With the recent updates and changes in Development Charges (DC), we take a look at how each sector is affected.
DC is a tax that is levied when planning permission is granted to carry out development projects that increase the value of the land. Development charge rates are reviewed every six months and the latest rates were released on 1 March 2021.
How Does DC Affect The Property Market?
Comparison of Development Charge sector map and rates for commercial properties between September 2020 and March 2021
Based on the table, we can see that, on average, there was a 1.5% decrease in the DC for commercial properties from September 2020 to March 2021. The lowered DC charges may appeal to commercial property developers, as the changes make it cheaper to develop a commercial land.
Comparison of Development Charge sector map and rates for residential properties between September 2020 and March 2021
However, we can see that there was, on average, a 0.3% increase in the DC for non-landed residential properties across all sectors and 1.5% increase for landed residential properties across all sectors.
Based on this information, we can infer that the government is possibly looking to encourage developers to focus on building more commercial properties, adding more value to commercial land. Although there was a 0.3% increase in the DC for non-landed residential properties, this is not a substantial increase and developers can easily defray this costcial properties from September 2020 to March 2021. The lowered DC charges may appeal to commercial property developers, as the changes make it cheaper to develop a commercial land.
Another Sign of Property Cooling Measures?
Whenever an increase in DC is implemented, the market often starts speculating whether this could signal the start of a series of cooling measures by the government. While we believe that this could indirectly lead to an implementation of cooling measures, this might not necessarily be the case. The slight adjustment will first impact developers, and may be one of the lead-in approaches the government undertakes to soften the market and monitor market movements, rather than implementing direct hard measures impacting the buyer market.
What Are The Implications of DC Changes?
By increasing DC, this possibly could discourage lesser established developers, with low economies of scale, from entering the new launch or en bloc market. Well established developers may be able to defray this increase in DC with their higher purchasing power for materials and by choosing a lower cost contractor. Developers can also defray this cost to buyers themselves, however, this will likely not affect prices significantly.
How Does This Factor In Buyer Consideration In Property Investing?
As a buyer, there is little to be concerned about. Since the increase in DC for non-landed residential properties is 0.3%, this is unlikely to significantly impact prices.
For buyers who are capitalising on the en bloc strategy, it would be ideal to avoid entering smaller developments with the expectation that it will en-bloc. The land size still needs to be sizable for the developer to build (approximately above 50 units). Purchasing a property with the hope of it being caught in en-bloc fever is a move with lesser predictability. We cannot control or predict a developer’s decision, it is similar to hoping a miracle to happen or timing the market.
However, for specific buyers only looking for a property with en-bloc potential, do ensure your monthly rental income is able to cover the monthly mortgage payment. Hence, a minimal gain would still be a fully paid property.
However, our stance on property investments does not favour en-bloc strategies. We always educate our community to favour predictability when purchasing properties over expecting an en-bloc to happen. Property investment is a long journey and holding power is important, entering with a get-rich-quick mindset is often a painful lesson to learn from.
Overall, the increase in DC is not much of a concern for buyers. Do not make the mistake of frantically buying overvalued properties with the thought of saving some money and trying to avoid possible implementation of cooling measures.
With the ongoing pandemic, the commercial market will most likely continue to soften. For buyers without holding power or capital, we suggest steering clear from Grade A office and retail properties. Positive cashflow is always a concern when investing office and retail spaces, however, if you do have the financial capability to tide through this period, there are opportunities on the market for undervalued deals.