Property investment dreams dashed? How the property tax hike may affect investors

SINGAPORE: If you own a penthouse or Good Class Bungalow for investment purposes, you may feel the pinch from the upcoming increase in property tax.

However, if your property commands an annual value of S$30,000 or less – like most homes – the tax hike may not have a “significant impact”.

As the increase targets the ultra-rich, it is a wealth tax rather than a cooling measure, making it a “progressive tax scheme”, property analysts told CNA. 

Finance Minister Lawrence Wong announced in his Budget 2022 speech that along with a higher personal income tax rate for top-tier earners and an additional levy on luxury cars, property taxes will be raised.

The increase will apply to homes with annual values of more than S$30,000 and all non-owner occupied properties, with the rise being more significant for high-end homes.

Currently at 10 to 20 per cent, the tax rates for non-owner occupied properties will first be raised to between 11 and 27 per cent in 2023, before being raised further to between 12 and 36 per cent in 2024.

“These hikes would see a slightly greater increase in property tax on higher-end assets with annual value exceeding S$30,000, but would only skew towards posing a significant impact when we transit into the luxury categories of penthouses and Good Class Bungalows,” said Mr Evan Chung, head of Knight Frank Property Network.  

“Hence achieving its goals of being a progressive tax scheme.”

The annual value of Good Class Bungalows typically are in excess of S$100,000 and would “bear the brunt” of the increase, he added.

TAX HIKE TARGETED AT “TOP END OF THE MARKET”

The hike is “regarded more as a wealth tax", and it’s targeted at the top end of the market”, added Ms Tricia Song, head of research for Southeast Asia at CBRE Singapore.

For example, the maximum 80 per cent hike of S$9,600 for a S$90,000 annual value investment property can chip away about 8 per cent of its gross annual rental income, she explained. 

“This is still minimal, considering a property worth S$5 million ... Out of the nearly 33,000 private home sales, including resales in 2021, only 1,539 units or 4.7 per cent were over S$5 million in value,” she said. 

“The bulk of the transactions were below S$2 million, meaning they would only attract 20 per cent more property tax, or less than 2 per cent of gross rental income.” 

But Mr Chung highlighted that the bulk of these luxury assets “cater for owner-occupation”, thus incurring a “milder increase” in taxation rates. 

For owner-occupied homes, the tax rate currently ranges from 4 to 16 per cent beyond the first S$8,000 of a property’s annual value. Under the new changes, there will be a taxation range of 5 to 23 per cent beyond the first S$30,000 valuation by 2023, with a further increase to between 6 and 32 per cent in 2024.

“The ultra-rich would unlikely be deterred in acquiring a trophy asset given greater financial resources at their disposal,” said Mr Chung.

The tax hike is also unlikely to affect the selling of luxury homes as such properties tend to be “more focused on capital appreciation than just rental yield”, added country manager for PropertyGuru Singapore, Dr Tan Tee Khoon.

“Demand for luxury residential properties has been resilient, largely driven by both local and foreign property buyers. Furthermore, the focus on capital preservation throughout the pandemic has driven many foreign investors to divert their funds to real estate properties,” he said.

Luxury home sales in Singapore have risen to their highest in more than 10 years, he noted.

According to Urban Redevelopment Authority data, private home sales in the Core Central Region jumped by almost 25 per cent quarter-on-quarter in the second quarter of 2021 to 1,930 units. This made it the strongest quarter since the fourth quarter of 2010. 

Additionally, in the first half of 2021, almost 3,500 luxury homes were sold, surpassing the annual sales from 2018 to 2020. 

Luxury homes are residences typically found in the Core Central Region with a price point of S$2 million and above, at an average of S$2,500 per square foot. 

TAX INCREASE “UNLIKELY TO PERTURB” AVERAGE INVESTORS

Outside of luxury homes, the property tax increase could affect average investors but it won’t be a dealbreaker, said analysts. 

After all, the median annual value of non-landed private homes, excluding executive condominiums, was a “modest” S$22,000 in 2020 – a category that most investment properties in Singapore fall under, said Knight Frank’s Mr Chung. 

“The magnitude of increase for non-owner occupied property tax is fairly moderate, given it would be only an increase of S$220 for each year of 2023 and 2024 from the original S$2,200 in 2022.”

Moreover, compared to the high cost of purchase with the recent hike in Additional Buyer's Stamp Duty (ABSD), the rise in property tax is “a very modest increase”, he added. 

ABSD rates were last raised on Dec 16, as part of a package of government measures to cool the property market.

“Owning a private residential investment property has always been highly desired amongst Singaporeans and many are willing to bear the premium of home ownership for its yield and potential capital gains.” 

Hence this hike is “unlikely to perturb most investors”, who could simply raise rentals to cover the additional costs of ownership, said Mr Chung. 

Added CBRE’s Ms Song: “On its own, the increase in property tax is unlikely to dent investor sentiment, but it will take some winds out of the sails as rents are on the rise. So investor sentiment for high-end property could stay low for a while, coming barely two months after the more significant measures, such as (an increase in) ABSD rates.”

Seasoned investors also play the long game, said PropertyGuru’s Dr Tan. 

“(They) often take a longer time horizon perspective on capital appreciation which is also the eventual return on investment. And property tax is scarcely a key determinant of property investment as it’s deemed to be part of holding costs for property ownership.”

Alternatively, the higher tax may also prompt existing owners of investment properties or property investors to consider commercial property investments that don’t attract ABSD, with property tax rates at 10 per cent of the annual value, he added.

COULD RENTAL RATES INCREASE?

While investors may not hesitate to purchase an investment property, the increase in tax rates could trickle down to affect tenants renting these homes, analysts noted. 

“It may be possible that landlords try to pass on the costs to tenants for the centrally located condos and landed properties, as the increase in property tax is quite significant for this segment,” said Ms Christine Sun, senior vice-president of research and analytics at OrangeTee & Tie. 

But she pointed out that there could also be other factors that lead to an increase in rental costs, such as inflation and rising interest rates. 

For areas that see a big increase in housing supply, it may be harder for landlords to raise rental prices due to increased competition for tenants, added Ms Sun. 

Landlords are “obligated in tenancy agreements to pay taxes”, Dr Tan said.

“Even if landlords take the increased property tax into consideration when revising rents in lease renewals, this may only affect tenants whose rents are above S$10,000 per month, given that the tax hikes are steeper for more luxurious properties.”

However, Dr Tan highlighted that the overall rental market is “flourishing” and a “vibrant” private rental market can be expected this year.  

“Locals are fuelling the rental market. The strong demand is driven by those who are choosing to rent while waiting for their homes to be completed as well as single millennials and unmarried couples who want to move out of their family homes due to insufficient space and privacy,” he said. 

“As more vaccinated travel lanes are introduced and expatriates return, the competition for rental units is set to climb.”

“SICK AND TIRED” OF TAX INCREASES 

Property owners who spoke with CNA were divided on their views towards the hike. 

Mary (not her real name) said in an email to CNA that she was "upset" about the latest increase in non-owner occupied property taxes. 

The 58-year-old who works in the electronics industry said she came from “a very poor family” and worked hard to reach a higher income – enough to own two properties, of which one is tenanted.

“The Government is always focusing on helping the low- and middle-income. Have (they) ever considered that there are people who choose not to work hard and study hard ... to enjoy the financial benefits from the Government?” she said.

At the moment, Mary pays about S$1,200 in property taxes a month, which adds up to about S$15,000 of property tax for 2021, she told CNA. 

The increase in property taxes should be a “case-by-case basis”, she added. 

“Some people inherit it from their parents and they may not be rich but they have to suffer the high tax. Some people worked very hard, like me, but I have to pay high taxes. For example, my company gave me a S$300 monthly salary increment but I had to pay S$400 more tax per month because I have a second property,” she said. 

“Some people are very rich and they can easily afford and own properties; tax is nothing to them as they are cash-rich. Some rich people evade tax by using their children’s name to buy properties – I know of friends who did this.”

Mary said she may consider selling her investment property as she is “sick and tired” of rising taxes and has “no means” to continue to “suffer high taxes”. 

But she won’t raise the rent for her tenants to cushion the impact of the tax hike, as the rental market is “very competitive”.

TAX INCREASE “STILL DOABLE”, HELPS LOWER-INCOME

On the other hand, another owner who only wanted to be known as Li Fen told CNA that the tax increase is “still doable”.

“It’s definitely a pain, it’ll definitely hit your pocket, but only because we see it as over S$1,000, almost S$2,000. But if you divide it up monthly, it is a couple of hundred dollars. So I think it’s still doable,” said the 44-year-old owner of two tenanted properties.

Unlike Mary, the tax increase wouldn’t prompt her to sell her investment properties, she added. 

“You know, home ownership comes with a lot of costs, you have insurance, property tax, maintenance and things like that. In fact, the maintenance charges (can be) higher than the property tax itself. So I don't think all this will affect the decision to sell a property, especially if you can get a good rental yield. It simply makes the rental yield lower.”

In fact, Li Fen said the ability to pay taxes means “you’re privileged enough”, and there are people who’d “rather pay taxes than to be poor”. 

“I can understand why the Government does this, because you really want to tax those who can afford it. If you tax the super-rich billionaires and millionaires, they're not going to stay in Singapore. They’re going to move elsewhere where the taxes are low, and in the end, who’s going to bear the tax burden? Normal people like us. 

“So I think if you spread out the tax a little … I mean, I'm not saying don't tax the rich. Yes, we should still tax them. But not a sudden increase.”

Li Fen added that the percentage increase is “okay”, since initiatives to help residents, such as the Jobs Support Scheme, would depend on taxes. 

“A lot of things have increased (in price) … even before the GST (Goods and Services Tax) has been implemented. So I think the lower-income group has been suffering, and if we can pay a little more tax just to make their lives easier, I’m quite okay,” she shared. 

“I’m really not paying a lot; the increase is not so bad that it’s going to bankrupt me. I may just get less rental yield. But if I can help the poor, then okay, I'm fine with that. It's like redistribution of riches.”