Wednesday, 9 July 2014
This year will still be a good year for property developers. There is no doubt about this.
So far I do not feel any slowdown in property market. Developers
are still launching their products in great pace and buyers are still
"sweeping" properties like buying vegetables.
Furthermore, more and more unknown and even listed companies start to join the property business.
Is it a sign of prosperity in property sector, or a warning sign of pending property collapse?
Tropicana recently sold RM600mil worth of property in just 6 weeks.
This amount matches its whole FY12's revenue and is almost half of
FY13's revenue. Just 6 weeks.
Eco World has also launched the first phase of Eco Majestic at
Semenyih in May. It offers 612 units of double storey terrace house in
which 95% are snapped up. Buyers still queue up for days before the
launch.
This might be Pre-GST property shopping spree.
As we known, GST will be implemented in April next year. How will it affect the property price?
There are generally 3 types of GST:
-
Standard-rated GST
- GST 6% charged at every stages of supply chain
- eg. cloth, car, fruits
-
Zero-rated GST
- No GST charged
- eg. basic food item
-
Exempt-rated GST
- GST is not charged to only final consumer
- eg. residential property, healthcare services
A great schematic explanation of GST can be obtained at loanstreet.com.my website.
For standard GST, manufacturer & retailer who pay the 6% GST
while receiving the goods/service can claim back 100% from the
government. So the final consumer is the one who will bear the entire
tax burden of GST.
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In other words, GST does NOT result in extra expenses for most
manufacturers and retailers. So their financial result should not be
affected.
For exempt-rated GST which includes residential property,
manufacturer (contractor) can claim back 100% GST paid to construction
material suppliers.
However, retailer (developer) cannot pass the GST to consumer
(buyer) and cannot claim back from the government. So developers have to
bear the entire tax burden of GST.
This sounds like developers are loser while house buyers are winner, but it is actually not necessary so.
Inevitably developer's cost will increase as it cannot claim back
GST paid to contractor from government. In order to maintain the profit
margin, developer can increase the selling price of residential
property.
So basically the profitability of developer is not really affected
as the profit margin remain the same, unless developer is forced to sell
at lower price because of low demand.
As a result, new residential property price will increase, as shown below (extracted from loanstreet.com.my)
In summary, GST will not affect developer very much but new house
buyers will need to bear higher house price. Government is a clear
winner as it collects more tax compared to current tax system.
So consumer is not a winner but a loser.
How about new commercial property?
Commercial property is in the category of standard-rated GST, which
means buyers have to bear the entire tax burden of GST throughout the
supply chain. This sounds scary.
If a developer sell a new shop office at RM1 million, should a
buyer pay 6% GST of RM60,000 on top of the RM1 million paid to
developer?
I have modified the residential GST scheme table above for
commercial property. Lets assume they have the same cost and profit
margin.
Even though the 6% GST is applied to commercial property buyer, the
final cost of the property to buyer (RM572,400) is still same as the
residential property.
This means that the final price that buyers pay (include tax) for
new commercial property will also increase after GST, and it is at the
same rate as residential property.
The difference is, when selling commercial property, developer can
claim back the 6% GST charged to it by contractor from the government.
Government will collect more tax because there is an extra 6% tax in the
end of supple chain compared to residential property.
It sounds like developer will earn more by selling commercial
property because it can claim back the GST charged to it. It is not
necessary so as the profit will depend on the margin. Actually in the
example above, developer earns less in absolute amount by selling
commercial property (sales price - final cost after tax claim).
After all, the pre-GST property shopping spree is warranted as property price will increase after GST implementation.
However, property developer's profit should not be affected
directly by GST but it may suffer indirectly should the demand of
property drops as a result of increasing property price.
These are what I know and it might not be totally right. Please correct me if I'm wrong.
