In addition to the latest LTV regulations, the residential property sector is facing two more headwinds - new land and building tax and potential hike in minimum wage. The new land and building tax should have limited impact on earnings, but a hike in minimum wage could hurt developers because we do not expect them to be able to pass on the incremental costs.

Facing potential multiple headwinds

The new land and buildings tax will be effective 1 Jan 2020. Meanwhile, political parties have promised to hike minimum wage in the election campaign. We believe the new land and buildings tax will have limited impact on developers’ earnings, but the wage hike may be significant. 

Expect new land and building tax to have limited impact

This regulation raises two major concerns – the taxes applicable to undeveloped land and on unsold inventory. If, as we believe, the aim is to target undeveloped land, the financial impact on property developers in Thailand should be limited because they do not hold a lot of land banks. What remains hazy at this point is whether unsold inventory would be taxed and at what rate. We believe this should not be taxed as the regulation would already encourage developers to accelerate construction on undeveloped land. The worst that could happen is a tax on completed unsold inventory; we estimate this would reduce each developer’s earnings by less than 1% in FY20F.

Minimum wage hike is a greater concern

Palang Pracharath Party (PPRP) has reportedly pledged to increase minimum wage to Bt400-425 per day if they win the election. Currently, the minimum wage in Bangkok is Bt325 per day. Labor cost accounts for c.15% of total project cost. Although construction costs for projects under development have been fixed, contractors might still ask developers to absorb some incremental costs. And given the current market situation, developers are unlikely to raise selling prices to offset higher costs. After the minimum wage hikes in 2011-13, GPM had been relatively flat because strong demand for property allowed developers to pass on incremental costs, but this time could be different due to weaker property demand. Our worst-case scenario suggests this could negatively impact our FY19F earnings by 8-25%.

Market has not priced in potential downside

Residential property stocks have risen 4.9% YTD, slightly outperform SET by 0.4%. We believe the market has not factored in the potential downside arising from the above two factors. We will revisit our assumptions after the election. Our top picks are QH and SPALI due to undemanding valuation and positive earnings growth in FY19F. Our current forecasts exclude the potential impact of the above two issues.