Banking on tax breaks

A brighter outlook for the property market this year has given way to anxiety because of political problems stirred in May by the People's Alliance for Democracy rallies and the rising costs of living and construction stoked by oil prices and inflation.

Early in the year, the development sector welcomed positive factors including higher consumer confidence in an elected government, the expected start of major new mass-transit systems, tax incentives and low interest rates.

Consumer confidence revived after the entry of the Samak Sundaravej government when it announced the acceleration in construction of new transit routes and the tax incentives.

The tax breaks included reductions of the transfer fee and mortgage fee to 0.01% from 2% and 1% respectively, and a cut in the special business tax from 3.3% to 0.1%. They were announced on March 4 but became effective on March 29, delaying unit transfers in that month. But this was not a concern among developers as they expected a strong pickup later on pent-up demand.

Many developers agreed the tax incentives would help stimulate the market and were better than nothing. Without the incentives, some of them expected a slight slowdown in sustainable growth this year.

However, Naporn Sunthornchitcharoen, senior executive vice-president of Land & Houses, the country's biggest residential developer, viewed the tax incentives as short-term - they expire in March 2009 - and unlikely to stimulate property demand.

"The government should [stimulate the property sector by] increasing tax deductions for homebuyers who pay income tax and it will bring new purchasing back to the market or other businesses," he suggested.

He said tax benefits should return to homebuyers, not developers as the private sector had a duty to survive by itself. Meanwhile, the government had a duty to build good fundamentals, infrastructure and to be a good regulator.

"The economy is related to imports, exports, domestic investment and consumption. It's derived from confidence and the country's image," he said.

After concerns about the political situation faded for almost four months, they returned in May with the PAD's expanding rallies that damaged confidence among local and overseas investors as well as consumers.

Mr Naporn suggested that everyone should have discipline and follow the rules or confidence among investors might be undermined.

"If the economy and the overall situation look good, housing demand should make a return during higher inflation rates and rises in housing prices pushed by higher cost structure."

"Homebuyers delayed their decisions and had second thoughts, like considering how the country will move on before making a decision," he said. "Thai politics is like a child - one day fighting, another day hugging."

But those considerations now pale beside concerns about living expenses surging because of higher oil prices and the inflation rate, which hit 7.6% in May.

"The higher inflation rate isn't occurring only in Thailand, but worldwide. It's a global inflation pushed by higher oil prices," he said. "Three parties - the government, the private sector and the public - need to adjust."

He said higher oil prices caused a decrease in the number of site visits by 30%. However, the number of bookings per visit rose substantially from 4-5% to 8% and up to 10% in some locations.

Condominiums continue to rise all over Bangkok, the closer to anewor existing mass-transit line, the better. But developers fret that high construction costs will eat away at their margins by the timenewunits are transferred 18-24 months after building begins.Some contractors are also walking away from jobs rather than accepting losses as their materials get more costly.

Prasert Taedullayasatit, chief business officer of the developer Preuksa Real Estate Plc, thought negative factors in the first half of the year including higher inflation rates, an upward trend in interest rates and weak consumer confidence because of the political situation would spill into the second half of the year.

"All of these are uncontrollable factors all developers will have to face for the whole year," he said. "Inflation rates are higher but if the economy does not grow, it will be worse even though demand remains strong."

According to the Real Estate Information Centre, property demand has been affected by higher oil prices since late last year. During the first two months of 2008, the number of newly registered housing units dropped by 7% from the same period last year.

At the same time, developers were more cautious in launching residential units as the number dropped by 29% in the first quarter and 11% year-on-year respectively to 67 projects and 18,039 units worth combined 46.34 billion baht according to a survey by the Agency for Real Estate Affairs.

Higher inflation rates, oil prices and costs of living are likely to cause an increase in interest rates in the second half of the year. As a result, purchasing power will be weak.

L.P.N. Development Plc managing director Opas Sripayak said that medium- to lower-priced residential units would become more popular as purchasing power ebbed.

"Higher construction cost is the greatest concern among developers as they don't know when the rises will end," he said.

At a time of higher construction costs, Preuksa's Mr Prasert suggested the Board of Investment (BoI) should revise the ceiling price of houses built by companies seeking BoI privileges from the current 600,000 baht a unit to one million baht as it would reflect a more accurate level.

"The price [of 600,000 baht] has not gone up for more than 10 years while construction costs have been rising every year," he said. "If the price is revised, the grassroots economy will be stimulated and the grassroots segment's quality of life can be raised."

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MANAGEMENT

Strategies for dealing with high costs

Developers say that increased efficiency, better cash-flow management and a larger scale are among the solutions for dealing with higher oil and construction material prices.

Opas: ‘‘Hidden costs’’ must be identified

Naporn Sunthornchitcharoen, senior executive vice-president of Land & Houses Plc, suggested that developers should be able to read market trends thoroughly and forecast costs of materials.

"If steel prices are in an upward trend, buying them in advance or stocking them should be done to play it safe," he said. But this should also be done under a supportive financial status.

However, a large amount of materials in inventory will create management complexities. Developers should make sure they can handle and manage surplus materials. Stocking should be done in case contractors cannot carry higher costs.

"If they [contractors] can, developers may give them extra," said Mr Naporn. "Developers will not have difficulty in stock management."

Surplus materials for high-rise condominiums may be 20% during an upward trend in construction materials, especially steel and cement that will be on demand in the second half of the year because of the new mass transit lines scheduled to start construction.

Developers should also estimate the market competition, consider the market database and decide which segment they should enter and to what extent. All of these will help increase a developer's efficiency.

"Before budgeting each year, we try to use databases to make an analysis and predict demand in each segment, area and product type," said Mr Naporn.

Pre-built housing developers such as Land & Houses seem to have more advantages than pre-sale developers as they can control costs and set prices before launching the product, he said.

Some new condominiums will stay empty by the time they’re finished, if buyers stung by rising inflation conclude they can’t afford their purchases.

"We have to manage and control cash and operations accurately. If our prediction [on market trends] is wrong, it will become a huge burden. Pre-built developers need to make sure their product is saleable," Mr Naporn added. Research, planning and monitoring tools are a must for pre-built development.

L.P.N. Development managing director Opas Sripayak said his company tried to save costs by readjusting in all construction processes starting from design to finish.

"We're trying more to save costs from the beginning of the construction process. In the design process, we will focus on the most efficient planning design to reduce repetitive and hidden costs," said Mr Opas.

"If we can save costs for a project, those for projects in the future can also be saved. For example, steel bars used to build balcony rails were changed to concrete as steel prices were higher."

Prasert Taedullayasatit, chief business officer of Preuksa Real Estate, said developers had to manage their cash flow more attentively in this unfavourable economic climate.

To handle rising construction costs, Preuksa reduced the construction period of townhouses and single houses from 180 to 110 days. It is also reducing the construction period of high-rise condominiums from 24-30 months to 18-24 months and low-rise condominiums from 12 to 18 months.

"This strategy helped us get quicker cash, reduce interest burdens, and be able to control possible risk from volatile construction material prices," he said.

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MANAGEMENT

Developers adjust to cooling of condo fever

The condominium market that began heating up a few years ago is likely to start cooling down and reach a balance point as developers are more cautious about launching new projects when building material costs are volatile.

At the same time, prospective buyers of condominiums may hesitate because of concern about higher costs of living and a decrease in their ability to afford new homes.

In fact, higher oil prices had been the factor creating strong demand for the condominium market as people were concerned about travelling expenses. Special interest was shown in those units near mass-transit routes and their planned extension lines.

According to a survey by Agency for Real Estate Affairs (AREA), the average sales rate of condominiums in six major locations - Ratchada/Lat Phrao/Ratchayothin, Phloen Chit/Sukhumvit/Ekamai, Onnuj/Baring, Silom/Rama III, the western bank of the Chao Phraya River and Bangkok's outskirts - rose by 40% in 2007 compared to 2006.

However, the average sales rate dropped by 7% in the first quarter of 2008 to 9,247 units from 9,895 in the same period last year.

The only two locations to enjoy an increase in sales were Sukhumvit and the western bank of the Chao Phraya River, up by 33% and 20% respectively.

The highest decrease in sales was in Ratchadaphisek with 46%, followed by Silom/Rama III with 43% and the outskirts by 0.1%, showing a significant downward trend in the condominium market.

Opas Sripayak, managing director of the low-priced condominium leader L.P.N. Development Plc, said the number of new condominiums launched in the first quarter of the year decreased compared to the same period last year.

"Some developers were not confident as volatile prices of steel and rising construction costs pushed unit prices higher while purchasing power was reduced because of inflation," he said.

Many developers shifted to develop more low-rise units as supply was limited and they expected single houses and townhouses would be more interesting to homebuyers while tax incentives lasted.

"Everything is becoming more expensive," Mr Opas said. "Low-priced condominiums will be popular during a time of weak purchasing power."

Teerachon Manomaiphibul, chief operating officer of the listed developer Property Perfect Plc, said higher construction costs were largely being driven by the doubling of steel prices and skyrocketing oil prices since last year.

As a result, construction costs for a condominium building that consumes a lot of steel have risen by at least 30% for construction of less than eight storeys and 35% for more than eight storeys.

Meanwhile, saleable area in a condominium building also has been reduced as stricter rules about environmental concerns require additional utilities in a high-rise residential building.

"Rising construction costs have forced many condominium developers to break their project plans. There will be no more projects at 30,000 to 40,000 baht a square metre," Mr Teerachon said. As condominium prices soar, townhouses in the same location might be an alternative.

"Though a condominium project may be sold out, if construction doesn't start or the financial status is not strong, developers may face lower margins and delays in unit transfers," he said.