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Court of Appeal to decide if advertising, promotion expenses can be deducted from rental income

Millions of tax dollars hang in the balance as mall operators await a decision by the Court of Appeal on whether spending on advertising and promotion (A&P) can be deducted from rental income.

Landlords saw their hopes dashed last month, when the High Court ruled that A&P expenses beyond those paid to them by tenants cannot be deducted from rent when determining the annual value of a shopping centre, which in turn determines the amount of property tax a landlord has to pay.

The case - which centres on a dispute between Parco Bugis Junction owner BCH Retail Investment and the Inland Revenue Authority of Singapore (Iras) - will now go to the Court of Appeal, after BCH’s lawyer Wong Partnership filed an application last week.

At stake in the case is the taxable portion of $2 million - the amount BCH spent on A&P of Parco Bugis Junction in 2003.

But industry players say the total taxable amount for all landlords could run to tens of millions, because a court ruling in BCH’s favour would open the door for other landlords to deduct A&P expenditure when valuing their properties.

‘If they (the landlords) could include A&P expenditure as part of their expenses, then they can get deductions from it,’ said a shopping centre landlord.

CB Richard Ellis’ executive director of valuation Li Hiaw Ho said some shopping centre managers match the amount they get in A&P contributions from their tenants, and in some cases spend even more than their tenants. Shopping centre operators saved on tax after a court ruled in 2002 that A&P contributions paid by tenants could be excluded from gross rent figures. In that case, BCH, represented by David De Souza and Jeanette Lee, obtained a ruling that meant A&P contributions by tenants, which amounted to $592,000, would not be subject to tax.

With property tax at 10 per cent, any savings add up to a tidy sum for big landlords, such as BCH’s parent company CapitaLand.

Market watchers say that to take advantage of the 2002 court ruling, mall operators have structured new lease agreements so A&P contributions by tenants are set out separately from basic rents.

Knight Frank says that since the ruling, many shopping centres have deducted A&P contributions by tenants from their annual property valuations.

Where there is no separate A&P provision in lease agreements with tenants, landlords are moving to include one as leases are renewed. A landlord that operates well-known malls told BT: ‘We are working towards amending the leases to allow us to capture the deductibility for the A&P portion. But this will take time.’

Landlords hoped that BCH’s victory in 2002 would pave the way for them to deduct as expenses a wider range of services they provide to tenants. And this year, BCH went a step further and sought a court ruling that all reasonable A&P expenses be deducted from gross rent, saying an additional $2 million should be deducted from gross rent for Parco Bugis Junction when determining its annual value.

But the High Court was not persuaded. Justice Tan Lee Meng said last month that additional A&P expenses were never regarded by the tax authorities as a part of gross rent.

Justice Tan said that going by BCH’s argument, landlords could easily adjust the annual values of their properties by increasing their A&P expenses.

This would mean that annual values would no longer represent hypothetical rents, he reasoned. And as a result, the annual value of a property could not be determined by reference to rents at comparable properties because annual values would depend on how much owners spent on A&P.

Source : Business Times - 30 Aug 2006

PROPERTY market watchers say a 1.36-hectare site for sale in Little India could eventually be home to another shopping centre - just metres from the tourist-friendly Mustafa Centre.

The Urban Redevelopment Authority (URA) said yesterday that the reserve list site, located at the junction of Race Course and Rangoon roads, is now open for application.

The 99-year leasehold parcel, directly above Farrer Park MRT station, has a gross plot ratio of 4.2, giving it a maximum gross floor area of 57,225 square metres. The maximum building height for part of the site is 20 stories, while the rest of the site can only go as high as six stories.

The site comes with a requirement that at least 40 per cent of floor area be used for a hotel. But it is zoned ‘white’, which means developers can use the other 60 per cent for residential, retail or other commercial purposes.

‘The minimum quantum of hotel use will provide opportunities to meet the demand for hotel accommodation in this area,’ said URA, pointing out that the area is highly popular with visitors.

Nicholas Mak, director of research and consultancy at Knight Frank, said: ‘I think that the rest of the space is going to be a shopping centre. A new development could spring up in about three or four years.’

The site could attract bids in the range of $300-$340 million, Mr Mak said.

It does not have the frontage of the nearby Mustafa Centre, but if it were to become a retail centre it could be a serious competitor to the Little India mainstay, he said. A new mall could have the advantage of being directly linked to an MRT station.

However, Savills Singapore’s director for marketing and business development Ku Swee Yong reckons that as much as 40 per cent of the space could be used for offices, and just 20 per cent for retail. In that case, he estimates that a winning bid could be $150-$180 million.

Because the site is situated close to Mustafa Centre, some speculate that Mustafa’s owners could bid for it. Big property developers might also be interested, sources say.

Source : Business Times - 30 Aug 2006

RIVAL developers from here and overseas are expected to be in the race for SingTel’s ageing Robinson Road building, which was put up for sale yesterday.

The seven-storey block at No. 71 - once known as Crosby House - is one of the last underdeveloped sites on the prime financial district street.

The 1950s property, which houses the Robinson Road Post Office, could be turned into a 35-storey office building or a 52-floor apartment block.

Marketing agent Credo Real Estate said the sale by tender could yield about $143 million, which would include a fee to intensify the land use and top up the remaining 45 years lease to 99 years.

The price would work out to $521 per sq ft (psf) per plot ratio. This would enable the new owner to sell a redeveloped office building for $1,300 psf.

In June, the 35-storey SIA building a few doors down was sold to CLSA Capital Partners for $343.9 million or $1,165 psf.

Credo managing director Karamjit Singh said the positive outlook for both the office sector and inner-city apartments should ensure a high level of interest from local developers and foreign funds backed by developers.

The new owners could build flats on the site as SingTel has been granted the permission to redevelop the building into a 52-storey, 330-unit apartment block with shops on the first level.

Leasehold inner-city apartments are in demand, judging from prices of The Sail @ Marina Bay in the new downtown. Units here are going for between $1,000 psf and $1,400 psf in the resale market, said Credo.

The Clift at the Natwest Centre site at nearby McCallum Street is being marketed at between $1,000 psf and $1,100 psf.

About 120 units of the 312-unit project have been sold since its preview early last month.

However, it may be better to redevelop SingTel’s block as an office building considering the shortage of office space, said Mr Donald Han, managing director of property consultancy Cushman & Wakefield.

Robinson Road is still a respectable address for offices, he said.

‘It’s also quite a sizeable plot,’ he said, adding that the new development would be similar in size to one tower of SGX Centre in Shenton Way.

The tender closes on Sept 28.

Source : Straits Times - 24 Aug 2006

Orchard Central will have 10 floors and boast a new Gluttons Square on its rooftop

SINGAPORE’S tallest mall, which will include food stalls situated on the 10th floor, will be developed on the Gluttons Square site by Far East Organization.

The mall will also be the first here to be built along the lines of Tokyo’s famous Ginza shopping district, where buildings compensate for their small plot sizes by piling on several floors of retail space.

Far East’s new mall is certainly on a small plot but will boast a 160m Orchard Road frontage and occupy a gross floor area of nearly 388,000 sq ft.

And while most Orchard Road malls go up five levels with two basements, Far East’s project will comprise 10 floors and two basements. There will be 12 glass lifts and 78 escalators.

Far East, which unveiled its concept yesterday, is reserving the top floor for a rooftop Gluttons Square. It hopes to have about 70 to 80 stalls, with some of the original stallholders or their descendants signing up.

‘We want to preserve the heritage of Gluttons Square,’ said Mr Chia Boon Pin, chief operating officer of Far East’s retail and lifestyle concepts business group.

All of the ninth floor, together with a part of levels five to eight and 10, will be reserved for 382 car park lots. Other floors will have shops and food and beverage outlets arranged in clusters.

‘It’s like a building within a building,’ said architect Bruce Ngam of DP Architects. It will also feature a colour-changing glass facade at night.

Orchard Central, as the mall will be called, should be finished late in 2008 at a cost of $650 million. Far East won the site in a tender in January with a bid of $421.1 million.

The ambitious plans are a sign that Far East, once known as the kingpin of Orchard Road malls, is back at the leading edge in the industry.

‘Far East Organization has always been a first mover in the retail industry,’ said the newly-appointed president of its Far East Retail Consultancy, Mrs Vivienne Tan.

It is also planning to spruce up its older malls such as Riverside Point.

The plans also spell an end to speculation that the three owners of the adjacent sites near Somerset MRT station, including Specialists’ Shopping Centre, would combine in a joint project.

Australia’s Lend Lease group emerged as the highest bidder for the other Somerset plot last week, which sparked talk that the three owners could work together to create an attractive shopping destination.

But while a mega-mall may be off the agenda, some form of cooperation between the three is likely. Their sites will share a pedestrian walkway to be built over part of the Stamford Canal.

‘We are sharing a common frontage, a walkway and one MRT station. Of course, we will talk,’ said Mrs Tan.

‘We believe in building a shopping precinct instead of just a shopping centre, This stretch is going to be quite happening.’

OCBC, which owns Specialists’ Centre, and Lend Lease have said they are keen to consider working together.

‘Going up to 10 floors is so far unheard of here. It is something new and exciting,’ said Mr Danny Yeo of property consultancy Knight Frank.

‘If the three sites are connected on every floor, it will be a clear bonus to the owners and will create a unique shopping experience.’

Meanwhile, Far East is filling up shop space at Central in Clarke Quay and Square 2 in Novena.

It will also work on repositioning some of its malls such as Riverside Point and Ginza Plaza to improve their yields, said Mr Chia.

Source : Straits Times - 23 Aug 2006

Park Hotel Group plans to pump $125m into stylish, boutique hotel

REFLECTING the strong sentiment in the Singapore hotel market, a state tender for a hotel site next to Robertson Quay Hotel yesterday attracted seven bids.

The top bid of $55.5 million came from Hong Kong’s Park Hotel Group. This price is more than double the $25 million minimum price for the 99-year leasehold site on the reserve list.

‘The price we paid reflects our confidence in the Singapore hotel market in the years to come,’ Park Hotel director Allen Law told BT. Last year, the group bought Crown Hotel on Orchard Road. T

Park Hotel beat Far East Organization by 6.4 per cent to emerge as the top bidder for the plot, which is located at the corner of Unity Street and Clemenceau Avenue. The site has a view of the Singapore River.

Far East offered $52.18 million, marking the second time in a week that the local property heavyweight has been beaten by foreigners at a state land tender. Last week, Far East was defeated by just a 1.1 per cent margin by Australia’s Lend Lease group, which emerged as the top bidder for the plum Somerset Central commercial site on Orchard Road.

Park Hotel unit ParkSing Property’s $55.5 million top bid at yesterday’s tender reflects a unit land price of $466 psf per plot ratio - which is 55 per cent higher than the $300 psf ppr fetched for a Bras Basah Road hotel plot next to Carlton Hotel in January 2005, property consultancy CB Richard Ellis observed.

Park Hotel plans to develop the 42,503 sq ft Unity Street site into a 350-room hotel at an all-in cost of about $125 million. This works out to nearly $360,000 per room and Mr Law said that the group is looking at a 5 per cent net yield, assuming an average daily room rate of $130.

Park Hotel plans to develop a stylish, boutique hotel along the lines of Starwood’s W Hotels brand. There will be some food & beverage outlets to cater to the nightlife near the Singapore River area.

‘We expect to open the hotel by end-2008 and we’re targeting business travellers as well as foreign independent travellers, because of its location near the Singapore River,’ said Mr Law. ‘The new hotel will also oversee Clarke Quay and the CBD. Guests should be able to see the fireworks on National Day in the Marina Bay area.’

The other bidders at yesterday’s tender were Hotel 81-linked CityView Development ($37 million); LaSalle Lao Singapore, representing the LaSalle Asia Opportunity Fund managed by LaSalle Investment Management ($34.6 million); Ho Bee Developments ($31.9 million); Republic Hotels & Resorts, part of Millennium & Copthorne Hotels plc ($29.1 million); and Yeoh Tiong Lay Construction ($29 million).

Mr Law said that Park Hotel hopes to bag another two to three hotel plots on the Government Land Sales programme.

He expects hotel room rates on the island, which are this year generally 20 per cent higher than last year, to rise at single-digit rates for the next few years.

The group is investing $80 million in Crown Hotel over the next three years, doubling the retail area to nearly 100,000 sq ft (housing five to seven luxury brand stores with Orchard Road frontage) as well as sprucing up the hotel.

Source : Business Times - 23 Aug 2006