The property development sector in Thailand has certainly seen its fair share of ups and downs. Like all businesses, it is quite dependent on the whims of market forces and other prevailing economic conditions. However, despite these fluctuations, in the past decade we have seen property development making steady progress and it has consistently triumphed over all the challenges if faces. This has been fueled largely by two factors. The first being the rise in income levels of local Thais and the emergence of a sizeable middle-class group in the country. The second is due to the increase of international interest in the high-end luxury accommodation market, particularly in popular resort areas such as Phuket, Hua Hin, Pattaya and Koh Samui. These places have long been popular for its natural beauty and in its ability to attract thousands of tourists each year.
Despite this, over the past year or so, confidence in the property sector diminished slightly due to the well-known military coup which ousted the former Prime Minister, Thaksin Shinawatra into a self-imposed exile. During the interim government’s tenure, we saw many prospective developers and buyers alike adopting a ‘wait and see’ approach although the market remained relatively strong. That wait is now finally over and although it is still early days, property professionals are confident that having a democratically elected government will benefit the sector greatly.
New Economic Stimulus Package
Indeed in early March, the Thai government approved a series of economic stimulus packages which will, among others, reduce some of the key taxes for property developers and their buyers. The Thai cabinet outlined the three main goals in introducing this package. They are, namely, to:
1. Increase the income of Thai citizens;
2. Promote and support the growth of SME businesses and;
3. Stimulate investment in the country and to enhance its competitiveness.
How This Affects Property Developers
There are a number of measures introduced by the cabinet, however, only a handful have direct relevance to property developers. The first is the reduction of the Specific Business Tax (SBT) from 3% to 0.1% for transactions which are made within the year after the package is enacted into the Royal Gazette. This is expected to be in April 2008. This is good news for property developers in Thailand as this is often a cost which they have to absorb in every transaction. Indeed the reduction will only be for one year so its main aim is to create a short term boost to the property sector. For large scale developers, this will inevitably help their bottom line depending on their backlog of properties due for transfer up until the first quarter of 2009. Smaller developers who concentrate on smaller projects such as low-rise developments or small scale housing projects could also benefit as they are often more flexible and able to acquire, develop and sell a project within one year.
Reduction of Transfer Fee
Reduction in Corporate Tax for SMEs, Public Companies and IPOs in MAI and SET Markets
Some smaller property developers may also benefit from this stimulus package in another way. Small to medium size companies with a paid-up capital of five million Baht or less are exempted from corporate tax on the first 150,000 Baht of their net profits. This should help smaller property developers but probably would not have much effect on larger companies.
Newly listed property development companies or companies which are currently requesting for an IPO will have their corporate tax reduced from 30% to 20% for their first three years if they are listed in the MAI market. For those who are listed on the SET, this reduction will be from 30% to 25%. The reductions in the foregoing will only apply to companies seeking an IPO in 2008 and listed by 2009. Currently listed companies on the MAI and the SET will have their corporate tax reduced to 20% for its first 20 million Baht in net earnings and 25% for the first 300 million Baht in net earnings respectively.
Increase in Salary Base for Income Tax Exemption
Another fiscal measure which may benefit property developers and the economy as a whole is the raising of the base salary for which income tax is exempted from 8,300 Baht per month to 12,500 Baht per month. This measure may help boost the property market further by increasing low-income homebuyer’s ability to purchase property and therefore should benefit low-cost housing developers in general.
The Property Market
So what does all this mean to the property development sector in Thailand? It is certainly a good sign and it shows the government’s commitment in the growth of property as the mainstay of its key economic policies. However, as is the nature of stimulus packages, it is a short term measure and property developers have to take this in mind if they wish to take full advantage of it. There are a number of things which may affect this.
The major factor is timing. Developers must have the ability to execute a project from procurement to transfer within one year. For existing developments, success will mainly be dependent on the size of the current backlog of customers which are awaiting transfer. Depending on physical phases and contractual obligations, developers may also wish to complete any of the existing transfers by the first quarter of 2009. For new developers in the early and planning stages, it may be useful to consider smaller projects which can be completed and transferred within one year.
Low-rise or exclusive housing estates may be ideal in these cases. Whatever the project may be, this stimulus is certain to help all property developers throughout the country. The extent to which they are successful may vary depending on circumstances. However, with good time management and planning, every property development should be set for further gains.
Rentals remain strong in the Prime Sukhumvit area as stated by Sukhumvit Condos who continues to see a strong increase from expats planning to relocate to Thailand later in the year.