Development charges

As of end-August, the Ministry of National Development (MND) has continued a trend of lowering Development Charge (DC) rates. In particular, DC rates for non-landed residential properties are down by 3.6 per cent (while some segments, like hotels, have seen cuts as high as 7.8 per cent to help with Covid-19).

You may also have heard property analysts comment on this, which can be puzzling to home owners – it’s true that the end-buyers seldom see or grasp the full effect of DC rates. In this article, I’ll explain the impact of the nature of these charges, and how it can impact home buyers:

What is the Development Charge (DC)?

The DC is a tax, payable by developers or land owners. It applies for anything that could raise the value of the land, such as raising the plot ratio.

The DC rate varies based on the location; Singapore is divided into 118 “sectors”, and the DC rate for each sector is set by the Ministry of National Development (MND). The rates are revised every six months.

At the time of writing, the most notable decreases have been in sectors like 34 and 35 (Sophia Road and Bukit Timah Road).

Home buyers don’t deal directly with the DC rates, in that you’re not the one to pay the tax. However, higher or lower DC rates can still impact you in the following ways:

  • Impact on en-bloc potential
  • It can affect the supply of new homes in the pipeline
  • Potentially higher prices, but moderation in supply of new homes too
  • It can encourage a higher proportion of smaller units

1. Impact on en-bloc potential

Home owners who are hoping for en-bloc deals tend to worry when DC rates rise. Any significant rise can make an en-bloc prospect less attractive to developers; it can also result in less generous sales proceeds, as the developer must now account for the higher cost of redevelopment.

Back in February 2018, for instance, DC rates rose by a jaw-dropping 22.8 per cent on average. The reason was the en-bloc fever at the time, where developers were buying up land plots at increasingly higher prices. While DC rates were not the only reason the en-bloc fever stopped, they were certainly a contributing factor.

As such, climbing DC rates can affect en-bloc prospects in a given area; the lower the rates, the more attractive the land becomes to developers.

(Notice that this means DC rates can be used to help ageing properties. If the government wanted to, they could lower DC rates in areas with a lot of ageing properties, and encourage private developers to snap up the land.)

2. It can affect the supply of new homes in the pipeline

You can probably guess that, with lower DC rates, developers are more likely to build new condos and add to the supply of homes. This is after all related to point 1 (more en-bloc deals mean more homes in the pipeline).

The inverse is also true. Maintaining high DC rates can help to slow the number of new homes entering the market.

3. Potentially higher prices, but moderation in supply of new homes too

Rising prices

In an immediate sense, higher DC rates can mean some home buyers end up paying more for a certain development (if the developer passes the cost on to them).

If we take the broader picture however, DC rates can also subtly help to moderate prices. As I mentioned in points 1 & 2, DC rates affect developers’ incentive to build more homes. If higher rates reduce the number of en-bloc sales and new projects, this can also help to prevent the oversupply of new homes in the given sectors.

As such, there are some winners (those who benefit from the more restricted supply of new homes when DC rates go up), and some losers (those who end up paying more for their new condo because the cost is passed on to them).

4. It can encourage a higher proportion of smaller units

Developers have an alternative to passing on the costs to home buyers. One simple way is to have a higher proportion of smaller or compact units.

For example, instead of providing a two-bedder for $1.5 million, the developer may instead sell the space as two separate units for $900,000 each. The developer nets $1.8 million when both units are sold, while the buyers face a smaller quantum (albeit a higher price per square foot).

As such, higher DC rates could incentivise projects with a higher number of small units, as a way to mitigate the cost to home buyers.

That said, how will the lower DC rates impact you in 2020?

2020

Some exception has to be made for 2020. This has not been a “normal” year, due to the impact of Covid-19.

The lower DC rates today are not really meant to encourage more new condos. Rather, they’re a way to ensure prices of future homes are less likely to climb; especially during the period of recovery the economy may need.

As a secondary concern, it could be a way to help developers; this is essential as they support related industries such as construction and manufacturing.

The bad news is, this won’t impact the projects that are on the market right now (the DC for those projects were settled a long time ago). But it can mean that those who go looking for homes, three to five years from now, won’t see prices rise too much.

(That’s not to say you can’t find a good deal right now of course; contact me on Facebook, if you’re looking for a home and want to know the best offers right now.)

It’s also good news for those who own older properties, and are hoping for an en-bloc. It’s still a difficult call for investors to make, given the Covid-19 downturn; but it will help that they pay lower taxes. This provides some light at the end of the Coronavirus tunnel.

For more information on the latest happenings in the property market, follow me on RonChong.net. I’ll provide you with the latest news that home owners and investors alike should be aware of.

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