lecture 5 - govt. role in rec

8/8/2019 Lecture 5 - Govt. Role in REC

1/4

1

LECTURE 5

GOVERNMENTS ROLE IN THE

REAL ESTATE ECONOMICS

By:

Ma sni binti SallehNo. Bilik: B208-02

Tel: 07-453 8152 / 019-7205105ma [email protected] u.my

BPE 3393BPE 3393

REAL ESTATE ECONOMICSREAL ESTATE ECONOMICS

SEM 1, 2009/2010SEM 1, 2009/2010

LECTURE 5:LECTURE 5:

CONTENT

a) Level of governmentb) Government intervention in real estate market

c) Role of local governments

d) Planning control

e) Government power of eminent domain

f) Rent control

g) Land taxation

1.0 LEVEL OF GOVERNMENT

Three (3) levels of government in Malaysia:

Federal Government

State Government

Local Government

Mechanism:

Principle of Decentralisation

Doctrine ofUltra Vires (beyond the powers)

2.0 GOVERNMENT INTERVENTION IN

REAL ESTATE MARKET

Three (3) governmental roles influencing real estate markets:

Stewardship of public lands

Provision of infrastructure and public goods

Land use regulations

Property values may be significantly affected, +vely or vely by

government interference.

Three (3) broad facets of government intervention:

1. Public sector operates as integral part of market eg. occupier of

office space, developer of industrial estates and investor in land

and buildings.

2. Influencing actions of market operators by management of the

economy eg. monetary and fiscal measures and regional

policies.

3. Imposing framework of legislative constraint eg. planning

control, rent control and property taxation.

In many countries, local governments are the primary authorities

that directly regulate land use development.

In Malaysia, local governments are accorded relatively fewer, and

only residual allocative functions; other functions are performed

by Federal and State government departments and agencies.

They provide obligatory (housekeeping) and discretionary

(developmental) services, apart from regulatory and enforcement

functions.

Dominant sources of revenue for funding such services are

property rates, licences, fees, charges and government transfers.

3.0 ROLE OF LOCAL GOVERNMENT


2/4

2

Purpose:

To minimise negative externalities eg. congestion and urban

sprawl.

Catalyst to speed up desirable land use changes.

Suppressant to slow down or stop undesirable trends

Increase efficiency and profitability of business activity.

Improve amenity.

Result:

Increase in aggregate property values.

4.0 PLANNING CONTROL (i) Land Use Controls

To contain development and limit urban sprawl ie. restrictingsupply of land for development. In times of rising demand, will

tend to result in rising value of development land.

Tends to increase density to which land is developed for higher

order uses. For eg. if office use is restricted in allocated area in

times of rising demand, there will be an increase in density of

development through redevelopment of existing property to meet

occupation demand.

Tendency of land use controls is to concentrate land value

spatially.

(ii) Density Controls

Prevent supply from responding to rise in occupation demand

causing rental values to rise.

Capital Values may rise even more because restrictions on density

reduce risk on oversupply and increase investors growth

expectations.

Unsatisfied occupation demand for office space in the bestlocations would be diverted to close substitute locations causing

rental, capital and site values to rise, and ultimately lower order

uses to be squeezed out.

Density controls tend to spread value over wider area.

(iii) Combination of Density and Land Use Controls

Will cause rental and capital value of property to rise to a greater

extent.

If sufficient amount of undeveloped property exist, supply will

respond to rise in demand with value being little affected.

If area is fully developed, than stock of property is virtually fixed,

and property values will vary only according to changing demandand existing supply.

Firms unable to justify high rentals will be diverted to close

substitute locations or to another town or city.

(iv) Building By-Laws or Codes

A series of standards and specifications designed to establish

minimum safeguards in the construction of buildings, and to

protect those who live and work in them

They describe in great detail the materials, methods and

techniques to be used in the construction of buildings

In recent years, they have been criticised as inhibiting the

introduction of new innovative building designs, materials or

technologies

(v) Timing of Value Changes

Minimal impact in the short run even if there is a development

prohibition. With a development of say, 2 5 years, property in

the course of development would continue to be completed over

succeeding years.

There tends to be a significant time lag before effect of office

development controls is reflected in rental values ie. when new

supply starts to fall after a time lag of about two years.


3/4

3

(vi) Influence of Structure Plans

Potentially have major implications for commercial propertyvalues and investment returns.

Provide framework for both public and private sector economic

development; may identify depressed areas in which economic

development is to be encouraged and other areas in which further

development will be restricted.

The right of Government to acquire private property (compulsory

purchase) without owners consent for a public purpose in

exchange forjust compensation.

Arises from practical necessity of government to provide basic

public services such as highways, schools and other public

facilities.

5.0 GOVERNMENT POWER OF EMINENT

DOMAIN

Can take a variety of forms eg. rigid rent freeze, restriction on

amount of or increase in rent, controls on rent payable by sitting

tenants only, or new tenants as well.

Objective is to restrict rental payments below a market level in

order to relieve tenants of their rental burden.

Will thus tend to affect all three elements of supply supply of

existing rented property for relet, the supply of existing property

through transfers into (or out of) owner occupation, and supply of

newly-developed property.

6.0 RENT CONTROL The impact of taxation on the property market is all pervasive.

Occupiers, investors and developers are ultimately concerned with

net of tax returns, and thus incidence of taxation must tend to

affect all land use and property values through the price

mechanism.

7.0 LAND TAXATION

Taxes On Real Estate

Federal Revenue:

Stamp Duty

Estate Duty

Real PropertyGains Tax

State Revenue:

Annual Rents

Premium andAdditionalPremiums

Local GovernmentRevenue:

Rates and Cess

DevelopmentCharges

Local Authority Rates

Rates are an annual tax levied on owners of property according to

its value. Once valued, these properties are included in local

authorities respective valuation lists for the purpose of taxation.

In Malaysia, the basis of assessment is Annual Value ie. gross

annual rent the property might be expected to let less certain

statutory allowances, or based on Improved Value ie. capital value

of property.

Generally, the calculation of rates assessment by a local authority

(LA) can be expressed as such:

AV of Property Rate % Imposed By LA

= Amount of Rates Assessment Payable

The rate percent is derived as follows:

Expend. of LA LA Rev. Other Than Rates 100

Total AV In Valuation List

= Rate % Imposed


4/4

4

LAs are allowed to impose different rates percent based on

categories of property and/or their location according to certain

standards of amenities provided.

Generally, property located in areas benefiting from many local

amenities would let and sell for more than those in less privileged

locations and this difference is automatically reflected in the

assessment. For eg. commercial properties located near town

centres have a higher rate burden compared to properties located

further.

Rates, however, is a non-elastic revenue which does not rise

automatically in consonance with the rise in the values of

properties or rise in inflation rates, or with rise of the incomes of

ratepayers.

Rates is also known for its high visibility due to its lump-sum, one-

time character. It is one of the most direct form of all taxes paid by

taxpayers and is therefore by nature a very sensitive levypolitically.

Rates is also incompatible to regional equalisation policy as it

perpetuates disparities instead.

Revenues from rates is dependent on level of development

(including public expenditures) in the areas of the individual LA.

The higher the intensity of development, the more taxes can be

collected owing to the higher value and larger number of

properties.

From tenants viewpoint, rates are not considered as part of total

costs of occupation along with rent and service charges. Changes

in amount of rates does not affect occupation demand for

property within the rent-review period.

For an owner, rates constitutes as part of the unavoidable costs of

owning properties and is reflected in his business undertakings or

offer of rent to prospective tenants.

A property investor will be concerned with how local and regional

variations will tend to distort rental or capital values, since rates

burden is not uniform but set by individual LAs.

Development Charge

Development charge is a tax on value of pure land on grounds of

equity and efficiency.

Tax on betterment ie. the increase in land value where a local plan

effects a change of use, density or floor area in respect of any land

or the granting of planning permission.

Imposition of Development Charge has the effect of restricting

supply of land and raising the price of development land, leading

in the long run to higher property values.

Thank youTHANK YOUTHANK YOUAug, 2009

lecture 5 - govt. role in rec

Documents