Tax package fails to reverse slump

The Nation

Following the formation of the new government, public expectations were high that the economy would pick up steam, and that feeling spilled over into the property industry, where business prospects depend greatly on general economic conditions, said country director Suphin Mechuchep.

Although the government and some think-tanks have upgraded their economic growth forecasts, the consensus is the economy improved at quite a slow pace in the first quarter.

External factors like fuel prices and the global economic slowdown have also had a negative bearing on demand for residences and commercial properties, she said.

The rise in fuel prices has continued to hit the property sector in several ways. On a bigger scale, it is driving the cost of living up dramatically.

The residential market will take the brunt of the blow as consumer-spending power is eroded and buyers grow wary about committing to carrying huge mortgage loans.

Fuel-related inflation has pressured construction costs - up 15 per cent last year and expected to increase further this year - as not only building materials, but also labour costs head higher.

The average prices in newly launched condominium projects in central Bangkok rose 15 per cent year on year in the first quarter. Discussions with major developers revealed that last year's price rises were more of a response to higher construction costs than to market buoyancy.

Despite the sub-prime loan crisis in the US real-estate market, the direct impact on the Thai economy and real-estate market has been minimal.

However, concerns are rising as some economists believe the US downturn has not yet

touched bottom and that the extent of its effects has yet to be revealed.

These concerns are reflected by a more cautious business approach adopted by both local and international companies in Thailand. Large multinationals have become exceptionally sensitive about occupancy costs.

Although leasing activity in Bangkok was buoyant in the first quarter, most transactions were concentrated in buildings offering monthly rentals not exceeding Bt500 per square metre, while the average rent of grade-A space in the central business district was more than Bt650 a square metre.

Since the coalition government was formed, a series of economic-stimulus policies has been introduced. Some of these are directly favourable to the property industry, such as the cancellation of the 30-per-cent reserve on foreign-capital investments, approval of mass-transit projects and issue of property-stimulus measures focusing on related tax reductions on property transactions.

However, the effects from most of these policies have not yet been realised.

"There may be some time lag between implementation of the actual policies and their effect on the economy and the property market.

"Therefore, we believe the impact will eventually be seen in the coming quarters," Suphin said.

"Together with this, should the government succeed in minimising the effects from the fuel-price crisis and manage the risks from the global economic downturn, we can expect substantial improvement of property demand in the second half of the year."