built units and low-rise housing that can be built in just four to eight months.

However, the condominium segment might not share in the spoils as big high-rises take up to two years to build. As well, condo developers are facing stricter Environment Impact Assessment (EIA) rules and more zealous enforcement of other building laws.

Anant Asavabhokhin, chairman and managing director of Land & Houses Plc, the country's biggest residential developer, said the resulting construction delays would be exacerbated by higher construction costs, especially steel prices that have risen more than 40% from last year.

Many developers last year stockpiled thousands of tonnes of steel so they could control costs and maintain unit prices but the inventories have almost run out.

Despite higher costs, developers are reluctant to raise selling prices too much as they might scare off buyers or lose market share to rivals who do a better job of controlling their costs. Even so, increases of 5-10% are likely.

Helping the market will be the long-delayed start of work on new mass-transit projects that increase the potential of several neighbourhoods in the capital. Buyers, meanwhile, can expect lower interest rates in line with the steep reductions made in the US, although the size and pace of cuts locally could be more modest, given concerns about inflation.

Also enhancing buyer confidence is a new regulation on escrow accounts that is finally expected to be enacted this year. The new law will, however, affect smaller developers as they cannot use downpayments as cash flow.

Many developers this year have resumed investment after limiting budgets last year. Some are focusing on condominiums near mass-transit routes and extensions, while others will develop more single houses and townhouses.

Recent data suggest that the property market this year will grow by 5-10% from last year, when newly registered units totalled 74,221 in Greater Bangkok, down 5% from 2006.

Among total new registered units last year, the Real Estate Information Center said condominiums in Bangkok rose 23% to 14,316 and accounted for 37% of all housing units built by developers.

The number of newly registered horizontal units dropped by 5.2% to 57,992. The largest decrease was in single houses, which fell 10% to 38,599. The proportion of single house dropped from 55% to 52%, while condominiums remained steady at 22%, up from 12-15% in 2003-05.

However, fewer condominium projects have been launched since early 2008. Most are from large developers, as newcomers and smaller operators faded away from the market. The main reasons were stricter loan approvals by financial institutions and more concerns about EIA approval.

Overall, signs are good for a property market rebound. The consumer confidence index rose in the first two months of the year and many developers experienced much better sales in January and February than in the same period last year.

"It's all about confidence," said Prasert Taedullayasatit, chief business officer of Preuksa Real Estate Plc. "The property market depends on confidence. The clearer political situation can restore confidence."

However, some developers need attractive campaigns and promotions, including events at project sites, to boost sales and encourage customers to speed up their decisions.

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