M-REITS - impact by assessment rate

M-REITS with property in the city centre may see some impact on their bottom lines in 2014. If a proposed assessment hike by KL City materializes.

Various reports have that DBKL has proposed to increase the annual value of properties of which the assessment rate is based, by between 100% and 300%.

This will be another stumbling block for the property sector that was also on the receiving end of cooling measures announced in Budget 2014 such as higher real property gains tax.

For REITs, a higher assessment would translate into higher operating expenditure, which would impact net profit.

Presently (Nov 2013), residential properties are taxed at 6% and commercial ones at 12% on the annual value. Industry players believe that DBKL does not intend to raise the tax rates but rather, revise the valuation of properties on which the assessment tax is levied,

This implies that the expectation is for the annual value to be restarted by as high as 100% to 300% on existing valuations.

Those impacted will be existing projects where the market value has not been updated recently. So newer developments should be fairly insulated.

The assessment tax rate is levied on the annual value of a property on a semi annual basis.

These rates vary for different types of residential properties in different localities and is payable in two installments annually.

DBKL has the right to review the assessment once every five years but has not done so for 21 years. The chargeable rates are at the discretion of the local council as long as the rates are less than 35%.