Development charge raised to 70%. The Ministry of National Development yesterday in a surprise move raised the Development Charge (DC) rates from 50% to 70%. DC is a form of capital gains tax that removes a portion of the land value enhancement as a result of planning approval granted by the authorities. Generally, DC is applicable when the government allows an increase in plot ratio (that allows for greater build-up area), change of land use (e.g. such as from industrial to commercial), or increase in lease tenure (e.g. topping of the tenure to 99 years). The new DC rate is effective from 18th July 2007 for all projects that has yet to obtain provisional planning approval (PPP).

In line with our assessment of intervention. The latest move is in line with our cautious view on the market and that the risks of government intervention are high as a result of speculative activities in the market. But we see the DC increase as another soft measure that the government is placing to warn the market not to be over exuberant on property prices. To recap, some recent government initiatives to try to moderate price increase over the last 6 months include; release of more land supply; releasing more property statistics; re-imposing stamp duty at an earlier stage of property purchases; warning that it is monitoring the market closely etc.

Not effective. In absolute terms, the DC rate hike is marginally and will likely increase the breakeven by 5-10%. We believe the measure is meant more to curb price rise on the HDB heartlands where affordability is more sensitive compared to the prime areas. However in our opinion, the measure is unlikely to curb developer?s hunger for land, especially if they believe prices will appreciate much more. We thus view the ?supply-side? measure generally as being ineffective in speculative market. What is needed are measures to curb speculative demand.

CapitaLand most affected. Generally, it takes about 3 months to obtain PPP post acquiring a land. So developers who have bought land before April 2007 should not be affected by the new DC rates. However, this explicitly assumes that developers are fast tracking the redevelopment of their land purchases and are not land-banking for later redevelopment. In terms of the large 3 developers,CapitaLand has spent most on land acquisition since early 2007, paying about S$2.3bn with estimated DC (pre-DC hike) needed of about S$640m. City Development acquired about S$700m YTD with DC estimated at about S$2-3m. Keppel Land has not bought any en-bloc this year but it has plans to redevelop Ocean Building and it is not certain whether PPP has been obtained.

Many will be tempted to short this one..

as it has broken down through the major support line...

A juicy one for the big boys?...