A taxing matter for the real estate sector

Will the assessment scheme halt soaring land prices?

Real estate agents say a government move to generate more taxation revenue from property transactions has assessed the value of land, houses and apartments in Yangon at about 40 percent of market prices.

The reaction follows the release by the Ministry of Revenue and Finance in September of a comprehensive assessment of land values throughout Yangon.

The assessment was aimed at avoiding transaction taxes by undervaluing land values and has been seen as an attempt to curtail massive price increases.

Myanmar’s commercial capital has the dubious honor of having some of the most expensive land on the planet. High prices to buy or rent may warm the hearts of real estate agents, but as the government is all too aware, the skyrocketing prices are deterring foreign investors and making it hard for Myanmar business people to acquire property as the economy begins to boom.

Average office rents in Yangon are nearly US$80 a square meter, compared with about $25 in Bangkok and $30 in Hanoi. Yangon even tops modern high-tech Singapore, where rents are about $70 a square meter.

Appraisal only

The government claims that its assessed value of land, houses and apartments is only for taxation purposes and is not intended to limit market prices. But many have misread it as an attempt to curtail sharp rises in market prices, which have risen almost 300 percent since 2010. Because of the uncertainty over the government’s motives, property sales have dropped since the release of the assessment. It has been used since October 1 to help determine transaction taxes, which can be nearly 40 percent.

Than Oo, managing director of Mandai Real Estate Agency and vice president of the Myanmar Real Estate Agency Association, told Mizzima Business Weekly that property sales had become sluggish after the assessment was released. “Many people feel indecisive and are waiting to see what is going to happen in the market,” said Than Oo, who said he was speaking as the managing director of Mandai and not in his capacity as vice president of the MREAA.

Following the release of the assessment, Deputy Minister of Finance Dr Maung Maung Thein, stressed that its purpose was to generate more taxation revenue and not to fix market prices.

Market sources say it is clear that the government’s intention of raising more revenue from the real estate market also has the objective of easing demand. Although the government has not expressly mentioned it, it hopes that the exhaustive assessment will drive prices down.

Than Oo acknowledged that the assessment was aimed at raising more tax revenue and was not an attempt at market intervention, adding that there are no restrictions on prices.

In an apparent attempt to assuage the concerns of the real estate industry, the Ministry’s Internal Revenue Department held consultations about the assessment with members of the MREAA in August before releasing it the following month.

Govt ‘not fixing the market price’

Than Oo, who has been in the real estate sector for 17 years, said there is a widespread misunderstanding about the aim of the assessment.

“It is not concerned with market prices,” he said.

“People think the government is trying to fix the prices of land and flats, as if it is in the age of the Burmese Socialist Program Party when the government fixed the prices of commodities and if people sold their goods at a higher price, they would be punished.

“Land and apartments can be traded at market prices, with no restriction.”

This latest government move follows its decision to end a tax holiday on property sales in 2012 and introduce transaction taxes. They require property buyers to pay 30 percent of the transaction price as a commercial tax, with a stamp tax of 7 percent applying in Yangon, Mandalay and Naypyitaw. A stamp tax of 5 percent applies elsewhere.

Than Oo said the assessment was the first step of an attempt to curtail spiraling real estate costs through policy, rather than by imposing restrictions.

“As far as I know, the government has two intentions on this issue,” he said.

“Firstly, the Internal Revenue Department did not think it had a proper tax scheme for real estate transactions and wanted to generate more revenue from them; secondly, the government would property prices to fall.”

Crony business roots

Business columnist and economic analyst Hla Maung, who is a retired Ministry of Trade official, said the rocketing prices are a consequence of cronyism and nepotism.

“During the earlier military regimes, many crony businessmen received permission to implement projects for which they acquired hundreds of thousands of acres of land,” Hla Maung said.

“Millions of acres of land throughout Myanmar has been monopolized by those cronies; this was the starting point of rocketing real estate prices,” he said.

Hla Maung said many people have become rich because of projects granted only to cronies.

“It is said these people have saved a lot of money in foreign banks, but nobody knows exactly,” he said.

“But it is widely known that when General Ne Win visited Indonesia in 1997, [then President] Suharto revealed that some military personnel had millions of US dollars in foreign banks.”

Hla Maung said that after Ne Win returned from Indonesia, military officers named by Suharto had millions of dollars and billions of kyat seized by the government.

“This sort of person can afford to buy land no matter how high is the price,” he said.

Hla Maung said the previous government had granted permission to those who enjoyed close relations with it to develop projects involving millions of acres of land.

“For example, 400,000 acres was made available to them in Tanintharyi Region for oil palm plantations,” he said.

The military government had also granted businesspeople concessions to cut timber and to establish resorts on islands in the Myeik Archipelago.

Hla Maung said that even though some of the projects never eventuated, they resulted in millions of acres being grabbed for personal use.

“Thus, in Myanmar millions of acres are owned by just a few people, while those who became rich because of nepotism have been investing heavily in land. This is why the real estate prices in Myanmar have been constantly rocketing up during the last two decades,’’ Hla Maung said.

The issue appears to be weighing on members of President Thein Sein’s government.

At a press conference early this year, Soe Thein, one of the six presidential advisers and a former chairman of the Myanmar Investment Commission, said some people were still intent on acquiring hundreds of acres of land and claiming it would be developed.

However, the MIC is no longer granting permission to cases such as this and is prepared to take back land if it is left vacant.

Hla Maung suggested that the government could help to bring down land prices by putting its considerable property holdings on the market.

He said there were many large government-owned compounds throughout Yangon. Many are along Kaba Aye Pagoda Road, he said, citing as an example the compound of the Myanma Scientific and Technological Research Department and a large plot under the Ministry of Industry.

If these compounds were rented at the government’s official rate of US$7.6 a square meter, land prices in Yangon would certainly fall, he said.

Hla Maung said he did not understand, if the government was concerned about land price speculation, why it was not releasing to the private sector some of its significant property holdings throughout Yangon.

Ten times over a decade

Hla Maung said land, houses and apartment prices have increased in value by 10 times in a decade.

He attributed the increase to real estate deals funded by black market money flowing from crony businesses and those who were close to the previous regime being able to take ownership of large, vacant plots.

Dr Aung Thura, the chief executive officer of Thura Swiss Myanmar Research, Consulting and Capital Markets, said it was clear that the assessment was for taxation and not to restrict the market. He also said that it was common in other countries for the taxation authorities to assess land and property values when transactions take place.

“In Myanmar, probably the authorities may have been concerned that if they went and estimated each price of traded land or property, it would be mistake. So probably they thought it best to try to fix an estimated price in advance,” Dr Aung Thura said.

He said the introduction of the assessment process might result in delays which might lead to prices falling. But it may be possible to avoid paying the tax by not re-registering property under the new owner’s name.

Dr Aung Thura told Mizzima Business Weekly that weaker demand could be expected to result in lower prices.

“But it very much depends on how much leverage has been included in real estate trading. Nobody knows…the more leverage in this market, the faster the price of land and property decreases,” he said.

“Nobody can stand high interest rates very long while holding the land. And for those who have bought the land or apartments with their own money, they will not re-sell them at a lower price.

“It is very difficult to estimate whether the price will go down or not.’’

Dr Aung Thura said vacant land owned by the state needs to be managed by a central government body which used a uniform procedure for all transactions.

“Only by doing this is one likely to see a drop in the land price,” he said.

While it is too early to estimate the impact of the assessment scheme, it was essential that the taxation system is fair, Dr Aung Thura said.

Mandai’s Than Oo said that although there was some slowing in the market after the assessment scheme was introduced, there was rising interest in small plots in the $50,000 to $100,000 price range and enquiries about more expensive property.

He was confident about prospects for a recovery.

“The market will be better soon,’’ said Than Oo.

Source: Mizzima News Myanmar

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