http://www.businesstimes.com.sg/arch...opers-20130227

Published February 27, 2013

Tax blow for high-end developers

Latest tax moves raise holding costs, make investments less attractive

By Mindy Tan


[SINGAPORE] The move to abolish the tax vacancy refund will put more pressure on individuals and companies, particularly those with high-end residential asset portfolios.

This, combined with progressive tax rates which will see the government raising property tax rates for high-end residential homes with the largest increases applying to investment properties, means that high-end developers could potentially be hit with a double whammy.

On the one hand, developers can no longer apply for tax rebates for vacant units, thus raising their holding costs. On the other, the higher tax rates make these properties less attractive as investments.

Currently, residential properties that are fit for occupation and intended for owner-occupation but undergoing building works can get full property tax refund for a maximum period of two years. Under the new treatment, however, such properties will no longer enjoy the tax refund.

Owners can apply to the Inland Revenue Authority of Singapore to be taxed at the owner-occupier residential property tax rate for the duration of building works (up to a maximum of two years).

The abolition of this tax refund, which is due to take effect on Jan 1, 2014, is likely to push developers to take on creative pricing structures, said Donald Han, special advisor at HSR Property Group.

"This could result in strategies to see how they can offload property by devising creative pricing structures, like CapitaLand in moving units at d'Leedon and Interlace. It's been proven that if you're willing to offer attractive discounts the buyers will come like bees to honey," said Mr Han.

That being said, high-end residential developers with unsold inventory, including Wing Tai, City Developments Limited, Wheelock, Ho Bee and Keppel Land, are likely to be impacted, said CIMB in a report issued yesterday. These developers, which have unsold units largely in the prime to high-end segment, might find it even harder to sell units, said CIMB.

Separately, the removal of the tax refund concession is likely to put pressure on rental for high-end properties as more investors lower rental expectations and seek to quickly rent out their properties to offset the property taxes, said UOB Kay Hian.

This is a double blow to a sector that has already experienced consolidation in recent years due to the economic slowdown and weaker demand from foreigners.

Jones Lang LaSalle's head of research, Southeast Asia, Chua Yang Liang, said he does not expect rents to drop.

"With the White Paper's long-term growth policy plus (the implications of) the Budget, I see prices holding steady in the short term.

"The market has seen rental corrections since Q3 2011 because of the weaker expatriate demand, although signs of stabilisation are emerging since Q4 2012. I reckon its nearing a trough," said Dr Chua. "Unless there is a further shock to the system such as worsening of the eurozone, US and China markets, I don't expect major correction moving forward."

The use of this progressive tax structure to tackle inflation may prove insufficient, warned Alan Cheong, head of research at Savills Singapore: "The Consumer Price Index (which tracks rents amongst other factors) is increasing because of how we calculate rent on a per square foot (psf) basis. With constrained rental budgets, expatriates are renting smaller units which carry a higher $psf. This feeds into the CPI, and it looks like it's causing inflation. But is it inflation or just a technicality?"

"(When) interest rates pick up, yields may concurrently have collapsed because you have an over-supply of residential property in the market after forcing people to bring all their units to the market. This can cause a lot of problems. . . It's not easy to solve this when you have a lot of liquidity in the system and interest rates are low," said Mr Cheong.

HSR's Mr Han said money might flow out of the residential sector into other segments, including commercial, industrial, hospitality and even overseas. The value proposition within the residential segment too may shift to smaller units.

"There could be higher value proposition for investor to come in and buy smaller units, with the lower loan-to-value (LTV) ratios, which means that you must put up more cash upfront," said Mr Han. "Buyers will be hit by lower LTV ratios, potentially higher property tax, and probably additional buyers stamp duty. Some people may only be able to afford smaller bite-size units, so these might start trending back into fashion."

Looking ahead, Mr Han said he expects price movement to be flattish, with maybe a thousand units sold in the month of February.