Published August 6, 2008

Tough calls in next property DC revision

Recent land sales point to cuts, but some disagree


(SINGAPORE) The next revision of property development charge rates is barely a month away. So what can the market expect?

Recently a few 99-year leasehold condo sites at Woodleigh, West Coast and Choa Chu Kang were sold at prices below land values implied by current development charge (DC) rates, and this could provide evidence for a downward revision in DC rates come Sept 1.

But some property market watchers suggest that the government may leave DC rates largely unchanged for most use groups.

Any drastic cut in DC rates at this point may be seen as the government taking a bearish view on the Singapore property market and lead to a further nosedive in sentiment.

DC rates are payable for enhancing a site's use or for building a bigger project on it. They are revised twice a year - on March 1 and Sept 1 - and are specified according to use groups and location. The revisions are made by the National Development Ministry in consultation with the Chief Valuer, who takes into account current market values.

In June, a condo plot at Woodleigh Close was sold at a state land tender for $270 psf per plot ratio. This is 43 per cent below the land value implied by the March 1, 2008, DC rate for non-landed residential use for that location. Two sites at West Coast Crescent and Choa Chu Kang Drive were also sold in March and May at $305 psf ppr and $203 psf ppr, 24 per cent below the respective land value implied by current DC rates.

However, Jones Lang LaSalle's S-E Asia research head Chua Yang Liang argued that these instances are 'not statistically significant' compared to the entire market activity over the past six months and that neither a drop nor rise in DC rates is warranted.

Even in Woodleigh, West Coast and Choa Chu Kang where there is land sales evidence to justify a reduction in DC rates, the cuts are likely to be moderate, 'possibly not more than 10 per cent as the accompanying message of a downward revision in DC rate is likely to cause a further dive in market confidence', said Colliers International director of research and advisory Tay Huey Ying.

Agreeing, JLL's Dr Chua said: 'This round of DC revision is being watched closely by developers and other property players as it may provide a hint of the state's view/confidence in the property market over the next nine to 12 months.'

DTZ executive director Ong Choon Fah, too, reckons that 'where there is compelling evidence, they may trim DC rates. But where the evidence is not strong, they may say it's an aberration and keep DC rates (unchanged) for six months before the next review'.

Another property consultant takes a different view as to why there may be no rush to reduce DC rates: 'DC rates are a revenue-generating tool. They tend to go up quickly, but usually tend to come down more slowly.'

The government may also be reluctant to trim DC rates just yet as that may be read as a proxy for its assessment of land values, and could in turn create pressure for the state to accept lower land bids at state tenders in coming months. 'That's not too good for the coffers,' an analyst quipped.

Offering a contrarian view, Knight Frank managing director Tan Tiong Cheng predicts DC rates will fall. 'Selling prices of private homes have either stagnated or are slowly declining while construction costs are going up, so land values have come down, as seen in recent government land tender results.'

Mr Tan also disagreed with the view that any cut in DC rates would be confined to locations with sales evidence of low land prices. 'After all, the Chief Valuer does not take into account just land sales but the property market in general,' he reasoned.

He does not think that any drastic cuts in DC rates will send the wrong signal to the market and further depress sentiment. 'The Chief Valuer has a duty to keep the public informed of reality,' he said.

Colliers expects average DC rates to stay unchanged come Sept 1 for landed residential, commercial, industrial and hotel use but to be cut 0.5 to 1.5 per cent for non-landed residential use.

DTZ forecasts that average DC rates will generally remain unchanged except for industrial use, which may see an increase of a few per cent. For non-landed residential use, some areas in the prime districts may see a slight decrease in DC rates on the back of softer home prices in these locations.

JLL, too, expects DC rates for all use groups except industrial to remain flat. 'A rise in industrial DC rates can be attributed to rising demand for cheaper office alternatives.'

Putting things into perspective, CB Richard Ellis executive director Jeremy Lake said: 'Previously, DC rates were eagerly watched to gauge the impact on land values especially for collective sale sites with a significant DC component.

'The collective sales market is so quiet now. There have been no private residential sites sold recently that will have exposure to DC. Most developers that have sites with DC exposure would already have locked in DC rates. And if they haven't, they'll find that DC rates probably won't change much.'