Developers' ability to pass on SST costs to buyers dependent on economic conditions
KUCHING: Property developer's ability to pass on the proposed six per cent sales and services tax (SST) costs for its current projects onto buyers will depend on the current prevailing economic conditions says analysts from Maybank Investment Bank Bhd (Maybank Research).
In a real estate sector report, the analyst guided that the recent announcement of six per cent SST on construction services starting from July 1, 2025 is a negative surprise to property developers due to possible margin pressure for ongoing or sold projects.
While there is currently no guideline on how the SST would apply to contracts entered into before July 1 but billed thereafter or if it is only applicable to contracts signed after, the analyst guides that they cannot discount the possibility that developers may have to absorb the additional cost for commercial and industrial builds.
'To avoid margin erosion stemming from rising construction costs, we believe developers are likely to pass on these additional costs from unsold stock and future projects to buyers, though this is subject to prevailing market demand,' they guided.
A slower economic growth trajectory and weak market demand could constrain pricing power causing developers to face margin squeeze.
Maybank Research also points out that as most contracts incorporate a regulatory change review clause, developers are expected to bear this SST rather than contractors.
'Developers engaged in data centre (DC) construction, including ECW and SDPR, could also see increased expenditures, potentially reducing their internal rate of return (IRR),' they opined.
Furthermore, the analyst also notes that the 8 per cent SST on rental income while borne by tenants is still a negative impact to developers as it could restrain their leverage for rental increment negotiations, especially as many developers has placed a strategic emphasis on generating recurring income from investment property such as malls in recent years.
To reflect this increased risk of margin's squeeze on developers, Maybank Research estimates a circa four sen reduction in Ecoworld Bhd's and Sime Darby Property Bhd's revised net asset value (RNAV) estimates due to the six per cent SST costs associated with their DC projects.
To recap, effective July 1, 2025, construction services for infrastructure, commercial, and industrial buildings will be subject to a six per cent SST if the taxable value exceeds RM1.5 million annually.
However, exemptions are provided for residential buildings, public utilities relating to housing, and non-reviewable contracts which will enjoy a 12-month grace period from the effective date.
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