Friday, March 1, 2013

Investors may end up with smaller rental yields

Removal of tax refund for vacant properties could compound depression
The Straits Times - February 27, 2013

SOME property investors may finish up with poorer rental returns as a result of higher property taxes on investment homes announced in Monday's Budget.

Analysts say that a second Budget measure, the withdrawal of tax refunds for vacant properties, could compound this possible depression of rental yields.

They said the more progressive property tax aimed at the well-off will raise the cost of holding some properties - and that landlords may have to absorb this cost rather than hike rents.

At the same time, more investors and firms might push currently vacant units into the market after the current concessions for such homes cease next Jan 1.

Ms Petra Blazkova, CBRE's head of research for Singapore and South-east Asia, said that the graduated property tax on luxury properties may take a toll on investors, particularly corporates and wealthy individuals.

"It may put pressure on the holding cost of investment properties held by developers and investors. At an asset level, we are likely to see yields compressing, even though only marginally."

Details from the respective ministries will provide further clarity of the full impact, she said.

The 2013 Budget, unveiled by Deputy Prime Minister Tharman Shanmugaratnam, increased property taxes for the well-off who own luxury residences and investment homes.

Besides the existing zero, 4 and 6 per cent tax rates for owner-occupied homes, five higher rates will be introduced: ranging from 8 to 16 per cent and depending on the estimated annual rental level.

This means the top 1 per cent of owner-occupied homes - or 12,000 units - will pay more tax.

For investment homes which are not owner-occupied, new marginal property tax rates of 12 to 20 per cent will be levied instead of the current flat 10 per cent rate across the board. These will be introduced in phases over two years, starting next Jan 1.

Experts added that headline rentals are unlikely to be affected simply by the change in property tax rates as they are determined by the forces of demand and supply. This means that the higher costs might have to be absorbed by the landlord instead of being passed on to the tenant since there is a healthy pipeline of homes under construction.

Net yields will likely be compressed marginally as a result, although prime homes are likely to bear the brunt of this pinch.

Savills Singapore research head Alan Cheong noted that owning a high-end property here for investment is becoming less attractive and more people may be encouraged to take their capital overseas. The removal of tax refunds for vacant properties is also a significant move, he added.

"This may have serious implications on the rental market in that it could force individuals or companies to put their vacant units on the market at a time when rental budgets are constrained and the net number of Employment Passes issued has not been growing," said Mr Cheong.

Depending on the state of the rental market, landlords could pass part or all the increased tax burden to the tenants, especially when rental demand is healthy, noted Mr Nicholas Mak, head of research at SLP International.

However, in the short run, the new tax structure may bring rental yields down. Gross residential rental yields are about 2 per cent to 3 per cent for freehold properties and 2.5 per cent to 3.5 per cent for leasehold properties now, said Mr Mak.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C

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DTZ Property Network Pte Ltd (L3007960A)

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