Property in Thailand brings good returns. So why isn't the market more vibrant?
Lalaine C. Delmendo | June 30, 2020
After winning the March 2019 elections, Prime Minister Prayuth Chan-o-cha (who led the military seizure of power from PM YingluckShinawatra in May 2014), declared that the country would now function as a normal democracy. But most powerful cabinet positions are still held by former members of Prayuth's military government, and the military keeps its power of arbitrary detention, used in the past to silence critics.
Also, the new constitution ensures that members of the National Council for Peace and Order (NCPO), the official name of the military junta, will not be held accountable for any rights violations committed during its rule.
Seemingly ignoring politics, the average price of single-detached houses in Thailand rose by 5.1% (5.3% in real terms) during the year to Q1 2020, according to the Bank of Thailand (BoT). On a quarterly basis, house prices increased 2.3% (3.1% in real terms) in Q1 202o.
By property type:
- Condominium prices rose by 4.4% (4.6% in real terms) during the year to Q1 2020, a sharp improvement from last year's 1% growth. However quarter-on-quarter, condo prices dropped 1% (-0.3% in real terms) during the latest quarter.
- Townhouse prices rose by 4.9% (5% in real terms) during the year to Q1 2020, following y-o-y increases of 5.8% in Q4 2019, 2.2% in Q3, 3.4% in Q2 and 7.3% in Q1. During the latest quarter, townhouse prices increased 2.8% (3.6% in real terms).
Land prices are also rising. The land price index rose by 3.7% (3.9% in real terms) y-o-y in Q1 2020, up from annual growth of 3% in Q1 2019.
Yet despite these property price rises, the market is in fact lacklustre. Residential construction has been weak, whichpartly explains why house prices continue to rise.
Nationwide condominium registrations plummeted by 30.3% to 70,841 units in 2019 from a year earlier, in sharp contrast to a 40% growth in 2018, according to the BoT. Land and building transactions fell by 11.6% y-o-y to around THB 1.01 trillion (US$32.61 billion), in contrast to 7.7% growth in 2018, according to the BoT.The total number of new housing units in Bangkok Metropolis and vicinity fell 14.7% y-o-y to 111,657 units in 2019, according to the BoT. Over the same period, new apartments and condominium units in the metropolis plummeted by 27.3% to 53,163 units.
In an effort to boost demand, the BoT recently eased loan-to-value (LTV) regulations for mortgage lending. Effective January 2020:
- The maximum LTV ratio for mortgages on first homes valued at less than THB 10 million (US$324,000) was raised to 110% from 100%;
- The maximum LTV ratio for mortgages on a second home is maintained but the minimum pre-servicing period for mortgages on first homes was shortened to 2 years from 3 years;
- The maximum LTV ratio for mortgages on first homes valued at more than THB 10 million (US$324,000) was raised to 90% from 80%.
An additional factor for recent weak demand is certainly that Covid-19 has hit both local and foreign demand, courtesy of harsh lockdowns. The Thai government has barred inbound international commercial flights until the end of June 2020. Tourist arrivals are likely to fall by almost two-thirds to 14 million people, from a record 39.8 million visitors in 2019, according to the Tourism Authority of Thailand.
Investors from Mainland China and Hong Kong make up almost half foreign demand for residential condos. People from the US, Singapore, Taiwan, Japan and the UK are also big investors.
Because of Covid-19, aGDP contraction of 5% to 6% is forecast by the National Economic and Social Development Board (NESDB). There was a contraction of 1.8% in Q1 2020, the deepest decline since Q4 2011. In response, the Bank of Thailand cut its benchmark rate by 25 basis points in May to a record low of 0.5%, the third rate cut this year.
Bangkok property - yields moderate
Rental yields in Bangkok average around 5.0%. The apartments included in our survey are located in Bangkok´s upscale residential areas which includes Sukhumvit Road, and Silom - Sathorn.
Round trip transaction costs are low in Thailand. See our Property transaction costs analysis for Thailand and Property transaction costs in Thailand, compared to the rest of Asia.
Income taxes in Thailand are high
Rental Income: Nonresidents pay tax on income derived from property located in Thailand at progressive rates.
Gross rent is subject to 15% withholding tax, which can be credited to the actual income tax due.
Property Tax: The House and Land Tax, levied on rental properties, is payable annually at a flat rate of 12.5% of the assessed annual rental value of the property.
Capital Gains: Gains derived from the sale of immovable property are taxed at standard income tax rates.
Inheritance: Inheritance tax is levied at a flat rate of 5% for direct descendants. Inheritance of the spouse is exempt from taxation.
Residents: Residents are taxed on their worldwide income at progressive rates.
Buying process is complicated in Thailand
Total round-trip costs are moderate at around 9.90% to 11.90% of the property value, inclusive of the realtor’s commission of from 3% to 5%. There are complications surrounding the computation of the buying costs; stamp duty and specific business tax are based on the assessed value or declared value, whichever is higher. Buyer and seller each pay for their own separate lawyer.
The landlord can call the police in Thailand
Given the absence of formal legislation, Thailand is pro-landlord.
Rent: The contract prevails on issues regarding the rent, rent adjustments, and notices.
Tenant Security: If the tenant refuses to leave after the contract and/or the notice to vacate expires, the police can be called upon to forcibly remove the tenant. However, landlords are not allowed to take abandoned appliances and furniture as compensation for unpaid rent and damages.
Coronavirus pandemic hits Thailand’s economyAs the coronavirus outbreak shuttered borders around the world, Thailand’s tourism-reliant economy contracted by 1.8% in Q1 2020 from a year earlier, the deepest decline since Q4 2011. The National Economic and Social Development Board (NESDB) slashed its forecast for 2020 to a contraction of 5% to 6%, from its earlier projection of a growth of 1.5% to 2.5%. The economy grew by an annual average of 3% from 2013 to 2019.
In addition to the dramatic decline in tourism, exports, another key economic driver, fell sharply by 22.5% in May to US$ 16.28 billion from a year earlier, the steepest y-o-y decline in over a decade, amidst a drop in shipments for cars and computers. In 2019, exports had already fallen by 2.7%, due to the strong Thai baht and the US-China trade war.
Recently, the BoT and the Center for International Trade Studies at the University of the Thai Chamber of Commerce forecast exports to contract by as much as 7.1% this year.
“Under the worst-case scenario in which the coronavirus Covid-19 crisis exceeds 9 months (to September 2020), the University of the Thai Chamber of Commerce is forecasting exports could contract by as much as 7.1% this year, with the actual export value shrinking US$17.42 billion USD, or 557.72 billion baht,” said AatPisanwanich, the director of the Centre for International Trade Studies.
In the past year, the Thai baht weakened slightly against the US dollar by 0.9% to an average exchange rate of THB 32.083 = USD 1 in May 2020, but still not enough to offset the 19.2% gain from 2015 to 2019.
After winning the March 2019 elections, Prime Minister Prayuth Chan-o-cha formally resigned as the head of military government in July 2019 and declared that the country would now function as a normal democracy after five years of military rule.
“Thailand is now fully a democratic country with a constitutional monarchy, with a parliament whose members are elected,” Prayuth said. “All problems will be addressed normally based on a democratic system with no use of special powers.”
But almost a year after the elections, critics argue that Thailand’s political situation has become more complex, with others regard it as a hybrid of democracy and authoritarianism.
The junta, which had given itself sweeping powers without oversight, was dissolved with the inauguration of the new Cabinet. But most of the powerful cabinet positions were held by former members of Prayuth’s military government. In fact, Prayuth also serves as a defense minister in the new government. The military also keeps its power of arbitrary detention, which was used in the past to silence critics.
Prayuth was retained as prime minister with the backing of military-appointed Senate and pro-military parties in the parliament who were elected during the March 2019 general election. The election, which was marred with controversies and irregularities, was held under a new constitution and laws enacted by the junta aimed at disadvantaging established political parties and keeping any single party from winning a clear majority.
Also, the new constitution more or less ensures that members of the National Council for Peace and Order (NCPO), the official name of the military junta that governed the nation, will not be held accountable for any rights violations committed during its rule.
Thailand’s military seized power from an elected government in May 2014, the 12th military coup since the end of absolute monarchy in 1932. Led by the present prime minister, Prayuth, the coup came after several months of protests against the ruling Pheu Thai party and former PM YingluckShinawatra. After dissolving the government and the Senate, the NCPO vested both executive and legislative powers in its leaders, and took control of the judicial branch. A nationwide martial law and curfew were declared; political gatherings were banned; opposition leaders and activists were arrested; and media and internet censorship was imposed.