Monday, May 4, 2009

BTO: Current DC rates too high for Lush to be an incentive

Business Times - 05 May 2009

Current DC rates too high for Lush to be an incentive



A NEW initiative called Landscaping for Urban Spaces and High-Rises (Lush) - launched last week by the Urban Redevelopment Authority - offers a gross floor area (GFA) incentive scheme for buildings in the Orchard and Downtown Core planning areas to promote roof-top greenery.


This additional GFA can be used only for Outdoor Refreshment Areas (ORAs) at roof-top level if owners provide roof-top landscaping. A Development Charge (DC) or land premium, where applicable, is payable for this additional GFA.


The DC system, now used in Singapore, is based on the principle of sharing of enhanced land value. Since July 18, 2007, DC rates have been pegged at 70 per cent of land value, up from 50 per cent previously.


The 30 per cent balance is free, which is supposed to give the owner an incentive to undertake development work.


Under the fixed-rate system, the DC rate is an average value within a geographical sector. Applying it to a multi-storey development on a specific site, it is also an average value for that development.


As building intensifies or plot ratio increases, the additional floor area inevitably goes to higher floors. DC rates, therefore, work in favour of office and residential developments, where higher floors command higher value, but vice-versa for shopping centre and industrial/warehouse developments.


By levying the DC rate on a roof-top retail floor area, the 30 per cent benefit to the owner for undertaking the development is diminished. For example, take a typical five-storey shopping centre development where the DC rate is $7,000 per sq m (psm) of GFA.


The implied average land value of $10,000 psm would be at third-storey level. As rental and capital values decrease progressively towards higher floors, the land value of the floor area on the fifth storey roof-top could well drop more than 30 per cent to below $7,000 psm. There is, therefore, no financial incentive for the building owner to participate in such an initiative.


That's just the DC component of cost. There will be other elements to consider, such as the cost of landscaping the roof-top and building the ORA, as well as the installation of additional mechanical and electrical equipment if necessary.


Most important is the accessibility of roof-top space. To install a new pair of escalators just to service a 200 sq m of ORA would not be cost-effective.


If the DC rates for roof-top ORA remain pegged at 70 per cent, how effective this initiative will be in promoting roof-top greenery will depend on the movement of the DC rates in the next few DC reviews.


The current DC rates for commercial use for the Orchard and Downtown Core planning areas, ranging from $4,550 psm in the Rochor Road area to $11,200 psm in the Scotts Road area, are near an all-time high.


The DC rates have to drop to make the Lush initiative attractive to building owners. And the drop has to be significant - and occur before the three-year validity period of the new scheme is over.


The writer is the owner of Landmark Property Advisers, a boutique property agency specialising in investment sales and property advisory services

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