The revision in development charge (DC) rates for the Commercial, Hotel/Hospital, and Residential (Non-Landed) Use Groups announced on 28 February 2019 was largely expected and reflective of current market conditions in the respective property segments.
Development charges – with rates revised on a half-yearly basis - 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.
In this latest round of revision, the DC rates for Commercial and Hotel/Hospital 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).
Meanwhile, DC rates for Residential (Non-Landed) use have been cut. The decrease in Residential (Non-Landed) DC rates 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.
The DC rates for Commercial use increased by 9.8% on average – the highest rate of growth since March 2014 when it grew 14.6%. 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, Geylang Road amongst others.
We believe the increase in the commercial use DC rates in these areas are 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.
On average, DC rates for Residential (Non-Landed) use have decreased by 5.5% - the first decline in DC rates for this Use Group since September 2016. The fall in rates is broadly in line with the more muted market conditions and cautious sentiment.
In this current DC rate revision, five sectors – 59, 91, 93, 94, and 104 – saw the sharpest decrease of 13%. There has been a lack of residential land transactions since July 2018. 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.
Meanwhile, DC rates for Hotel/Hospital continue to rise, with a sharp increase of 45.6% on average – the highest rate of increase on record*. This is the second consecutive hike in DC rates for this Use Group, following the 11.8% average increase announced in the previous revision on 31 August 2018.
The sharper upward revision was expected, in view of the rosier outlook for the hospitality sector, amid stronger tourism performance.
The increase in the latest round of revision was fairly broad-based, affecting 116 out of the 118 sectors, with the sharpest hike of 74% observed in areas including Selegie Road, Bencoolen Street, Victoria Street, Jalan Besar, Serangoon Road, Mackenzie Road, Bukit Timah Road etc.
The number of hotel deals have picked up in recent months, with some bullish transaction prices such as the collective sales of Waterloo Apartments and Golden Wall Centre (both to be converted to hotel use), the government land sale of Club Street hotel site, and the private sale of Ascott Raffles Place serviced apartments. These transactions could have contributed to the broad-based and significant increase in DC rates in hotels.
*Based on data tracked by Colliers Research