Tuesday, September 2, 2008

Part Of Lease Extension Levy Waived

Source : The Straits Times, Sep 2, 2008

Building premium waiver will boost upkeep of ageing property

A LEVY that property owners had to pay the Government when they extended a lease on state land has been axed.

The so-called 'building premium' is being waived with immediate effect, said the Law Ministry yesterday.

The move gets rid of a potential hindrance to owners keen to upkeep, improve or redevelop an ageing property nearing the end of its lease.

It will help owners of industrial land, which tends to have shorter leases, and conservation properties but will have little effect on residential sites.

The Government has been charging both a land premium and a building premium when extending a lease.

'The charging of these premiums was based on the common law principle that both land and buildings would revert to the landlord at the end of the lease,' said a statement from the Law Ministry.

In the past, the Chief Valuer, who decides the premiums, had computed the building premium, if applicable, into the land premium. This made it unclear how much of the building premium makes up the land premium.

It is understood that only owners of a handful of sites, including industrial properties and conservation shophouses, have had to pay the building premium upon lease extension.

In general, the Government's policy is still to allow leases to expire without extension because it needs to reallocate land to meet fast-changing socio-economic needs. It will consider lease extensions only on a case-by-case basis.

Industrial properties are likely to benefit more from the levy waiver. Residential en bloc sites are not affected. Under redevelopment, the estate sold en bloc is torn down so no building charge is payable even if the site's 99-year lease is extended.

There is no building premium payable when leases are renewed on vacant land.

Yesterday's move is not entirely new. In 1997, the Government waived the building premium for short-term or 30-year-old industrial and institutional leases on the recommendation of the Committee on Singapore's Competitiveness, said the Law Ministry.

The latest waiver applies to all types of land, including longer industrial leases and residential properties.

It said the decision was made to encourage 'lessees to continue to invest in the upkeep and improvement of the property' when a lease extension is granted.

Previously, if an owner was granted a lease extension, he could opt not to redevelop the property if there was only a few years left on the lease.

He would be able to avoid paying a building premium if he let the lease run out and redeveloped the property only when the new lease started.

The waiver will give the owner no reason to hold back on redevelopment plans.

The waiver will please some owners of conservation shophouses, said Knight Frank's director of research and consultancy, Mr Nicholas Mak.

Rising construction costs could make it worthwhile for some owners to upkeep their buildings instead of tearing them down for redevelopment, he said.

Overall, waiving the building premium is expected to affect only a small group of owners, market watchers say.

'It's about urban renewal but in Singapore, the strategy is to demolish and rebuild,' said Mr Mak. Also, market watchers say most buildings are not built to last forever, particularly those on leasehold sites.

'Properties generally become obsolete after 30 years,' he said. 'Factories, for instance, may become obsolete within a shorter period because of changing technology and changing manufacturers' needs.'

The question of lease renewal will be a big issue nearer to 2070, when most of the leases on Singapore's 99-year leasehold land will expire, Mr Mak added.

Waiver aimed at lessees of state land

# What is a building premium?

It is a charge payable by an owner when he extends the lease on state land.

The amount is determined by the chief valuer but not disclosed as it is computed into the land premium.

The premium is calculated based on the building's condition. Lessees tended to let properties run down until the leases expire in the hope of paying less when they extend their lease.

# Why waive it?

It is to encourage lessees to continue to invest in the upkeep and improvement of a property when a lease extension is granted so they will not let the site run down.

If a building premium is payable, lessees will not be motivated to upkeep, improve or redevelop a property.

It is not meant as an incentive but rather removes a factor that may have discouraged improvement work.

# What's the impact?

The waiver is expected to have minimal impact as few people will be affected, although lessees of long-term industrial land are among those likely to benefit.

In general, the Government will allow leases to expire without extension. It will consider lease extensions on a case-by-case basis. For instance, it may allow extensions for conservation properties to give as incentive for lessees to carry out major conservation works.

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