_Commentary: Land Betterment Charge Rates from 1 September 2023

Use Group A (Commercial)

Despite the economic headwinds, commercial Land Betterment Charge (LBC) rates increased by a slight 0.4% across the board, reflecting increments in 12 out of 118 sectors. The increases in these 12 sectors range from 3.3% to 3.9%, and it is notable that all these locations have significant clusters of shophouses. The rise in the LBC rates was probably due to the manner in which shophouse prices, typically measured by the unit rate on land size, have been increasing since the pandemic. The shophouse market in Singapore continued to be attractive to buyers in the first half of 2023 with average prices growing 8.4% in the first half of 2023 from S$4,610 psf (on land) in H2 2022 to S$5,454 psf (on land) in H1 2023 despite economic uncertainties, especially after the April 2023 implementation of increased Additional Buyer’s Stamp Duty (ABSD) rates for the residential sector. As ABSD is not applicable for commercial properties, interest in shophouses remains firm with private wealth buyers comprising high-net-worth (HNW) investors and family offices.

 The ongoing gentrification of shophouse areas has been and will continue to draw investors, as shophouse inventory remains fixed, with this niche market no longer supplied with any new product. With steady growth in affluence over the long-term, there will be investors on the lookout for opportunities from this limited and scarce property asset class, as a means for wealth preservation, stable recurring income and the prospect of substantial capital appreciation over time.

 Use Group B1 (Residential, Landed)

It is a little surprising that there are no changes to LBC rates for landed homes, as the URA Price Index for these residences increased by 7.0% in the first half of 2023.

Use Group B2 (Residential, Non-Landed)

However, it is not surprising that there were widespread decreases of LBC rates across 111 out of 118 sectors in the non-landed residential use group, with an overall average fall of 3%. Development sentiment for non-landed homes has turned uncertain with the imposition of cooling measures announced in April 2023. The recent government land sales (GLS) tenders where there were only four bids for Marina Gardens Lane at S$1,395 psf per plot ratio (ppr) with the top bid far outdistancing the remaining three bids perhaps contributed to the lower of LBC rates in sectors 11, 12, 13 and 14.

The decrease of 6.3% in sector 107 at Thomson and Central Catchment Area was likely due to the sole bid of S$985 psf ppr at Lentor Gardens in April 2023, a rate lower than all the other Lentor GLS sites that preceded it. The risk environment facing developers has increased due to the cooling measures affecting foreign buyers, elevated interest rates, construction costs and new supply of homes. Going forward, developers are likely to take a more cautious stance in acquiring both private and GLS sites.

The declines in other sectors generally ranging between 2.5% to 5.3% would not make that much of an impact to collective sales sites. Although it might be slightly less costly to maximise untapped Gross Floor Area (GFA), the main hurdle to successful collective sales in the current market is due to the gulf between sellers’ price expectation and developers’ risk appetites.

Use Group C (Hotel/Hospital)

There was no hotel sale in the last six months apart from Parkroyal Kitchener Hotel at S$525 million or S$968,635 per room in July 2023. It could be that the general rise in 116 out of 118 sectors reflects the improving tourist market, with more than one million international visitor arrivals each month since March 2023.

Use Group D (Industrial)

There were no changes in all geographical sectors for industrial Use Group D. The manufacturing sector is in a bad place now with Singapore’s export manufacturing under stress registering declines. In Q2 2023, manufacturing contracted 5.5% y-o-y and 1.0% q-o-q.

And although industrial real estate indicators remain stable at the moment, there is no cause to rate LBC rates for this use group until such time when Singapore’s manufacturing sector returns to health and manufacturing output and export numbers return to positive territory.