Court ruling creates uncertainty for developers

In a landmark ruling last month, the Court of Appeal overturned a High Court decision and affirmed the right of the Chief Assessor to raise the annual land value for the Sail@Marina Bay site from the original S$27 million to S$51.4 million when it was re-assessed to market value in 2009, notwithstanding that pre-sales of units had taken place.

When the case first surfaced, I was surprised by the action of the tax authorities as the developer Glengary had sold nearly all of its residential units — 1,106 units or some 97 per cent — in 2004 and 2005, and could not possibly benefit much, if at all, from the subsequent sharp rise in land values.

The move shocked the real estate industry because such an action had never been undertaken before, especially considering that the land was bought from the State, which came with a stipulated fixed time limit for project completion. Thus, any intention to profit from land-banking activities would already have been severely curtailed.

The tax authorities may have wanted to establish a tax principle as well as set a precedent for future similar action, whether or not benefits have accrued to the developer.

Whether intended or not, the latest judgment has introduced more uncertainty into the business of property development, which is already a high-risk activity.

Developers will now have to factor into their tender bids any expected or unexpected significant increases in land value before their targeted project completion dates. In the current case, Glengary has to fork out more than S$2 million in additional taxes. While this amount may be small compared to the value of the project, it can have a significant impact on the developer’s cash flow.

Having earlier pre-sales and selling out completely within a few months of securing the site is now not without its disadvantages.

Also, now that a precedent of making the developer liable for increases in land value has been set, it also opens the path — in principle — for developers to apply for a downward revision of assessed land values should there be a sharp property market downturn following the land sale.

And if the additional property taxes collected from a rise in land values on average cancel out the drop in taxes in a downturn, I wonder who will actually benefit more from this whole episode — the State or the developers? One thing is certain: There will be more administrative work for all.

Executive Condominiums

Executive Condominiums (ECs), the hybrid public-private housing type originally designed to meet the needs of the sandwiched class, are in the limelight again, this time for the huge profits that owners could potentially reap given the present high resale values.

That huge profits can be and are being made cannot be denied, but this is because owners are open to greater risks due to their exposure to the private housing market. Who can tell what the market will be like when the first five-year minimum occupation period is fulfilled, or the next five, after which the EC units can be sold to foreigners?

It was not so many years ago, before the present market up-cycle, that owners of ECs struggled to find buyers and grappled with stagnant resale prices. Let us be clear: It is never a sure-win purchase.

To put this whole controversy into proper perspective, not many people know that owners of run-down or ill-maintained properties in red-light districts known for their unsavoury night activities are reaping close to a 100 per cent return on their investment if they had bought their properties before the current bull run.

Is it unreasonable then to expect that prices for resale ECs should show similar, if not greater, returns over the same period?

We should forget about introducing resale levies and what not to make the scheme more equitable. The permanent solution to the EC conundrum is one that ensures that our housing policies are flexible enough to accommodate all income categories so that there is no sandwiched class in the first place.

The authorities should ensure that there is sufficient supply in the private housing market to meet demand or else raise the income ceiling for HDB purchases to bring those left behind under the public housing umbrella.

Tweaking the present EC scheme only treats the symptoms, not the problem itself.

Colin Tan is Head, Research and Consultancy at Chesterton Suntec International.

Source : Today – 11 May 2013

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