Singapore property taxes aim to deter foreign speculators

Singapore and Hong Kong are neck-and-neck competitors on so many levels, including their property markets. Prime real estate in both regional hub cities is considered a safe asset class, and one made even more desirable these days by the uncertainty elsewhere.

The resultant runaway prices have led their respective governments to impose a series of market cooling measures. In both cases, speculative foreign investment is the primary target.

In the latest round, Financial Secretary John Tsang Chun-wah announced on February 22 that an across-the-board doubling of stamp duty on residential and non-residential properties would apply to all buyers who are not permanent residents. Warning that "the risk of an asset bubble is increasing", Tsang said that a further 2 per cent price rise in January this year had pushed prices up by 120 per cent since the trough of 2008, "and the momentum is continuing".

Singapore countered just days later with additional taxes on luxury homes and investment properties, effectively adding anywhere from 12 to 20 per cent to the purchase price. The Lion City's latest announcement by Finance Minister Tharman Shanmugaratnam followed January's increase to 15 per cent of the Additional Buyer's Stamp Duty (ABSD) payable by non-Singaporean property buyers, a year after it was first introduced at 10 per cent. The government was reacting after prices climbed to a 2012 fourth-quarter record high, yet private home sales continued to soar - by a reported 43 per cent - in January. Seemingly, what one commentator called "a worrying trend", it has not deterred foreign investors.

But will this latest round stop speculators? Alan Cheong, director of Savills Singapore, believes it might. Cheong says: "The key feature of the latest budget on residential properties is that even unoccupied premises will be taxed. This has the effect of forcing individual owners and corporates, who hold untenanted units, to [put] them on to the market at a time when expatriate rental budgets are constrained and the number of foreign professionals, managers, executives and technicians coming here is slowing.

A decline in rental yields at this juncture can create problems because the probability of interest rates rising has simultaneously increased."

On the other hand, Singapore's property tax rates are still low in comparison with many developed economies, Cheong points out. "However, in life, perception can sometimes be important too. With two rounds of ABSD impacting foreigners, and now higher property taxes being levied, it could have an unintended effect of parrying foreign capital destined for Singapore real estate."

CBRE, noting that the proportion of foreign buyers of new homes dropped from 13 per cent to 17 per cent before 2012 to below 10 per cent in 2012, believes the cooling measures have "definitely had an impact" on sale prices if not volume. Petra Blazkova, head of CBRE research for Singapore and Southeast Asia, expects sales volume to decline this year, although Singaporean first-time buyers of residential flats, who are not affected by the measures, will remain in the market.

Amous Lee, executive director of international property investment at IP Global, agrees that the confidence of foreign investors may be impacted in the short-term, but adds that Singapore "is still a very attractive market, like Hong Kong". "[Investors] can either get in now, or later, when potentially the price may be higher," Lee says. These latest measures "will stop speculation for sure, but not long-term investors. After all, it's pointless to leave money in the bank, or put it into stocks. Better to invest in the international market, where there is prime property". And, while foreign property buyers were just one sector to be targeted in the latest round of cooling measures, Steve Melhuish, CEO and co-founder of PropertyGuru Group, a property media company, says the 15 per cent ABSD may already be the last straw for some. "The tax hike will deter some foreign buyers, but we've also witnessed some developers absorbing these additional costs, or at least giving discounts equivalent to the additional costs that buyers now have to pay."

Melhuish doubts that foreign speculators are active in Singapore, but says that as it's unclear which way the market is heading, "anyone who is looking for a profitable short-term property investment will probably do better looking elsewhere in Southeast Asia".

"Foreigners who are buying in Singapore at the moment will almost exclusively be buying for their own use, and because they need to be here," he says.

And of these foreign buyers, Chinese nationals, whose purchasing volume dropped by half in the quarter following December 2011's ABSD, are slowly regrouping. Melhuish says: "Over time, some Chinese buyers returned to the market, and by Q4 2012 the number of purchases made by this sector had risen 50 per cent from Q1 2012 - but still significantly less than in Q4 2011."

They remain, however, among the keenest foreign buyers of property in Singapore, competing for the top spot with Indonesians. Melhuish says Chinese buyers "generally buy in the prime districts of Districts 19, 16, 23 and 9 - close to the centre of the city. Their top preference is for homes priced in the S$500,000 (HK$3.14 million) to S$1.5 million range." Last year, he adds, Chinese nationals purchased 59 homes priced at more than S$5 million.

As for whether this is the last of Singapore's cooling measures, Blazkova doesn't think so. The measures have been "dramatic enough" to date, and buyers may get a reprieve for three to six months. "Buyers' appetite for Singapore residential property is so high that, regardless of low yields, there is still potential for capital growth," she says.

Extra Costs

When it comes to investing in real estate, IP Global recommends looking beyond the purchase price. Given the new market cooling measures impacting property purchases in both cities, the company has prepared the following cost comparison for Hong Kong and Singapore:

Hong Kong Property price: HK$1 million; stamp duty HK$225,000; legal fees 0.5 per cent of transaction value; agent fees HK$10,000. Total cost on top of the purchase price: 24 per cent.

Singapore Property price: S$1 million; stamp duty S$175,639; legal fees S$3,000; agent fees nil. Total cost on top of the purchase price: 17.9 per cent.