DBKL rate hikes a major punch in the gut

By Khairul Khalid

DBKL’s recent decision to raise assessment rates has caused much dismay and confusion among the city’s residents, not least because of the haphazard way in which it has been communicated. KiniBiz looks into some of the roots of the problem and the potential economic impact of the proposed hike.

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DBKL’s recent announcement of an imminent assessment rates increase has sent shock waves that could be felt in the years to come. It will hit approximately 1.6 million residents and over 424,000 households in KL, not to mention the multitude of businesses operating in KL.

Suddenly these households and businesses, already squeezed by other increases on costs and expenses, are facing another major punch in the gut.

Many of them are staring at an astonishing rate hike of between 100%-300% and in some instances even more. This would translate into exponential increases in assessment rates.

Hike levels not realistic

For example, a property owner who had previously paid RM500 in assessment would now conceivably have to pay up to RM2,000 or more under the new assessment. The increase could be palatable if household incomes and business revenues were also going up by the same levels, but in reality it is not.

The public is still reeling from spiralling costs of living, property prices and the announcement of GST (Goods and Services Tax) to be implemented in 2015. This unwelcome news of a new assessment rate due to be implemented in January 2014 has led to a predictable uproar.

Property owners all over KL have been receiving notification of the new assessment in the past few weeks and to quote a resident, “been falling off our chairs” after reading the new valuation of their properties by DBKL.

There has been mass confusion especially over the quantum of the rate increase and the actual amount that needs to be paid.

A valuer has commented that the assessment hike is “too high and unrealistic”, adding that it would be difficult for DBKL to collect if the public is simply unable to pay.

What is causing the confusion?

Many who received their notifications by DBKL were shocked due to the fact the letter only told them what their “Cadangan Nilai Tahunan” or “Proposed Annual Value” is. However, the letter only tells them only one side of the assessment computation – the annual value.

So it is no surprise to learn that some people have wept and fallen off their chairs at seeing the numbers stated on the notification. A property owner was completely stunned when seeing a RM39,000 valuation assuming that was his new payable assessment fees, whereas he had previously paid just over RM2,500 yearly in assessment fees.

To clarify, the “annual value” stated in DBKL’s letter of notification is simply an estimate rental value of the property.

The total assessment fee to be paid by a property owner is a percentage of the annual value.

For example, Property A that is estimated to fetch RM1,000 rental monthly has an annual value of RM12,000 (i.e. RM1,000 x 12 months).

Assessment rates differ between categories or type of properties. At the moment, the proposed rates are 6% for landed residential properties, 8% for apartments and 12% for commercial properties.

So, based on a hypothetical annual rental value of RM12,000 assessment fees to be paid for Property A (assuming that it could be either landed, strata or commercial property) is as follows:

Conflicting rationales

The timing of this assessment hike has caught everyone by surprise and is at odds with DBKL’s own previous pronouncements.

In excerpts from DBKL’s budget speeches found on its website, KL mayor Ahmad Phesal Talib announced in DBKL’s 2013 budget proposal that the city council is in good financial shape, with income from assessment expected to double to RM880.5 million, a spike of 8.6% from 2012. This did not include revenues from other streams.

He also added that a new assessment rates is unnecessary even though property prices have shot up because of the increasing number of new developments and housing units coming into the market, thus increasing the tax base.

This clearly does not jive with Federal Territories Minister Tengku Adnan Tengku Mansor’s statement that the hike is necessary because property prices in KL have skyrocketed and DBKL has not raised assessment rates for the last 21 years.

Even KL’s two former mayors Elyas Omar and Phesal’s predecessor Ahmad Fuad have waded into the debate by saying that the hike is absolutely unnecessary.

So if DBKL is in rude financial health, why has DBKL deemed this hike necessary all of a sudden?

And DBKL has not specified any particular reasons to justify the additional RM400 million that the new assessment is expected to rake for the council. More and more parties have clamoured for DBKL to make its annual reports public and disclose its spending in more detail.

Lack of communications and consultation

The public’s anguish over this matter could have been mitigated had DBKL had clearly communicated the amount of rates actually payable, instead of just assuming that everyone is knowledgeable enough to calculate the rates.

DBKL’s lack of clarity in its communications is also compounded by the new valuations that could vary wildly even for properties within the same area, without any sensible rationalisation.

Some have received relatively mild increases of 20%-60% while in other cases some have 200%-300% increases in valuation.

Resident Associations (RA) all over KL have gathered to vent their feelings. During one particular RA meeting, a man complained that he would have to pay 500% more under the new assessment, although his neighbours occupying similar units have been receiving different valuations.

“I am a valuer by profession and even I don’t understand how they (DBKL) came up with the new valuation. It is ridiculous,” said the furious homeowner.

Faizul Ridzuan, a property investor who owns several serviced apartments KL said that his new rates are up between 100% to 200%.

Indeed, the speed and suddenness of DBKL’s decision to raise the rates have begged the vital question, “Was there any proper consultation done during this revaluation exercise?”

Speaking to a few industry experts, KiniBiz found out that revaluation for purposes of increasing assessment rates could be a lengthy affair taking up to a year, or sometimes even more. This is understandable considering the complexity of revaluing the number of units and various types of buildings in KL.

Possible inflationary effects

The issue has clearly hit a public nerve because people are still feeling the pinch of rising costs of living KL. There are also fears that new rates would have an inflationary effect.

According to James Tan, Associate Director of Raine & Horne the increase would affect both the tenants and property owners.

“For renters/tenants, housing and accommodation costs would go up as their landlords would ask for higher rental eventually due to the new rates. This would result in the reduction in Household Disposable Income (HDI) causing them to spend less on other goods and services. Thus, in the long run it could have some impact on the economy,” James explained.

Tenants may also choose to move out of their houses if the increase in rental is too drastic which would cause an increase in vacancies. This would create an overhang in the property market.

From the property owners’ and landlords’ point of view, the increase in assessment would have to be absorbed and result in an increase in outgoings thus affecting the net income, yield and returns on the property.

James suggests that a more equitable way is to adjust any new assessment to the official government inflation rate and charge it once every five years.

“Annual value is calculated on the estimated market rental and is not tied to the cost of property, contrary to what the FT Minister is reported to have said. Rentals usually rise very gradually, unlike property prices in certain areas,” James said.

Tomorrow: Is a hike in assessment rates justified?