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Development Charge Hike for Singapore Hotel Developments Could Stunt Investments

20/03/2019

The Ministry of National Development (MND) on March 1, revised the development charge (DC) rates for redevelopment land for the period of March 1, 2019 to August 31, 2019.

Non-landed residential (B2) DC rates fell 5.5%, the first fall since March 2016 when DC rates fell 0.9%. This is also the strongest fall in DC rates since March 2009 when DC rates fell 15.3%.

As developers have adopted a cautious stance towards acquiring residential collective sales and government land sales sites since the July 6 cooling measures, it is unsurprising that non-landed residential DC rates have experienced a decline of 5.5%. With the reduction of DC rates, developers will get a temporary reprieve if they were to consider replenishing their landbanks over the next six months. However, this in our view might not be significant enough to offset the higher acquisition costs faced by developers as a result of the latest round of cooling measures. The fact that the average unit sizes are also increased from 70 square meters (sqm) to 85 sqm for homes outside central area will also cripple developer’s ability to increase selling prices over the medium term. Residential en bloc hopefuls might have to continue reducing their asking prices in order to attract serious buyers in this increasingly challenging residential market.

Hotel DC Rates Rose to a New High

Hospitality (C) DC rates rose a whopping 45.6% in the latest DC revision, after a 11.8% increase in September 2018. This is the strongest increase in DC rates historically, based on data since 2000. The last time hospitality DC rates rose in a similar fashion was in July 2007, when DC rates were raised by 40%. However, it was due to a one off adjustment to the DC from 50% to 70%.

The recent en bloc sales of residential and commercial sites for conversion to hotel use led to the skyrocketing of hotel DC rates. The steepest hike in hospitality sector is very much in line with the recent buying frenzy in the hospitality sector. Based on Cushman & Wakefield’s research, in 2018, hotel investment sales hit a four-year high of S$1.36 billion, 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. The latest round of DC could have some dampening effect on the conversion of hotel use.

The significant hikes took place in Sector 26 (Selegie Road, Rochor Road, Bencoolen Street). The sale of Golden Wall Centre for S$276.2 million or S$2,331 psf per plot ratio (ppr) 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 caused the hotel DC rate for the sector to rise by a hefty 66.7%.

Commercial (Group A) DC rates rose 9.8% in March 2019, the highest in five years, since March 2014 when DC rates (A) rose 14.6%. Landed residential (B1) DC rates remained stable. Landed residential DC rates have remained unchanged since their last increase of 0.3% in September 2017. Industrial (D) DC rates remained flat, after a 2.1% increase in September 2018.

The significant hike took place in Sector 24 (Bras Basah Area). ARA Asset Management & Chelsfield’s acquisition of Manulife Centre for S$555.5 million or S$2,300 psf contributed to a commercial DC rate increase of 12.0%.

Kenedix’s purchase of a 25% stake in Capital Square for S$270.0 million or approximately S$2,783 psf led to the commercial DC rate in Sector 17 (New Bridge Road, Upper Pickering Street, Telok Ayer Street, Upper Cross Street) rising by 10.3%.

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