A New Way Forward
Over the last two years, the Singapore Government dedicated a total of close to S$100 billion to combat the impact of Covid-19. Indeed, these efforts have borne fruit and Singapore’s economy has rebounded strongly, growing by 7.6% in 2021.
Singapore starts from a position of strength, and GDP growth for 2022 is expected to come in at 3%-5%. Nonetheless, some sectors remain under pressure and have not yet recovered to pre-Covid-19 levels.
As such, the latest budget is designed to balance Singapore strong growth prospects and provide support to sectors which have not yet fully recovered. On a social front, support packages were announced to offset the expected rise in GST as well as the impact of inflation and rising cost of living. Also, given Singapore’s green ambitions, there was a strong emphasis on sustainability with an increase in carbon tax. Finally, there were changes to the tax system, which includes an increase in property taxes for residential properties.
Below we discuss two salient points that would impact the Singapore property market.
Higher Carbon Taxes May Lead to Higher Operating Property Costs
Singapore has brought forward its net zero timeline and is striving to achieve net zero emissions by or around 2050. Towards this end, Singapore is increasing its carbon tax from S$5 per tonne currently to S$25 per tonne in 2024-2025 and S$45 per tonne in 2026-2027, with a view of reaching S$50 to S$80 per tonne by 2030.
For context, Singapore’s carbon tax rates are considered relatively low. For example, the average carbon tax rate in the European Union is US$42 per tonne.
Given the accelerating sustainability push and relatively low levels of carbon tax in Singapore as compared to other countries, it is plausible that carbon taxes may be increased further.
For now, the increase in carbon tax from S$5 to S$25 is a significant leap and would lead to higher energy costs. This in turn would result in higher operating costs for properties with higher energy requirements. For tenants, this could mean higher future property service charges.
According to a BCA report, among the four main commercial building types, retail malls had the highest average energy use intensity (EUI) at around 312 to 326 kWh/m2 per year in 2020. Retail malls have higher energy consumptions due to the wide variety of tenant mix and design concept of retail shops. Mixed developments and hotels had an average EUI of 224 and 218 kWh/m2 per year, respectively. Office buildings depending on their size had an average EUI of 185 to 217 kWh/m2 per year. While industrial properties were not benchmarked in the report, we expect a significant impact especially for data centers which have very high levels of energy usage.
Given the increase in costs, we anticipate a stronger drive for asset enhancement and redevelopment across all property types as building owners would do more to lower their carbon footprint. There could be higher investment sale activities with a view to redevelop or for asset upgrading to brush up its green credentials.
Property Tax Rates Increase to Have Little Impact on Residential Investment Demand
For non-owner-occupied residential properties, which includes investment properties, property taxes will be increased from 10%-20% currently to 11%-27% in 2023 and 12%-36% in 2024.
For owner-occupied residential properties, the property tax rates will be increased from 4%-16% currently to 5%-23% in 2023 and 6%-32% in 2024. This increase applies only to the portion of annual value in excess of S$30,000.
Based on data from IRAS, the median annual value of non-landed private properties in Singapore is about S$22,200 in 2020. For landed properties, it is about S$34,800.
While an increase in property tax does increase holding costs for property, it is unlikely to dampen demand as the increase in costs seem manageable. Assuming an investment property with annual value of S$30,000, the increase in tax in 2024, would only come up to S$600.
Notably, this assumes that annual values remain static, which is unlikely the case. Annual values are likely to increase given the current strong rental market. However, higher rents would bolster investment demand and offset any impact from higher property taxes.
On a whole, demand in mid-tier and suburban markets, which are the largest drivers of private residential volumes are expected to be largely unaffected.
Even for the high-end markets, the impact is expected to be negligible as high-net-worth individuals are more than able to absorb the increase in property taxes.
Other taxes such as Additional Buyer Stamp Duties and Seller Stamp Duties and loan curbs like the Total Debt Servicing Ratio continue to play the dominant role in impacting property demand.