Tax reform seen to hit residential market hard

MANILA, Philippines -  The residential market is likely to take a hit once the country’s tax reform plan as approved by the House of Representatives is implemented, real estate consultancy firm Colliers International Philippines warned.

Colliers said the tax reform plan would slow down the residential market as the value-added tax (VAT) exemptions sought to be removed by the proposed program pertain to housing-related transactions. 

“If the House bill is passed into law, selling prices of low-cost housing stand to add as much as P384,000 due to VAT. Colliers believes that the increase is quite significant especially for starting families or new professionals,” said Dinbo Macaranas, Colliers senior manager for research.

The Lower House approved House Bill 5636, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) bill, last May 31.

The bill seeks to improve Filipinos’ disposable income by reducing personal income tax for majority of its citizens and at the same time, increase revenue collection by limiting VAT exemptions.

Colliers said part of the TRAIN bill is the removal of the VAT exemptions on the sale of low-cost housing, residential lots valued up to P1,919,500 and other residential dwellings priced up to P3,199,200 as well as lease of residential units not exceeding P12,800 per month.

The property consultancy firm reported that over 10,700 condominium units were taken up in the first quarter in Metro Manila alone, up 29 percent from the same period last year.

It said about 40 percent of the take-up accounts for low-cost and socialized housing groups.

 “Thus, the removal of the VAT exemptions will potentially slow down the take-up,” Colliers said.

Meanwhile, pre-selling residential lots in Metro Manila has also been increasing about five percent annually in the last three years, while those in nearby provincial locations showed a slower one percent growth, Colliers said.

“Inevitably, the planned tax reform will make it harder for lower income families to own house and lots. The removal of the VAT exemption on residential leases amounting to P12,800 and less will also see additional increase in rental rates. The higher rents will consequently push vacancies up in existing condominiums,” it said.

Colliers said the condominium market has seen vacancy in Metro Manila gradually increasing at an average of one percent every quarter since the start of 2016, while rental rates have been decreasing at a slightly faster pace.

With over 49,000 condominium units expected to come online between now and 2020, it said vacancies would likely rise.

 “Colliers believes that the planned imposition of additional taxes on residential leases will accelerate the on-going trend in the condominium market of rising vacancies and reducing rents,” the firm said.

Should the VAT exemptions be part of the final version of the bill, Colliers said developers would be forced to be more creative in strategizing on how to pre-sell their projects and lease out their ready-for-occupancy units.

 “We see developers stretching the payment terms to a few more months to ease the burden of condominium buyers. Furthermore, many will be strengthening residential leasing teams to help keep them competitive in the rental market,” Macaranas said.