High hotel DC rates threaten to throw a spanner in the works for CBD Incentive Scheme

Fri, Dec 13, 2019


ON March 27 this year, the Urban Redevelopment Authority (URA) unveiled the CBD Incentive Scheme, offering 25 or 30 per cent additional gross floor area (GFA) to motivate owners of older, predominantly office buildings in some parts of the Central Business District (CBD) to redevelop their properties to mixed-use projects.

The scheme aims to promote a wider diversity of uses - including having more residences and hotels - to liven up the CBD in the evenings and on weekends. It took effect from Nov 27, with the gazetting of URA's Master Plan 2019.

The announcement of the scheme has generated some excitement in the market. Some observers have commented on its potential positive impact on listed landlords including Perennial Real Estate Holdings (for AXA Tower, which it owns jointly with Low Keng Huat and other partners); and on City Developments (for Fuji Xerox Towers and City House). Keppel Land would also qualify for the scheme for its two office towers in Hoe Chiang Road.

Fragrance Group has stated that it plans to apply for the scheme in connection with its plans to redevelop Tower 15, which is also along Hoe Chiang Road. The group has already received URA's written permission to redevelop this asset into 807 hotel rooms, with carparks and other facilities - with a maximum GFA of 248,483 square feet. The GFA could be raised by another 25 per cent if Fragrance obtains approval under the CBD Incentive Scheme.

Even before the scheme's introduction, some owners of old CBD office properties had already been evaluating plans to rejuvenate their assets.

For those whose buildings face the proposed Greater Southern Waterfront district, plans for the area announced by the government in August have provided additional impetus to look into how best to redevelop their assets.

The CBD Incentive Scheme seems to provide the icing on the cake. Ironically, the potential party pooper to the scheme are the government's own high development charge (DC) rates for hotel use, say industry players.

DC is payable to the state in exchange for the right to enhance the use of some sites or to build bigger projects on them. DC rates are revised twice each year, on March 1 and Sept 1.

On March 1 this year, about a month before the CBD Incentive Scheme was announced, DC rates for the use group that includes hotels were jacked up by 45.6 per cent on average.

The new rates marked the sharpest increase in DC rates for the hotel use group in 20 years and followed the 11.8 per cent increase in the previous DC rate revision six months earlier.

Property consultants attributed the March 1, 2019 hike to the slew of hotel land deals last year and earlier this year - such as Golden Wall Centre, Waterloo Apartments (bought with the intention of conversion to hotel use) and a plum hotel development site in Club Street sold at a state tender.

Analysts noted that the above three properties were transacted at significant premiums - ranging from 67 per cent to 118 per cent - to their respective land values implied by the then-prevailing Sept 1, 2018 DC rates for hotel use in the locations.

This and other evidence of land sales must have looked compelling enough for the taxman's Chief Valuer (CV), to decide on the steep DC rate hike for hotel use. (The Ministry of National Development revises DC rates in consultation with the CV; the rates are based on the CV's assessment of land values and take into consideration recent land sales.)

In the latest DC rate revision effective Sept 1, 2019, the rates for hotel use were left untouched. As things stand, DC rates for hotel use for most of the city area, including the areas earmarked for the CBD Incentive Scheme, are the highest among all use groups, surpassing those for commercial and residential uses.

As a result, the current high DC rates for hotel use may cream off a significant portion of the enhancement in land value from conversion to hotel - and owners of old office blocks may find that it does not make financial sense to redevelop them into hotels.

Sure, they could still go ahead with a commercial and residential project, or one that is residential with commercial on first storey in order to qualify for the CBD Incentive Scheme and tap the additional GFA.

However, having a sizeable residential component in a CBD project may be risky these days as it would have to compete for buyers with the already substantial pipeline of private housing projects. In the current climate, there may not be sufficient depth of demand for CBD apartment launches.

"The absolute price point is likely to be beyond the affordability of most Singaporean families. Most foreign buyers are likely to be put off by the 20 per cent additional buyer's stamp duty," said a seasoned property consultant.

On the other hand, having a hotel with restaurants and entertainment offerings would provide the X factor or unique selling point for a developer marketing apartments for sale within the same project.

Well-heeled buyers, especially foreigners, may also find it appealing if they can avail themselves of concierge, housekeeping, dining and other services from the hotel, particularly if it is a luxe brand.

Furthermore, a hotel would enable the developer to have a source of recurring income. Developing a residential project only yields a one-time gain because the units will be sold.

"However, before it can become viable to embark on hotel developments where DC payment is required, DC rates for hotel use would have to ease very significantly," stressed the seasoned property consultant. From a development viewpoint, it may be more feasible to clinch a hotel site at a state tender, for which no DC is payable, he added.