PETALING JAYA: Property developers’ operational costs could rise following the government’s move to impose a 6% sales and service tax (SST) on construction services.

Effective July 1, 2025, construction services for infrastructure, commercial and industrial buildings will be subject to a 6% service tax if the taxable value exceeds RM1.5mil annually.

However, exemptions are provided for residential buildings, public utilities related to housing, and non-reviewable contracts, which will enjoy a 12-month grace period from the effective date.

Additionally, business-to-business (B2B) relief will be available to prevent double taxation.

According to Maybank Investment Bank Research, the SST on construction services from July 1, 2025 will add pressure to property developers’ margins for ongoing (sold) projects, as they might have to absorb the additional cost for commercial and industrial builds.

It pointed out that there is currently no guideline on how it applies to contracts entered into before July 1 but billed thereafter, or whether it is only applicable to new contracts signed after the SST implementation date.

“As most contracts incorporate a regulatory change review clause, developers are expected to bear this SST, rather than contractors,” the research house said.

It believes that developers are likely to pass on these additional costs to buyers (those unsold stock and future projects) to avoid margin erosion stemming from rising construction costs.

However, a slower economic growth trajectory and weak market demand could constrain pricing power.

“Developers engaged in data centre (DC) construction, including Eco World Development Group Bhd (EcoWorld Malaysia) and Sime Darby Property Bhd (SimeProp), could also see increased expenditure, potentially reducing their internal rate of return,” it said.

Maybank IB estimates a four-sen reduction in EcoWorld Malaysia and SimeProp’s revised net asset value or RNAV estimates due to the 6% additional costs associated with their DC constructions.

The research house added that with a strategic emphasis on generating recurring income from investment properties in recent years, such as malls, the 8% SST on rental income would be borne by tenants, which could restrain developers’ leverage for rental increment negotiations.

“We maintain our earnings forecasts, pending clarity. Maintain ‘neutral’ on the property sector.

“Our buys are Eco World International Bhd, S P Setia Bhd and EcoWorld Malaysia,” it said.

The research house highlighted risks to its calls including weaker-than-expected property sales dragged by weaker economic outlook, policy risks, stricter lending measures by the banks, higher-than-expected liquidated ascertained damages compensation following the latest ruling by the Federal Court, and rising building material costs and labour issues.