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News Release

Bangkok

Land and buildings tax should have more positive than negative impact

The new tax policy should promote a more efficient use of land and real estate and thus benefit the country’s property industry in the long run


​Earlier in this month, the Cabinet approved the framework of a new land and buildings tax bill. While it will take some time for property owners to familiarise themselves with the new tax when put into effect, many of them will inevitably feel a short-term negative impact. However, the new tax policy should promote a more efficient use of land and real estate and thus benefit the country’s property industry in the long run, according to Mrs. Suphin Mechuchep, Managing Director of property consultancy firm JLL.

Some owners will be forced to dispose of assets to avoid holding cost

As the new tax will introduce financial burdens on owners of properties that do not meet the tax exemption criteria, some of these owners will be forced to make better use of their property to avoid a high tax rate and/or get the property to generate income to offset the holding cost. Others will be pressured to dispose of their property surplus so as to escape from this tax burden.

Mrs. Suphin explains “Many of these owners are “asset-rich and cash-poor”, and may not be able to afford the new land and buildings tax, especially when the assets have high values. Therefore, they may decide to dispose of their real estate assets.”

Banks are another group of owners that could face pressure from the new tax policy and thus may have to accelerate the disposal of foreclosed real estate collaterals.

“Though a low land and buildings tax rate of 0.05% is planned for banks’ non-performing assets for a period of five years, the amount of tax to levy on foreclosed high-value real estate collaterals could still be significant. Therefore, it is expected that banks will try harder to dispose of these NPAs,” says Mrs. Suphin.

In these circumstances, property owners who are forced by the new tax to sell their property assets will likely adopt a flexible pricing strategy to accelerate sales, meaning some of them may reduce asking prices.

However, some well-capitalised owners are unlikely to lower their price expectation and will continue to absorb the opportunity costs associated with their assets and add the increased costs to the selling price. “This strategy may work when the asset is a sought-after property in a prime location,” Mrs. Suphin comments.

Gross rents in all property sectors may rise

For income-generating properties, there remains no clarity around whether the existing ‘rental’ tax (12.5% of the annual rental value or the annual assessed rental value) will remain or be replaced by the new land and buildings tax.

“Whatever the case may be, landlords would be undoubtedly pass on any additional cost resulting from the new tax to tenants. This would eventually push up gross rents in all property sectors. Nonetheless, the amount of tax that owners would pass on to tenants may vary from sector to sector,” says Mrs. Suphin.

“For example, owners of rental apartments in Bangkok may absorb most of the addition tax cost themselves due to fierce competition for tenants, not only with other apartment developments but also with rental condominiums. On the other hand, in the Bangkok office sector which is a landlord market, most of the additional cost, if not all, is likely to be passed on to tenants either directly or indirectly,” she explains. 

Despite these downsides, the impact should be more positive than negative

Apart from being a source of revenue which can be used to fund services at a local level, the new tax should help encourage a more efficient use of land, particularly when the highest tax rate is applied to vacant land that has been left unutilised. 

This new tax policy should also reduce speculative property purchasing.  “The land and buildings tax will increase risk exposure to speculators who acquire a property asset with the hope to hold it until it becomes more valuable and then resell it for profit. With the new tax, holding a property can be costly, particularly when the property is left unutilised or does not generate any income,” says Mrs. Suphin.

JLL also expects that the new tax will help reinforce the trend of professional developers focusing mainly on land plots for immediate development rather than buying land without a specific and concrete plan of what and when to develop.

“If well executed, the land and building tax should yield immense long-term benefits for the country,” Mrs. Suphin concludes.