How will the real estate sector fare with a property tax hike?
Property developers are expected to see little to no impact by the latest Budget 2022 measures, according to DBS Group Research and RHB Group Research. The Budget 2022 that was announced on Feb 18 included an increase in property taxes for investment property, as the government moves to tap the wealthy for a bigger proportion of its tax revenues.
DBS’ and RHB’s views differ from CGS-CIMB Research’s, which reckons a “downward knee-jerk reaction” to the share prices of developers and property agencies. “We expect some erosion in the rental yield on investment property, particularly for high-end segment. In our view, this could negatively impact demand and selling prices for larger properties in the high end in the near-term,” says CGS-CIMB’s head of research Lim Siew Khee.
Finance minister Lawrence Wong said that property taxes for non-owner occupied residential properties, held by owners for investment and rental income will see tax rates increased from 10-20% currently to 11-27% from Jan 1, 2023, and subsequently higher to 12-36% with effect from Jan 1, 2024.
Meanwhile, owner-occupied residential properties with an annual value in excess of $30,000 will be increased from the current 4-16% to 5-23% from Jan 1, 2023, and to 6-32% from Jan 1, 2024.
The way DBS analysts Yeo Kee Yan and Woon Bing Yong see it, “The increase in property taxes for investment properties is widely expected and investors are likely to pass on the increased costs in the form of higher rental rates come 2023-2024 as the Singapore economy recovers.”
While the increase in property taxes for investment properties was widely expected, the rise in property tax rates for owner-occupied homes was a negative surprise. On top of the rise in overall cost of living, homeowners’ disposable income are further clipped, although home owners of larger properties (centrally located condominiums, landed properties) shoulder a larger part of the tax burden.
Nonetheless, the analysts believe that property developers will not be impacted as the increase is “very manageable”. They see this as a relief for local developers such as City Development Limited (CDL), Bukit Sembawang Estates, UOL Group and Ho Bee Land.
RHB’s Shekhar Jaiswal too is on the same page as he expects limited impact on the property developers from the rise in property tax. He too anticipated a hike in taxes, but was expecting property stamp duties to increase instead.
Although all residential properties will see a two-step increase in property taxes from 2023-2024 the measures are calibrated to have larger impact on high-end property purchases and investment demand similar to that of latest cooling measures.
“With latest cooling measures already targeting investment purchases, current market demand in our view is mainly driven by first time home buyers and upgraders. As such, we see only a marginal negative impact on high-end segment demand from higher property taxes,” says Jaiswal, who has kept a “neutral” rating on the real estate sector.
“In our view, the key headwinds for the residential sector is the expected sharp hike in interest rates, but this is offset by strong market fundamentals such as improving employment numbers accompanied by real wage growth, strong household balance sheets, and low inventory levels,” he adds.
From the developers’ perspective, strong unbilled sales from healthy sales volumes last two years and a high proportion of recurring income stream (50-80%) from investment properties provides good earnings visibility. Jaiswal has CDL as his top sector pick, which he has a “buy” call on with a target price of $9.00, as valuations remain attractive and catalysts from successful asset redevelopments and a recovery in hospitality portfolio stand.