The property tax increases are not expected to change buying behaviour or dampen prices of premium homes (Photo: Samuel Isaac Chua/EdgeProp Singapore)
SINGAPORE (EDGEPROP) - On Feb 18, Singapore Finance Minister Lawrence Wong unveiled the Budget for 2022, laying out plans for a post-pandemic future. Themed “Charting our New Way Forward Together”, the Budget looks at how Singapore can better position itself for future challenges and opportunities, invest in its capabilities and strengthen its social compact, build a more sustainable future, and enhance the country’s tax system.
See also: Fresh set of property cooling measures with immediate effect
Among the announcements, the tax rates for residential properties will be raised – in two steps starting from 2023 – with higher-end properties seeing a steeper increase.
For non-owner-occupied residential properties, which includes investment properties, property taxes will be increased from 10% to 20% currently, to 11% to 27% in 2023, and 12% to 36% in 2024.
For owner-occupied residential properties, the property tax rates will be increased from 4% to 16% currently, to 5% to 23% in 2023, and 6% to 32% in 2024. This increase applies only to the portion of annual value in excess of $30,000. (Check all latest Singapore property Market Trends)
"The revised property tax rates will impact mainly the higher-end homes with higher annual values of above $60,000," says Tricia Song, CBRE head of research for Southeast Asia. "On its own they should have minimal impact. However, coupled with the latest round of cooling measures effective December 2021, this could further deter the overall buying sentiment, in particular in the mid to high-end market."
Comparatively, when the previous property tax revision was announced in the 2013 Budget, it had little impact on the residential market as prices and volumes continued to grow until cooling measures that were introduced in Jun 2013, in particular the Total Debt Servicing Ratio (TDSR) framework, Song observes.
"Given that a pull-back of investment activity from the December 2021 cooling measures is expected, this set of wealth taxes targeted at the high-end market should have a marginal near term impact on the market," says Song. CBRE Research maintains the forecast of average private home price growth of up to 3% in 2022, and new developer home sales volume in 2022 to be 9,000 to 10,000 units.
Based on data from Inland Revenue Authority of Singapore (IRAS), the median annual value of non-landed private properties (including executive condos) in Singapore was about $22,200 in 2020, cites Wong Xian Yang, Cushman & Wakefield head of research, Singapore. For landed properties, it was about $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,” observes Wong. “Assuming an investment property with an annual value of $22,200, the increase in tax would only come up to $444,” he says.
In the landed property segment, the Good Class Bungalow segment may see the largest increase in property tax. However, it is unlikely to impact demand as high net worth individuals would be able to absorb the increase in property tax, adds Wong.
“Prior to the unveiling of the Budget 2022, there was a lot of speculation about wealth tax and capital gains tax – which if imposed, could impact sales and investment,” says Ismail Gafoor, CEO of PropNex. “In a way, I see it as a positive outcome for the real estate market in that those taxes did not come up, but rather the government adjusted property tax instead.”
The current tax system already encompasses certain features of a wealth tax, such as the property tax as well as the additional buyer’s stamp duty (ABSD), which was raised in December 2021, adds Gafoor.
“The increase in property tax rates is an element of the overall taxation on wealth, so that wealthier property owners contribute more, in property taxes”, says Ong Teck Hui, JLL Singapore senior director of research & consultancy.
Ong doesn’t expect the higher property taxes to dent Singaporeans’ aspirations to own a residential property to live in, or to invest for rental income. “Owners of higher value homes should be able to absorb the higher taxes as they are likely to be higher income households,” he notes. “So, potential buyers of high value homes are unlikely to be deterred by the property tax increases.”
The property tax increases are not expected to change buying behaviour or dampen prices of premium homes, says Karamjit Singh, CEO of Delasa. “Investments into homes do not tend to be driven purely by yields, but are also driven by emotional, utility and capital preservation needs,” he comments.
Singh sees the impact of the higher taxes somewhat mitigated by capital values and rents having risen, especially in the case of landed properties. The higher taxes, however, could push ‘asset rich-cash poor’ owners to sell long-held investment properties “that are ripe for redevelopment”, or motivate families to “right-size” their housing needs, he says.
The increase in property tax rate for owner-occupied homes will not change the strong culture of home ownership in Singapore, says Nicholas Mak, ERA Realty head of research & consultancy. “Although some homeowners would have to pay tens of dollars to a few hundred dollars more in property tax each year, this would not discourage them from owning their own homes,” he points out.
The Ministry of Finance said 93% of owner-occupied property will not be affected by the higher property tax. These properties include HDB flats, most condominium apartments and low-value landed property. However, the higher property tax would reduce the net rental yield for residential properties, Mak says. “As a result, investors would rely even more on capital appreciation when they invest in real estate.” (Find HDB flats for rent or sale with our Singapore HDB directory)
In fact, for investors, capital appreciation is more significant than rental, according to Lee Sze Teck, Huttons Asia senior director and head of research. “Property is seen as a good hedge against inflation and to hold its value over time,” he says. “In the current positive rental market conditions, owners will try to pass some of the increase in property taxes to the tenants. This will result in higher rents and costs to foreigners. They may ask for a higher pay package which [in turn] raises the business costs for companies.”
The increase in property tax could raise an additional $380 million in the government's coffers each year, ERA’s Mak adds. “It is not a property cooling measure, but another way for the government to fill its coffers. The objective is to draw more milk from the cow but not to kill the cow.”
The increase in Goods and Services Tax (GST) will be delayed to 2023 and staggered over two steps: to 8% from Jan 1, 2023; and 9% from Jan 1, 2024.
A key thrust of the Budget was “a concerted slew of measures to tax the haves while shielding the have-nots from the GST hikes and the rising costs of living,” says Lam Chern Woon, head of research & consulting, Edmund Tie.
The deferment of the implementation of a GST hike until 2023 and the staggering of the hike over two years will be welcomed by the retail sector which is undergoing a nascent recovery, observes Angelia Phua, JLL consulting director for research & consultancy.
“The announcement of the GST hike could lead to a modest frontloading of consumption a few months ahead of the actual implementation of the hike in 2023, similar to prior GST hikes,” says Phua. “This could benefit the retail market in 2022 and, in turn, further underpin the recovery of the retail property market.”
As Singapore gradually reopens its borders, the establishment of more Vaccinated Travel Lanes, fewer onerous travel restrictions and improved traveller confidence will also drive healthier growth in tourism consumption in 2022, Phua adds. “Coupled with business expansion driving vacancy rates lower amid a tightening supply and on the back of sustained economic growth, retail rents should recover in 2022.”
The GST hike could have a short-term dampening impact on consumer spending in 2023, with limited impact in 2024, similar to prior GST hikes. “However, the government’s GST Offset Packages will mitigate the impact of the GST increase on consumption for the majority of the population,” says Phua.
Moreover, wage growth, on the back of sustained economic growth, should support consumption growth whilst alleviating higher living costs and other inflationary pressures, notes Phua. “The medium-term growth foreseen for the retail property market should remain intact.”
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 $5 per tonne currently to $25 per tonne in 2024 and 2025 and $45 per tonne in 2026 and 2027, with a view of reaching $50 to $80 per tonne by 2030.
“The increase in carbon tax from $5 to $25 per tonne is a significant leap and could lead to an increase in operating costs for properties with high energy requirements,” says Cushman & Wakefield’s Wong. “Landlords could potentially pass these additional costs to tenants resulting in higher property service charges.”
According to a report by the Building & Construction Authority, among the four major real estate sectors, retail malls had the highest average energy use intensity (EUI) at around 312 to 326 kWh/m2 per year in 2020. The higher energy consumption is due to the wide variety of tenant mix and design concept of retail shops, Wong explains.
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 for data centres which have very high levels of energy usage,” says Wong.
Given the expected increase in operating costs, Wong anticipates a stronger drive for asset enhancement and redevelopment across all property types as building owners do more to lower their carbon footprint. “There could be higher investment sale activities with a view to redevelop or for asset enhancement to brush up its green credentials and to future proof the asset to cater for “green conscious” demand,” he says.