Reverting to the 50% formula might be timely
NEW incentives rolled out this week to support the greening of Singapore's buildings have once again put the spotlight on the formula for calculating development charges (DC).
For instance, the Building and Construction Authority and Urban Redevelopment Authority will offer bonus Gross Floor Area (GFA) of up to one per cent of total GFA capped at 2,500 square metres to developers that construct new buildings which attain Green Mark Gold Plus rating.
For new projects that achieve the top Platinum rating, a higher bonus GFA of up to 2 per cent capped at 5,000 sq m will be granted as incentive.
The bonus GFA is not free; DC is payable.
URA has also announced a new incentive to promote skyrise greenery. It will allow additional GFA for existing buildings within key activity corridors in the Orchard and Downtown Core planning areas.
The additional space can be used for outdoor refreshment areas on the rooftop level if owners provide rooftop landscaping for their developments. Again, DC is payable for this bonus GFA.
Unfortunately the way DC has been calculated since a formula change in July 2007 could diminish the attactiveness of these incentives. The current DC formula creams off 70 per cent of the appreciation in land value that arises from changing the use of a site or putting more GFA on it.
The previous DC formula, which was effective between 1985 and July 2007, creamed off 50 per cent of the enhancement in land value. A point to note is that prior to 1985, DC rates had also been based on the 70 per cent formula, until they were adjusted to 50 per cent during the 1985 recession.
With Singapore in the throes of a slump currently, many property industry players have called on the government to reinstate the 50 per cent formula.
After all, in 1985, the authorities deemed it fit to cut the DC rate to 50 per cent because of the recession and the same should apply now as Singapore is going through its worst recession.
Another reason to argue for a restoration of the 50 per cent DC formula is that sharing the appreciation in land value equally between government and private land owner - instead of developers being forced to surrender 70 per cent of the enhancement to the state - would be a fairer policy. Developers have to be given sufficient incentive to bear the risk of development.
Now, there's an extra reason why it would be timely for the government to reinstate the previous DC formula: to spur developers to attain higher Green Mark ratings for their buildings and promote skyrise greenery on the island. According to BCA data, it costs 2-8 per cent more to develop a building to attain the top Platinum standard and the payback period for this is between two and eight years.
For developments built to the second-highest Green Mark standard of Gold Plus, the green cost premium is 1-3 per cent and the payback period is 2-6 years.
Having to pay a lower DC rate on the bonus GFA would lessen the cost burden to developers keen on building new projects that attain the top two Green Mark ratings.
Some observers have suggested that even if the government refuses to restore the old 50 per cent DC formula, it should at least consider using this formula for computing DC for the bonus GFA under the new schemes announced this week.
But having different DC rates for different purposes may complicate things. Retaining the current uniform DC rate would be desirable but a reversion to the old 50 per cent formula would be a timely move for the government to give developers more bang for their buck to invest in green buildings.
It will also allow the government to get maximum effect from its newly minted schemes to promote Sustainable Development in Singapore.
Source: Business Times, 30 April 2009