DC Rates Poised To Change Amid Churn

Source : The Business Times, August 20, 2009

Commercial DC rates may dip while rates for landed homes may go up in some areas

With revisions to development charges (DC) due on Sept 1, some property pundits say that the Chief Valuer (CV) may have a challenge on her hands, given the shift in the direction of the residential property market.

Balancing act: In revising the DC, how much weight should be placed on the current market sentiment?

'Chief valuer employs historical data to revise DC rates that will be applied over the next six months. But these historical transactions may be too far off from the market conditions in the next half year,' says JLL's head of SE Asia research Chua Yang Liang. 'In short, the CV has the difficult task of balancing past decline and future growth. The key question is: How much weight should she place on the current market sentiment?'

Agreeing, Colliers International director Tay Huey Ying says: 'The main challenge facing the CV in assessing DC rates this round would be to assess accurately the conditions of the various sectors of the property market for the next six months.' And while the economic outlook remains clouded, the residential market is showing signs of recovery.











DC rates, payable for enhancing or intensifying the use of some sites, are tracked in property circles as they reflect land values. The rates - revised on March 1 and Sept 1 every year - are specified according to use groups across 118 geographical sectors. They are also significant because they are an indication of government's reading of land values.

Most market watchers feel that commercial DC rates will ease as office market fundamentals are still weak. Credo Real Estate managing director Karamjit Singh reckons that commercial DC rates in the CBD may decline about 10-15 per cent.

CB Richard Ellis executive director Li Hiaw Ho is predicting a marginal decline while JLL's Dr Chua expects a reduction of around 10 per cent mainly in the CBD core areas where prime office capital values have corrected some 38 per cent from the peak in Q2 2008 - while DC rates have fallen much less.

Colliers's Ms Tay expects a drop of up to 5 per cent in the average commercial DC rate.

Ms Tay suggests industrial DC rates will stay largely unchanged despite the bullish bids received for a site in Kaki Bukit at a recent state tender, as the manufacturing sector outlook remains uncertain.

CBRE predicts selective increases in rates for landed residential use in prime areas, citing a surge in Good Class Bungalow deals in Q2. This may marginally push up the overall average DC rate for this use group.

But the rates for non-landed residential use could remain largely unchanged until the economic condition becomes clearer, says Colliers' Ms Tay.

JLL's Dr Chua suggests a 0 to -10 per cent change in non-landed residential DC rates, with the maximum cut mainly in Districts 1 to 4 (including the financial district and Sentosa). There's room for further DC cuts as median prices for transactions in completed projects in these locations have fallen an estimated 40 per cent from the Q4 2007 peak to Q4 2008, while DC rates fell relatively less.

When the collective sales market was active, non-landed residential DC rates were keenly watched as some sites had a considerable DC component payable to the state to build a bigger project on the site. Things are different now as most en bloc sale projects are in their early stages. The next DC revision will be more significant to en bloc sellers as they approach their marketing phase, says Credo's Mr Singh.

Another discussion topic on DC rates is whether the Ministry of National Development (MND) will revert to the pre-July 2007 DC calculation formula which creams off 50 per cent of the enhancement in land value instead of 70 per cent currently.

'We feel MND should consider reverting back to 50 per cent. We believe the 50 per cent formula is principally equitable and had worked well for 22 years before 2007. Under this arrangement, the state and developers co-share the upside when a property's potential is maximised,' says Mr Singh.

However, others are not holding their breath for MND to make the change just yet. 'With the revision enforced only in July 2007 as well as recent improved sentiment in the real estate market, we do not expect any major changes to the DC formula,' says Dr Chua.

Agreeing, Colliers' Ms Tay says: 'Market conditions for assessing DC rates were likely to have been at their worst for the March 2009 review exercise. Yet the government did not revert to the previous DC formula.

'In view of the fact that some segments of the property market are showing nascent signs of recovery, it will be even more unlikely government will see it necessary now to revert to the previous DC formula,' she said.