DC Rates May Be Cut In Unforgiving Market

Source : The Business Times, February 12, 2009

One hot discussion topic is whether govt will revert to 50% formula for DC calculation in face of recession

Property consultants expect the government to make bigger cuts of up to 20 per cent in development charges (DC) for the upcoming revision effective March 1. And some observers say the authorities may even lower the proportion of the enhancement in land value that goes to the state.



















The bigger cuts in DC, which is payable for enhancing the use of some sites, may come despite a dearth of land transactions.

This is because there is sufficient evidence that prices and rentals have fallen for condos, offices and industrial properties - a trend that points to lower land values.

Explaining the residual land valuation method, Knight Frank managing director Tan Tiong Cheng says: "Condo prices have come down; that can be measured quite accurately. On the other hand, construction costs have eased at a more modest rate. This implies land values have fallen more than sale prices of apartments."

Property analysts say another challenge ahead for Chief Valuer would be to make an accurate assessment of property market conditions for the next six months for which the upcoming DC rates would remain applicable.

Development charges must be paid for enhancing the use of some sites or building bigger projects on them. DC rates are revised twice yearly, on March 1 and Sept 1, by the Ministry of National Development (MND), in consultation with the Chief Valuer. They are specified according to use groups (such as landed residential, non-landed residential and commercial) across 118 geographical sectors or locations across Singapore. DTZ senior director (research) Chua Chor Hoon said: "We expect average DC rates for all major use groups to decline come March 1. Commercial and non-landed residential DC rates are likely to fall more, as prices and rents of these two major categories of properties have fallen more than the rest."

Jones Lang LaSalle's associate director (research and consultancy) Desmond Sim predicts average DC rate cuts of about 20 per cent for landed and non-landed residential uses as well as for commercial use, and a 5 to 10 per cent reduction for industrial use. "For non-landed residential use, more downward pressure can be expected for high-end locations," he added

Colliers International forecasts average chops of 15 to 20 per cent for non-landed residential use, 10-12 per cent for commercial, 5-8 per cent for industrial, and up to 5 per cent for landed residential and hotel uses. Forecasts by both houses assume there is no reinstatement of DC formula to 50 per cent of enhancement in land value.

Colliers says the biggest drops in non-landed residential DC rates of up to 25 per cent will be in luxury residential enclaves such as Ardmore Park, Orchard, Cairnhill, Tanglin and Cuscaden as well as on Sentosa Cove due to a steeper fall in values of luxury homes. Colliers director (research and consultancy) Tay Huey Ying suggests the biggest chops in commercial DC rates could be in outlying locations rather than in the CBD, arguing that spillover office demand to outside- CBD areas has cooled considerably lately, due to ample new supply of offices in the CBD.

For industrial DC rates, Ms Tay reckons the largest cuts of up to 12 per cent may be seen in places like Jurong Industrial Estate, Mandai, Kranji and Woodlands based on the fact that some of these locations saw the biggest downward adjustments of about 10 per cent in JTC Corp's land prices recently.

A hot topic of discussion surrounding DC is whether the government will revert to the previous formula of calculating DC rates which creamed off 50 per cent of the enhancement in land value (instead of 70 per cent, since a rule change in July 2007 during the property bull run). Many consultants are making the case for reinstating the previous 50 per cent formula, though some are not holding their breaths for a change just yet.

"If they make a change now, it may be seen as a knee-jerk reaction. The change could eventually still come, but perhaps one or two revisions later," said Jones Lang LaSalle's Mr Sim.

Colliers' Ms Tay argues for an immediate restoration of the 50 per cent formula. She said that prior to 1985, DC rates had also been on the 70 per cent formula until they were cut to 50 per cent during the recession that year. She said: "If in 1985, they deemed it fit to cut the DC rate to 50 per cent because of the recession, they should do the same now because we're going through our worst recession.

"In any case, sharing the appreciation in land value equally between government and private land owner is a fairer policy since the latter must be given sufficient incentive to bear the risk of development to encourage him to optimise scarce land resources."

During the last DC rate revision effective Sept 1, 2008, MND left DC rates largely unchanged, except for an average 6.3 per cent cut for non-landed residential use.

At the time, property consultants said there may not be sufficient evidence yet of declines in property values, and that rates could be cut at the next revision if stronger evidence emerges of falling values.

The last revision also saw MND change boundaries for eight geographical sectors in three precincts - the Race Course Road area, Jurong Lakeside area and Pulau Brani.