Govt waives building premium on lease top-ups

Little impact seen as only a handful of applicants incur cost in past year

The government will waive the building premium when a lease extension is granted
with immediate effect. But as tantalising as this may sound, the impact is likely
to be minimal.

Fewer than 30 developments have sought lease extensions in the past year, says the
Ministry of Law. And only a ‘handful’ have incurred the building premium.

The building premium is based on the value the Chief Valuer puts on a building
sitting on the land with an expiring lease and is payable if a lease extension is
sought.

It is separate from the land premium, which is based on the value the Chief Valuer
puts on the land the building sits on.

There is no change to the land premium.

The building premium does not apply if a building is demolished. Only the land
premium - as in most collective sale deals - applies.

In a statement released yesterday, the government said it decided on the building

premium waiver because ‘this will encourage lessees to continue to invest in the
upkeep and improvement of the property’.

DTZ senior research director Chua Chor Hoon said: ‘This is good news for lessees.
It seems illogical that one has to pay a building premium for a building one built
on the site. It’s like a double charge. This will reduce the cost of extending a
lease.’

But the building premium is thought to be only a fraction of the land premium -
more often referred to as the differential premium.

Knight Frank director (research and consultancy) Nicholas Mak said: ‘The building
premium makes up a small part of the taxes compared with development charges or
the differential premium.’

And according to him: ‘If the amount waived is too small, it may not encourage
building owners to upkeep or improve their property.’

As such, Mr Mak believes the properties most likely to be affected are industrial
units on short leases and leasehold conservation properties because they cannot be
torn down.

The waiver was actually introduced in 1997, when it only applied to the extension
of short-term industrial and institutional leases. It will now apply to the
extension of leases on all types of property.

But the impact on other types of property is expected to be limited, says Cushman
and Wakefield managing director Donald Han: ‘I don’t think there will be a lot of
residential properties affected by this, except for those on short-term lease
tenure like at Riffle Range, which has some 30-years left of its lease remaining.’

The extension of a lease is also not a given, he noted: ‘I think government may
consider extending leases on short term basis, but this must be in line with
socio-economic and overall planning considerations.’
Source : Business Times - 2 Sep 2008