reporter2
19-09-13, 12:15
http://www.businesstimes.com.sg/specials/property/debunking-wrong-ideas-about-dc-rates-20130919
Published September 19, 2013
COMMENTARY
Debunking wrong ideas about DC rates
The idea of the government using such rates to effect a particular outcome in the market is ill-conceived
By lee hon kiun
THERE has been extensive media coverage on the bi-annual revision of development charge (DC) rates, the most recent of which took effect on Aug 31
this year. At first glance, the headline percentage increase of DC rates, such as the 15.4 per cent average hike for industrial use DC rates, seems exorbitant. But what is the real impact of these DC rate increases on the overall property market?
I hope to shed some light on DC rates, a subject that is often misunderstood by many. DC is a tax on the enhancement in land value as a result of the state approving a higher value development proposal, which is quite often a result of a change of use and/or increase in plot ratio. DC is computed based on the difference between development ceiling and development baseline. No DC is payable if the difference is negative. The value of development ceiling is based on the approved development. To determine the value of development baseline is much more complicated. One has to compare the provisions in the 1958, 1980 and 2003 Master Plans as well as the previously approved development in accordance with certain principles as laid out in the Planning Act.
DC rates apply mostly to development sites whose potential has not been fully realised. Strata units, such as apartment or commercial units, are generally not affected by DC rates, unless such units can be converted to other use of higher value which is very rare. Houses and Good Class Bungalow(GCB) sites bought for redevelopment will also not be affected by DC rates.
Administrative and technical exercise
DC rates are reviewed every six months and the new rates take effect every March 1 and Sept 1. The revision, as required by law, is merely an administrative and technical exercise to peg the rates according to movement of land value of the preceding six-month period. It serves nothing more than the sole purpose of computing DC.
Under the current planning system, any development initiative on private land is entirely at the discretion of the landowner and developer. The Urban Redevelopment Authority (URA) only processes the planning application as and when it is submitted. It does not actively go out to seek a planning application on any particular site to encourage development.
DC is also not a factor in evaluating a development proposal. Whether DC is payable for a particular development or not is determined only after a planning approval has been granted. Furthermore, not every planning approval granted will result in enhancement in land value, even though re-zoning might be involved. Hence, the number of cases (except bonus balcony on residential projects) that are subject to DC could be very limited.
Sharing enhanced land value
Given its limited scope, it is doubtful that DC rates can be effectively used as a policy tool to influence the market - contrary to suggestions in some quarters that rate hikes or declines for specific use groups could be intended as a tool to direct the flow of money into or out of certain segments of the property market.
The DC system is based on the principle of sharing of enhanced land value. Since July 18, 2007, DC rates have been pegged at 70 per cent of land value. The remaining 30 per cent is free to give the owner an incentive to undertake development work. DC rates are specified according to use groups across 118 geographical sectors in Singapore. Hence the DC rate is an average value within a geographical sector. Therefore, in theory, DC rates are "30 per cent discounted average market land value" of a geographical sector. They are revised based on actual land transactions of the preceding six months and are applicable for developments which will be granted provisional permission for the coming six months. The DC rates reflect the past trend of land values which has no bearing on the current and future market directions.
The current DC system allows developers to "hedge" against any DC rates increase. This is because the material date of determining DC is based on the date of provisional permission (PP) and that material date will remain valid if there is no more than two extensions of PP. Each extension of PP is valid for six months.
Developers will only be affected by the DC rates revision if there is insufficient time between committing to the site purchase and the DC review date to secure the PP. Once PP is secured before the review dates, the prevailing DC rates are locked in for 12 months. Hence, if a developer knows how to manage it, any increase in DC rates would not normally affect a project's development cost.
In the case of declining DC rates where the saving is significant, developers could let the PP lapse and resubmit under the same development scheme for a new PP to enjoy the saving. Even if they are caught by the increase in DC rates, the impact is insignificant in most cases as the DC component usually constitutes only a few per cent of the total development costs. For example, the DC component of $4.366 million is only 3.1 per cent of the overall land cost for Yi Mei Garden at Tampines Road, which was recently sold for $136 million.
An increase in DC rates is not always negative. In the latest revision, industrial use DC rates went up by an average of 15.4 per cent, the highest among all use groups.
Nevertheless, the increase in industrial DC rates has hardly any effect on the industrial market. This is because most private freehold industrial lands would have a plot ratio of 2.5 as their development baseline (except Mandai Industrial Estate) and they are not allowed to be developed above this plot ratio (and in some cases, they are allowed to be developed only up to a 2.0 plot ratio).
On the other hand, the increase in DC rates will benefit those industrial sites that are allowed a change of use, as their development baseline value would now be higher. For example, in the Balestier/Jalan Ampas area, where industrial properties are allowed a change to residential use, there is a DC saving amounting to $26 per square foot on the residential gross floor area (GFA). This is because the industrial DC rate there was raised by 27 per cent while the residential B2 rate remains unchanged.
DC rates have no relevance to sub-divided Good Class Bungalow (GCB) sites. This is because the plot ratio for most GCB land is at least 0.7. With a minimum plot size of 1,400 square metres, each GCB can therefore be built up to a GFA of 980 sq m without having to pay DC. This GFA quantum is more than enough for one GCB.
For other forms of landed housing, owners are also exempted from paying DC if the construction of a single dwelling house, no matter how big the GFA of the new house is, is to replace an existing house which is to be demolished.
A form of tax
Many people grumble about having to pay DC to the state for the development of a particular site. Having to pay DC for a particular development is not actually a bad thing. The fact that a site attracts DC means its land value has been enhanced as a result of planning approval. Comparing two sites with the same planning approvals, one with and the other without DC, there are some benefits for developers to buy the site that is subject to DC payment.
DC is treated as a form of tax and hence there is no stamp duty payable on it. DC is also due for payment six to 12 months later after PP is issued. Hence, the site that is subject to DC will enjoy savings on stamp duty as well as interests on loan compared to similar sites where full land cost is paid upfront.
URA does not compel a land owner to develop his or her land up to the full potential allowed by the Master Plan so as to levy the DC. In other words, DC is entirely discretionary and it is up to the landowner to decide when and what quantum of floor area to build on his or her land. A landowner willing to pay DC for a proposed development would have enjoyed some value enhancement on his or her property.
A common perception that any DC rate increase will push business costs higher and severely affect developers' bottom lines is not entirely true. A few years ago, many property counters on the local bourse were badly hit the day after a substantial increase in DC rates was announced. Such overreaction reflects the general public's poor understanding of how the development charge system works and the effect of the DC rates.
In short, DC rates should be treated as nothing more than figures to be used in computing DC. The idea of the government using DC rates to effect a particular outcome in the property market in general or for the collective sales market in particular is ill-conceived.
The writer is director of Landmark Property Advisers Pte Ltd
Published September 19, 2013
COMMENTARY
Debunking wrong ideas about DC rates
The idea of the government using such rates to effect a particular outcome in the market is ill-conceived
By lee hon kiun
THERE has been extensive media coverage on the bi-annual revision of development charge (DC) rates, the most recent of which took effect on Aug 31
this year. At first glance, the headline percentage increase of DC rates, such as the 15.4 per cent average hike for industrial use DC rates, seems exorbitant. But what is the real impact of these DC rate increases on the overall property market?
I hope to shed some light on DC rates, a subject that is often misunderstood by many. DC is a tax on the enhancement in land value as a result of the state approving a higher value development proposal, which is quite often a result of a change of use and/or increase in plot ratio. DC is computed based on the difference between development ceiling and development baseline. No DC is payable if the difference is negative. The value of development ceiling is based on the approved development. To determine the value of development baseline is much more complicated. One has to compare the provisions in the 1958, 1980 and 2003 Master Plans as well as the previously approved development in accordance with certain principles as laid out in the Planning Act.
DC rates apply mostly to development sites whose potential has not been fully realised. Strata units, such as apartment or commercial units, are generally not affected by DC rates, unless such units can be converted to other use of higher value which is very rare. Houses and Good Class Bungalow(GCB) sites bought for redevelopment will also not be affected by DC rates.
Administrative and technical exercise
DC rates are reviewed every six months and the new rates take effect every March 1 and Sept 1. The revision, as required by law, is merely an administrative and technical exercise to peg the rates according to movement of land value of the preceding six-month period. It serves nothing more than the sole purpose of computing DC.
Under the current planning system, any development initiative on private land is entirely at the discretion of the landowner and developer. The Urban Redevelopment Authority (URA) only processes the planning application as and when it is submitted. It does not actively go out to seek a planning application on any particular site to encourage development.
DC is also not a factor in evaluating a development proposal. Whether DC is payable for a particular development or not is determined only after a planning approval has been granted. Furthermore, not every planning approval granted will result in enhancement in land value, even though re-zoning might be involved. Hence, the number of cases (except bonus balcony on residential projects) that are subject to DC could be very limited.
Sharing enhanced land value
Given its limited scope, it is doubtful that DC rates can be effectively used as a policy tool to influence the market - contrary to suggestions in some quarters that rate hikes or declines for specific use groups could be intended as a tool to direct the flow of money into or out of certain segments of the property market.
The DC system is based on the principle of sharing of enhanced land value. Since July 18, 2007, DC rates have been pegged at 70 per cent of land value. The remaining 30 per cent is free to give the owner an incentive to undertake development work. DC rates are specified according to use groups across 118 geographical sectors in Singapore. Hence the DC rate is an average value within a geographical sector. Therefore, in theory, DC rates are "30 per cent discounted average market land value" of a geographical sector. They are revised based on actual land transactions of the preceding six months and are applicable for developments which will be granted provisional permission for the coming six months. The DC rates reflect the past trend of land values which has no bearing on the current and future market directions.
The current DC system allows developers to "hedge" against any DC rates increase. This is because the material date of determining DC is based on the date of provisional permission (PP) and that material date will remain valid if there is no more than two extensions of PP. Each extension of PP is valid for six months.
Developers will only be affected by the DC rates revision if there is insufficient time between committing to the site purchase and the DC review date to secure the PP. Once PP is secured before the review dates, the prevailing DC rates are locked in for 12 months. Hence, if a developer knows how to manage it, any increase in DC rates would not normally affect a project's development cost.
In the case of declining DC rates where the saving is significant, developers could let the PP lapse and resubmit under the same development scheme for a new PP to enjoy the saving. Even if they are caught by the increase in DC rates, the impact is insignificant in most cases as the DC component usually constitutes only a few per cent of the total development costs. For example, the DC component of $4.366 million is only 3.1 per cent of the overall land cost for Yi Mei Garden at Tampines Road, which was recently sold for $136 million.
An increase in DC rates is not always negative. In the latest revision, industrial use DC rates went up by an average of 15.4 per cent, the highest among all use groups.
Nevertheless, the increase in industrial DC rates has hardly any effect on the industrial market. This is because most private freehold industrial lands would have a plot ratio of 2.5 as their development baseline (except Mandai Industrial Estate) and they are not allowed to be developed above this plot ratio (and in some cases, they are allowed to be developed only up to a 2.0 plot ratio).
On the other hand, the increase in DC rates will benefit those industrial sites that are allowed a change of use, as their development baseline value would now be higher. For example, in the Balestier/Jalan Ampas area, where industrial properties are allowed a change to residential use, there is a DC saving amounting to $26 per square foot on the residential gross floor area (GFA). This is because the industrial DC rate there was raised by 27 per cent while the residential B2 rate remains unchanged.
DC rates have no relevance to sub-divided Good Class Bungalow (GCB) sites. This is because the plot ratio for most GCB land is at least 0.7. With a minimum plot size of 1,400 square metres, each GCB can therefore be built up to a GFA of 980 sq m without having to pay DC. This GFA quantum is more than enough for one GCB.
For other forms of landed housing, owners are also exempted from paying DC if the construction of a single dwelling house, no matter how big the GFA of the new house is, is to replace an existing house which is to be demolished.
A form of tax
Many people grumble about having to pay DC to the state for the development of a particular site. Having to pay DC for a particular development is not actually a bad thing. The fact that a site attracts DC means its land value has been enhanced as a result of planning approval. Comparing two sites with the same planning approvals, one with and the other without DC, there are some benefits for developers to buy the site that is subject to DC payment.
DC is treated as a form of tax and hence there is no stamp duty payable on it. DC is also due for payment six to 12 months later after PP is issued. Hence, the site that is subject to DC will enjoy savings on stamp duty as well as interests on loan compared to similar sites where full land cost is paid upfront.
URA does not compel a land owner to develop his or her land up to the full potential allowed by the Master Plan so as to levy the DC. In other words, DC is entirely discretionary and it is up to the landowner to decide when and what quantum of floor area to build on his or her land. A landowner willing to pay DC for a proposed development would have enjoyed some value enhancement on his or her property.
A common perception that any DC rate increase will push business costs higher and severely affect developers' bottom lines is not entirely true. A few years ago, many property counters on the local bourse were badly hit the day after a substantial increase in DC rates was announced. Such overreaction reflects the general public's poor understanding of how the development charge system works and the effect of the DC rates.
In short, DC rates should be treated as nothing more than figures to be used in computing DC. The idea of the government using DC rates to effect a particular outcome in the property market in general or for the collective sales market in particular is ill-conceived.
The writer is director of Landmark Property Advisers Pte Ltd