Makati, July 5, 2017 – Colliers International Philippines believes that the government’s tax reform plan will potentially slow down the residential market, particularly because the VAT exemptions sought to be removed by the proposed program pertain to housing-related transactions.

Last May 31, 2017, the House of Representatives approved HB 5636 also known as House Bill on “Tax Reform for Acceleration and Inclusion”. The bill aims to improve Filipinos’ disposable income by reducing personal income tax for majority of its citizens. At the same time, it seeks to increase revenue collection by limiting Value Added Tax (VAT) exemptions.

The following VAT-exemptions will be removed:

1) Sale of low cost housing;  Sale of residential lot valued at Php 1,919,500 and sale of other residential dwellings valued at Php3,199,200 (The sale of socialized housing will also be removed from VAT-exemption upon the establishment of a housing voucher system)

2) Lease of residential units not exceeding PHP12,800 per month.

“If the House Bill is passed into law, selling prices of low-cost housing stand to add as much as Php384,000 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.

Over 10,700 condominium units were taken up in the first quarter of 2017 in Metro Manila, up by 29% from the same period last year. Interestingly, about 40% of the take-up accounts for low cost and socialized housing groups. Thus, the removal of the VAT-exemptions will potentially slowdown in the take-up.      

Pre-selling residential lots in Metro Manila have also been increasing by about 5% annually in the last three years, while those in nearby provincial locations showed a slower 1% growth.  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 Php12,800 and less will also see additional increase in rental rates. The higher rents will consequently push vacancies up in existing condominiums.

The condominium market has seen vacancy in Metro Manila gradually increasing at an average of approximately 1% 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, vacancies will 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.

Overall, developers will be forced to be more creative in strategizing on how to pre-sell their projects and lease out their ready-for-occupancy units. Considering these recent developments in the tax reform plan, it appears longer-term payments for sales and shorter-term leases will be continuing trends in the residential market. “We see developers stretching the payment terms to a few more months to ease the burden of condominium buyers,” Macaranas noted. “Furthermore, many will be strengthening residential leasing teams to help keep them competitive in the rental market.”

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