On 1 January, Thailand introduced a new minimum wage of THB 300 per day – a measure which will increase the salaries of low-income workers throughout the country, including the Eastern Seaboard.
The opinions of economic analysts are mixed with regards to whether the increased wages will have a positive or negative affect upon the Thai economy. Some believe it to be a beneficial move in that increased disposable earnings for low-paid workers will lead to an increase in the middle class. Others believe that increased salaries will lead to inflation as employers will be forced to offset their higher costs by charging higher prices for goods and services. This will become most apparent in the most labour-intensive industries, such as agriculture, the hospitality and garment manufacturing industries, plus construction.
The Thailand Development Research Institute expects construction costs to increase by 7-11% as a result of the introduction of the new minimum wage – an increase of THB 800 million to 1.3 billion across the entire sector.
So does this mean that property prices are likely to increase by the same amount to offset construction company’s increased costs? Not necessarily – particularly in the short-term.
When developers appoint construction companies to build a development, they usually invite several companies to tender for the project and then sign an agreement with the most competitive offer at a fixed price. Once the contract is signed, any increased costs are the responsibility of the construction company alone – they cannot be passed on to either the developers or the buyers of apartments in the project.
Julian Stanley, MD of New Developments, who is currently involved with five projects both in Pattaya and across Thailand, warned that there was a danger that some construction companies may try and cut their costs by using inferior materials in order to offset their increased salary bill – particularly at the lower end of the market where their margins are slim to begin with. He stated that there was less risk of such cost-cutting measures at the top end of the market, including projects from developers such as the Tulip Group and Nova Group, whose projects are built to higher standards, and are priced accordingly.
Much of the labour used by construction companies operating in Pattaya already comes from outside Thailand, from countries such as Myanmar, Laos and Cambodia, where wages are a third of the new domestic levels. As a result, the establishment of the ASEAN Economic Community at the end of 2015, which will allow for free movement of labour between all member countries, is likely to have only a limited additional effect upon the pool of unskilled labour available in Thailand. In fact, it could have the opposite effect as Thai workers move to more affluent member countries, such as Singapore and the Philippines.
As a result, prices of apartments will need to rise at some point in the future in order to compensate for higher construction costs – not for those projects which are already under construction or due to commence shortly – but almost certainly for those that are currently in the planning stages. The bottom line is that those buyers who purchase now are likely to see additional capital increases on their property over the next 12-24 months.