DC Rate Hiked, But 'It's Not A Cooling Measure'

Sources : The Business Times, Thu, Jul 19, 2007

(SINGAPORE) Catching the market off-guard, the government yesterday changed the formula for computing the development charges (DC) that must be paid for enhancing a site's use, effectively raising DC rates by 40 per cent.

With immediate effect, the new DC rates will cream off 70 per cent of the appreciation in land value that arises from changing the use of a site or more intensive construction on it. Till now, this rate was 50 per cent.

'The change is not to cool the property market,' a spokeswoman for the Urban Redevelopment Authority said. Instead, it seeks to achieve a 'more equitable sharing of gains between land owners and the state', she added.

Industry insiders said that the state was probably laying claim to a larger share of the property boom since many of its initiatives had directly spurred the current, buoyant market conditions.

It can be argued, for instance, that the strong demand driving the local residential and office markets owes much to the government's decision to go ahead with two integrated resorts and its promotion of the Business & Financial Centre and the Republic as a banking hub. The efforts to transform Singapore into a global city have played their part, too.

In fact, until 1985, the DC creamed off 70 per cent of the enhancement in land value arising from higher use or plot ratio, and yesterday's move merely turns the clock back to pre-1985 days.

Market watchers are expecting 'a second whammy' on Sept 1 when government is expected to announce higher DC rates under its regular six-monthly review of the rates based on market values.

Yesterday's DC formula change - which is independent of the regular review - is likely to boost the development charges flowing into the government's kitty. For the financial year ended March 31, 2006, the state collected $264 million of DC and $130 million in differential premium (DP) which applies to sites where there are title restrictions on use and intensity. Since 2000, DC and DP charges have been aligned to the same percentage level.

Analysts, meanwhile, pointed out that the higher rates charged by the government could cool the property market, especially the fervour for collective sales.

'Maybe they want to send a signal that they are watching the property market closely. I wouldn't be surprised if more policies are introduced in the coming months, especially if property prices and rents continue to rise in a way that undermines Singapore's competitiveness,' said Chua Yang Liang, head of research (South-east Asia) at Jones Lang LaSalle.

Speculation has been rife of late that the government could curb the deferred payment schemes extended by residential developers, which have been blamed for fuelling speculation.

Some argue that yesterday's change in the DC formula would help generate even more income for the government if plot ratios go up under Master Plan 2008, even if very selectively.

Typically, developers rush to lock in prevailing DC rates by obtaining provisional permission before the next revision date - either March 1 or Sept 1. Hence, yesterday's announcement took them by surprise.

A mid-sized developer who recently bought a site in the eastern part of Singapore where the DC quantum was $4 million will now end up paying $5.6 million. He paid the owners of the en bloc site $15 million. 'My land cost has just gone up by 8 per cent. In terms of unit land cost, the additional $1.6 million DC works out to $25 psf of potential gross floor area, which is not a small amount for a project in a suburban location,' he said. 'It's unfair to those who have paid the deposit for a site and who are suddenly slapped with a 40 per cent increase in DC cost.'

Credo Real Estate managing director Karamjit Singh said that the impact of yesterday's announcement will be felt most by developers that have bought sites in the last month or so and have not obtained provisional permission. On-going negotiations of en bloc sales with big DC components could be affected, he added.

Knight Frank managing director Tan Tiong Cheng said that in the majority of collective sales these days, the DC component makes up just 5-10 per cent of total land value.

But for some sites, the DC component could touch 15-30 per cent of total land value and such sites would be clearly hit by the hike. Among them are many 99-year leasehold sites such as privatised HUDC sites, currently a hotbed for en bloc sales.

The extra charge will have to be paid either by the buyers, sellers or developers - and this might depend on how highly sought after the site was.

'For prime sites, developers may just take the higher DC cost in their stride as it may be justified by the still positive outlook,' Mr Singh said.

However, market watchers reckon that for less sought-after sites, owners may have to take the biggest hit by settling on a lower price.

The Singapore Properties Equities Index fell 43 points or 2.7 per cent yesterday.