Residential development charge rates raised to 22.8%

The government lifted rates after the frenzied biddings for development sites both in the collective sales as well as GLS market.

The Ministry of National Development raised the development charge (DC) rates applicable for the period from 1 March to 31 August 2018 for the commercial and non-landed residential use groups have been revised upwards by 2.7% and 22.8%, respectively, whilst those for the remaining use groups have remained unchanged.

The DC is a tax that is levied when planning permission is granted to carry out development projects that increase the value of the land.

JLL Singapore head of research & consultancy Tay Huey Ying said, "This is in keeping with the current state of Singapore’s property market characterised by the strong upswing in the office leasing and investment sales markets, as well as soaring residential land prices amid frenzied biddings by land-starved developers looking to replenish land banks as their unsold inventory fell to record low on the back of the strong rebound in buying demand."

The steep increase of 22.8% in the average DC rates for the non-landed residential use group is in keeping with the frenzied biddings by developers for development sites both in the collective sales as well as GLS market.

JLL noted that 27 pure residential collective sale were concluded during the review period between September 2017 and February 2018. This is significantly higher than the seven pure residential collective sales concluded in the preceding six months to end August 2017. Moreover, majority of transaction prices achieved for non-landed residential development/redevelopment sites consistently exceeded their corresponding implied land values derived from the September 2017 DC rates and these ranged from 2% to 111%.

Tay noted that in DC Sectors 19, 23 and 34 where the DC rates for the non-landed residential use group saw the steepest increase of 38%. "JLL’s analysis showed that development land were transacted at an average of 61% above their land values imputed from their September 2017 DC rates. Specifically, the top bid of $1,733 per sq ft per plot ratio received for the Jiak Kim Street GLS site in DC Sector 19 zoned Residential with Commercial at first storey, was 62% above the land value implied from the September 2017 DC rate. We recognised that this premium which was computed in comparison with pure residential DC rate would have received a slight boost from the site’s commercial use on the first storey. In DC Sectors 23 and 34 where the Handy Road residential GLS sites straddles across, the top bid of $1,722 per sq ft per plot ratio was 61% above the implied land value," she added.

JLL forecasted that the steep increase in the DC rates for the non-landed residential use group is unlikely to derail the collective sales market as many developers have secured only one site or none at all and there will still be demand for sites at this early stage of recovery. "Nonetheless, the sharp increase in DC rates could widen the buyer and seller price expectations for sites that attract significant development charge levy and this could lead to more sites experiencing protracted sales period," Tay said.

Meanwhile, office DC rates saw the fourth consecutive round of increases. JLL cited the keen bidding seen for the Beach Road commercial Government Land Sales (GLS) site in September 2017, with the top bid of $1,706 per sq ft per plot ratio exceeding the $1,689 per sq ft per plot ratio IOI Properties paid for the prime CBD plot at Central Boulevard in November 2016. The $1,706 per sq ft per plot ratio (for DC Sector 3) is also 20% above its implied land value based on the Sep 2017 DC rate.

Tay noted that CBD Grade A office rents posted a second consecutive quarter of strong growth of 4.2% QoQ in Q4 2017, bringing the total recovery to 9.4% from the bottom in Q1 2017 by the end of 2017. "With occupier demand expected to stay buoyed by prospects of steady economic growth, and pipeline en bloc supply tapering sharply to a standstill by 2019, office market fundamentals are looking supportive for Grade A CBD rents continuing to trend up in the short to medium-term," she added.

The DC rates for landed residential and industrial use groups have been kept unchanged.

"The lack of development land transactional evidences during the period of review, coupled with the mere 1.7% improvement in URA’s price index in 2H 2017 for the landed residential properties had likely influenced the Chief Valuer to leave the DC rates of the landed residential use group unchanged," Tay said.

The DC rates for the industrial use group have been left unchanged in spite of the sharp and sustained rebound in manufacturing and trade activities as the industrial property market remained in a supply overhang condition although this is likely to ease in the coming months given moderating supply and improving demand. "Additionally, the Chief Valuer had likely also taken into considerations the recent lacklustre demand seen for industrial GLS (IGLS) that resulted in JTC’s non-award of four plots of land during the September 2017 to February 2018 period owing largely to low bid prices or non-compliance with tender conditions. These were the sites at Woodlands Industrial Park E2/E5, Jalan Lam Huat (Plot B), Tampines North Drive 3 (Plot 2) and Tuas South Link 3 (Plot 27)," she added.