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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

Luxury homes lead the way, as rents post biggest increase in at least eight years for the previous quarter

AS HOME prices start to rise slowly but steadily, rentals of residential properties are also beginning to show signs of creeping up.

The rental market, which has been in a slump in recent years, registered its largest increase in at least eight years for the April-to-June period this year.

According to the latest figures from the Urban Redevelopment Authority, rents rose by 2.1 per cent for the second quarter over the preceding three months, compared with a quarter-on-quarter increase of just 1 per cent in the first three months this year.

As with home prices, luxury residences are leading the way in stirring the rental market.

Although average rentals across all districts and residential property types are still around 25 per cent below their peak levels in the late 1990s, rents for high-end non-landed homes - that is, apartments and condominiums - have surpassed the most recent high in 2000.

New figures from property consultancy Savills Singapore show that monthly rentals for such properties have hit $3.53 per sq ft (psf), up from $3.41 psf in May and overtaking the 2000 peak of $3.50 psf.

The number of residential leasing transactions is also on the rise, said Savills’ senior manager of research and consultancy, Mr Wallace Chu.

He noted that there were 8,807 transactions for the first quarter of this year, 15.8 per cent more than in the same period last year.

Preliminary numbers for the second quarter already indicate almost 6,000 transactions for the April to June period, and this figure looks set to surpass that of the first three months when the final numbers come in, Mr Chu added.

Due to an increasing number of senior-level expatriates coming to work in Singapore, rental demand is strongest in the prime areas of Districts 9, 10 and 11, he said.

‘Large properties and landed homes are still the most popular, and I think the rental market should keep increasing,’ he added.

In District 9, which covers Orchard Road, Cairnhill and Leonie Hill, monthly rents have reached highs of almost $6 psf, according to figures from Colliers International.

The most sought-after developments include The Light @ Cairnhill, Ardmore Park and Leonie Hill Residences, with The Light @ Cairnhill fetching rents of $5.77 psf per month, said Colliers’ director of research and consultancy, Ms Tay Huey Ying.

But certain ‘non-traditional areas’ such as Woodlands, Toa Payoh and Bishan are starting to increase in popularity due to nearby international schools such as the Singapore American School in Woodlands and the Australian International School at Lorong Chuan, added Mr Chu.

‘Although prices are not skyrocketing, we are seeing the number of leasing transactions go up in these areas,’ he said.

For the rest of the year, he expects average apartment rents to rise by another 3 per cent to 5 per cent, while rents for high-end prime properties could go up by as much as 10 per cent.

Source : Sunday Times - 13 Aug 2006

Good demand from expats, but rents still have some way to go before reaching highs of 2000

Residential rents in Singapore have rebounded by double-digit figures since the market bottomed out two years ago, but they still have some way to go before reaching the high levels achieved in 2000.

The present market recovery in residential leasing is led by the luxury segment, data shows. Rents for high-end properties have rebounded faster than rents for the rest of the market - and market players attribute this to good demand from the expatriate crowd.

Data from property consultancy CB Richard Ellis (CBRE), which monitors a sample of properties in each segment to calculate average residential rents, shows that while average rents for luxury properties have climbed 17.1 per cent since the second quarter of 2004 - when the residential leasing market hit rock-bottom - rents across the whole island have increased by a smaller 13.9 per cent. And rents in what CBRE terms the ‘prime’ category, which is slightly more low-end than the luxury category, have also increased by a comparatively lower 13 per cent.

Average rents for the luxury segment grew from $3.50 per sq ft per month (psm) in the second quarter of 2004 to $4.10 psm in the second quarter of 2006. Rents for the prime segment grew from $2.30 psm to $2.60 psm, while islandwide rents climbed from $1.58 psm to $1.80 psm.

Observers say that the rental uptrend is in line with the general recovery and strengthening of the economy. But they also agree that upward price movements - especially in the high-end segment - are aided by expatriate demand. ‘The continued rental uptrend . . . is an indication that there is strong expatriate demand for quality rental housing, as well as some signs of improvement in the budget for housing,’ CBRE’s associate director for residential services Teresa Tso said.

Wallace Chu, senior manager of Savills Singapore, agrees with the assessment. ‘One reason for this is that a lot of expats are coming in,’ he said.

According to Savills, more senior executives are relocating to Singapore with higher housing allowances of $15,000 per month and above, and these executives usually look for larger units and detached houses in prime districts.

But recent figures released by the Urban Redevelopment Authority (URA) show that rents are still below their recent highs in the third quarter of 2000 for all types of private properties - non-landed apartments, terrace and semi-detached houses, and bungalows.

Present market sentiment believes that there is still a bit of time to go before prices draw on par with their highs in 2000, and one reason for this is that multinational companies have not been too quick to increase their housing allowances for the people they have brought into Singapore since the property downturn began. ‘While companies have adjusted expatriate housing budgets upwards since late 2005 in response to the upward market movement, many are keen to look into localised packages for their expatriates with a view to managing fixed costs whenever possible,’ said CBRE’s Ms Tso.

In a departure from URA’s statistics, CBRE’s data shows that islandwide rents have recovered to even exceed their 2000 high, while rents in the prime and luxury segments have almost reached the 2000 levels. CBRE said, however, that its sample size is much smaller than that used by the URA, and that calculation methods also differ.

Another effect of the expatriate demand is that properties in the two parts of Singapore more popular with the expat crowd - the Central and East regions - are seeing good rent growth. Looking at apartment and condominium rents across Singapore, Ms Tso said: ‘While these rents have on the whole improved islandwide, some regions have nevertheless moved ahead of the pack.’

As for rents outside the high-end segment, market watchers think that it will not be too long before a supply crunch means that increasing rents in top-tier properties filter down to the rest of the market. For example, demand for landed properties is expected to go up at a time when the number of such properties remain in short supply. This means that house-hunters may start to look at smaller properties, pushing up prices.

Source : Business Times - 7 Aug 2006

Property prices relatively low but rents are good due to proximity to downtown area

GEYLANG may not be the first place that comes to mind for home buyers looking to settle down in a quiet area.

But its infamous reputation has ironically helped to make some properties there a good investment: Rental yields there can be almost double those in surrounding areas.

These yields, an indication of the value owners get out of renting out their properties, are calculated as a ratio of the annual rents earned over what the buyers paid for the properties.

The relatively low prices for properties in Geylang, coupled with the attractive rents they get, mean good yields.

The fact that Geylang is just a stone’s throw away from the downtown area is a big selling point to many looking to rent, said property experts.

‘The demand comes from foreigners and working singles who like the proximity to their offices in Suntec City,’ said Mr Mark Teo, group division director of property agency ERA Singapore.

He added that ‘properties in Geylang still command a good rental price’.

Rents in Geylang are comparable to nearby Katong and East Coast - about $1,800 to $2,000 for a two-bedroom flat and $2,000 to $2,200 for a three-bedder.

Because home prices in Geylang are lower, annual rental yields, which are between 3 and 4 per cent for Katong and East Coast properties on average, can go up to 7 per cent in Geylang, property agents said.

For example, Mr Tan, an investor who declined to give his full name, enjoys a 7 per cent rental yield on his unit at Wing Fong Mansions in Geylang Lorong 14, which he bought for $350,000.

‘The apartments here are cheap and the rental price is good,’ he said, adding: ‘Apartments in other areas cost more than $400,000.’

A check of seven properties situated between Lorong 28 and Lorong 40 in Geylang found that the average price per sq ft (psf) is $441, compared with an average of $520 psf in nearby The Legenda in Joo Chiat, Dunman View and Haig Court.

That translates into rental yields of 5.2 per cent for Geylang properties, at least 1 percentage point higher than Katong and East Coast homes, which can cost up to $700,000, according to Mr Eric Cheng, senior division director of PropNex.

However, investors hoping to get financing for their home purchases should bear in mind that some banks may be reluctant to give loans for certain areas in Geylang for fear that they may face difficulty selling these properties in the event of a default and repossession.

But that does not bother some investors like Mr Tan.

‘I’m not worried about not being able to sell the apartment because the rental return is good,’ he said.

‘For properties, as long as the price is good, location doesn’t matter.’

Source : Sunday Times - 6 Aug 2006

Increased demand from relocating expats, prime districts most popular

THE number of residential leasing transactions increased to 8,807 over the first three months of this year. This represents a 15.8 per cent increase compared to the same period last year when the number of transactions was 7,599.

And according to Savills Singapore senior manager Wallace Chu, there have been 3,284 leases registered in April and May so far. ‘These are just the preliminary numbers and I am confident the final figure for Q2 could top the previous quarter,’ he said.

Mr Chu said that Districts 9, 10, 11, 15, 16 and 21 are the most popular residential districts among lessees. An analysis based on the latest full-year figures in 2005 by Savills revealed that District 10 registered the most leases - 17 per cent or 5,887 out of a total of 33,874.

District 15 - which includes Katong, Joo Chiat and Amber Road - came in second with 3,872 transactions, beating District 9’s 3,474 leases. Mr Chu said one explanation for District 15’s popularity could be the sheer number of developments there.

The most expensive homes for rent are in District 10 with developments like Ardmore Park, Spring Grove and The Wilby Residence fetching average rents of $48.64 psm pm, $32.17 psm pm and $34.12 psm pm (as of Q1 2006) respectively.

The Bayshore, costing $17.24 psm pm in District 16, had the most number of units leased - 75 units. Valley Park ($26.99 psm pm) in District 10 had 71 units leased and Aspen Heights ($30.08 psm pm) in District 9 had 66 units leased.

Rents also depend on the age of the development, and Mr Chu noted that the rental gap for developments less than five years old and those older than five years has ranged between 33-38 per cent for the last seven quarters.

Mr Chu said that the increase in leasing activity is due in part to the number of expatriates in Asian countries like Hong Kong and Japan relocating to Singapore. ‘They come from sectors like banking and R&D,’ he said. Based on Savills’ own data, Mr Chu said that these expatriates are senior executives with housing allowances of at least $15,000 per month.

With increased housing allowances, Mr Chu said that expatriates are looking for larger apartments and landed property.

He said that the volume for detached and terrace houses was 20 per cent more in the first quarter of this year than in the first quarter of 2005. He added that apart from the prime districts, landed property in Districts 15 and 16 were also popular with expatriates.

Those keen on buying property as an investment will be interested to know that gross rental yields are on par with Hong Kong at between 3.5-4.5 per cent. Those with a higher appetite for risk may want to consider China; Mr Chu said yields in Shanghai are 7-8 per cent.

Source : Business Times - 18 Jul 2006