Steepest DC rate hikes for hotel, commercial uses; biggest fall in three years for residential non-landed

/ EdgeProp Singapore |

February 28, 2019 11:57 PM SGT

The Ministry of National Development (MND) has released the revised development charge (DC) rates for the redevelopment of land for the six months from March 1 to Aug 31, 2019.

DC rates, which are revised half-yearly, are payable when planning permission is granted to carry out development projects that increase the value of the land, for example, rezoning to a higher value use and/or increasing the plot ratio.

The revision in DC rates for commercial, hotel/hospitality and residential (non-landed) use groups announced on Feb 28 “was largely expected and reflective of current market conditions in the respective property segments”, notes Tricia Song, Colliers International head of research for Singapore.

Credit: Colliers International Research, Ministry of National Development

In this latest round of revision, the DC rates for commercial and hotel uses have been raised, taking into account stronger investment transactions over the last six months as well as brighter outlook for both sectors - underpinned by rising office rents and firmer RevPar (Revenue Per Available Room), notes Song.

Meanwhile, DC rates for residential (non-landed) use have been cut. The cut was not unexpected, given the fewer transactions and weaker sentiment in the residential property market. “Since the fresh property cooling measures were implemented in July 2018, developers’ perceived risk-reward ratio on residential deals has shifted, resulting in waning investment appetite,” Song observes.

Residential (non-landed)

In this current DC rate revision, five sectors – 59, 91, 93, 94, and 104 – saw the sharpest decrease of 13%, notes Colliers’ Song. The largest declines in non-landed residential DC rates, appear to be in city fringe areas with large potential future supply such as East Coast and Hougang, she observes.

The largest declines in non-landed residential DC rates, appear to be in city fringe areas with large potential future supply such as East Coast (pictured) and Hougang (Credit: Samuel Isaac Chua/EdgeProp Singapore)

On average, DC rates for non-landed residential use fell 5.5%, the first fall since March 2016 when DC rates fell 0.9%. It is also the biggest drop in DC rates since Mar 2009, when DC rates fell 15.3%, says Christine Li, senior director and head of research for Cushman & Wakefield (C&W).

It is “unsurprising” that non-landed residential DC rates have fallen 5.5% as developers have adopted a cautious stance towards acquiring residential collective sale and government land sale (GLS) sites since the July 6 cooling measures. On the other hand, the reduction of DC rates could give developers who wish to replenish their land bank “a temporary reprieve”.

But the increase in average unit sizes from 70 sq m to 85 sq m for homes outside the Central Area will also “cripple” developers’ ability to increase selling prices over the medium term, says C&W’s Li. “Residential en bloc hopefuls might have to continue reducing their asking prices in order to attract serious buyers in this increasingly challenging residential market.”

The reduction in DC rates for non-landed residential use is unlikely to reinvigorate the collective sale market “as the mismatch in buyers and sellers’ price expectations remains”, says Tay Huey Ying, JLL head of research & consultancy, Singapore. According to JLL research, not a single residential collective sale site was sold in the six-month period to end-February 2019.

The 99-year leasehold Chancery Court was sold en bloc for $401.76 million ($1,610 psf ppr) in May 2018 (Credit: OrangeTee Advisory)

GLS sites for private residential development (excluding executive condos) for tenders which closed during the same period attracted fewer bids (up to seven) compared to those closed in the six months prior (which drew up to 10 bids). Bids were also more cautious, notes JLL’s Tay.

For instance, the residential site at Kampong Java Road, for which the tender closed in January 2019, had a top bid of $418.38 million ($1,192 psf per plot ratio). In the vicinity, several collective sale sites were sold at higher unit land prices although these were before the July cooling measures. These included the freehold Makeway View ($1,626 psf ppr) in March 2018; the freehold Dunearn Gardens ($1,914 psf ppr) in April 2018; and the 99-year leasehold Chancery Court ($1,610 psf ppr) in May 2018.

The winning bid price of $1,192 psf ppr for the Kampong Java Road GLS plot also indicated an 11% discount compared to corresponding implied land value derived from the September 2018 DC rates, observes Tay.

The sale of Golden Wall Centre in Rochor for $276.2 million or $2,331 psf ppr last November resulted in a surge in hotel DC rate of 73.9% (Credit: ET&Co)

Hotel/Hospitality

DC rates for hospitality sites rose 45.6% after an 11.8% increase in the last revision in September 2018. “This is the strongest increase in DC rates historically, based on data since 2000,” says C&W’s Li. The last time hospitality DC rates rose at a similar pace was in July 2007, when they were raised by 40%. However, it was due to a “one-off adjustment” to the DC from 50% to 70% then.

Li attributes the hike in hotel DC rates to the recent en bloc sales of residential and commercial sites for conversion to hotel use. Another reason is the recent buying frenzy in the hospitality sector, she adds. Based on C&W’s research, hotel investment sales hit a four-year high of $1.36 billion in 2018, due partly to investors shifting their focus away from the residential sector as a result of the July cooling measures.

“The optimism around tourist arrivals, coupled with tight hotel supply in the short term, has emboldened investors to look at hotel asset class seriously,” says Li of C&W. “The latest round of DC could have some dampening effect on the conversion of hotel use.”

The sale of the GLS site for hotel development along Club Street for $562.2 million, or a record price of $2,149 psf ppr, in January resulted in a DC rate hike of 52.8% in Sector 16 for hotels (Credit: URA)

The significant hikes took place in Sector 26 (Selegie Road, Rochor Road and Bencoolen Street). The sale of Golden Wall Centre in Rochor for $276.2 million or $2,331 psf ppr last November resulted in a surge in hotel DC rate of 73.9%. Similarly, at the nearby Sector 27 (Bencoolen/Waterloo Area), the sale of Waterloo Apartments in mid-November also caused the hotel DC rate for the sector to rise by a hefty 66.7%.

Commercial

The DC rates for commercial use increased by 9.8% on average – the highest rate of growth since March 2014 when they grew 14.6%, observes Colliers’ Song. The largest increase of 17.4% was seen in eight sectors covering areas that include Outram Road, Chinatown, New Bridge Road, Selegie Road, Victoria Street, Jalan Besar and Geylang Road, among others.

The DC rates for commercial use increased by 9.8% on average – the highest rate of growth since March 2014 when they grew 14.6% (Credit: Samuel Isaac Chua/EdgeProp Singapore)

“We believe the increase in the commercial use DC rates in these areas is mainly due to the bullish valuations in the shophouse segments in these locations, as well as the rising office and stabilising retail markets in general,” says Song.

The most significant hike of 12% took place in Sector 24 (Bras Basah Area) where ARA Asset Management & Chelsfield acquired Manulife Centre for $555.5 million or $2,300 psf.

Kenedix Inc’s purchase of a 25% stake in Capital Square for $270 million ($2,783 psf) led to the 10.3% increase in commercial DC rate in Sector 17 (New Bridge Road, Upper Pickering Street, Telok Ayer Street and Upper Cross Street).

Based on JLL research data, $4.73 billion worth of commercial assets (comprising office, retail, shophouses and mixed assets with significant office/retail components) priced upwards of $5 million were transacted during the DC review period between September 2018 and February 2019. This is 46.9% higher than the $3.22 billion attained in the preceding six months, notes JLL’s Tay.

“The DC rate revision is usually retrospective on how the real estate market has been performing,” says CBRE’s Sim. “Not surprisingly, increased activities in the office and hotel markets have resulted in upward revisions in the DC rates, while a slowdown in residential land activity has resulted in lowered DC rates for some key areas.”

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