Developers face cost challenges as 6% SST kicks in for commercial projects
THE 6% SST on construction services from 1 July 2025 is a negative surprise to property developers in Maybank Investment Bank (MIB)'s view with possible margin pressure for ongoing (sold) projects, as they might have to absorb the additional cost for commercial and industrial builds.
While future or unsold projects may allow cost pass-through, a slower economic growth and weak market demand could limit pricing power. MIB maintains neutrality in the property sector.
Effective 1 July 2025, construction services for infraastructure, commercial, and industrial buildings will be subject to a 6% service tax if the taxable value exceeds MYR1.5 mil 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.
The imposition of a 6% SST on construction services could elevate developers' operational costs. As most contracts incorporate a regulatory change review clause, developers are expected to bear this SST, rather than contractors.
Developers engaged in data center (DC) construction, including ECW and SDPR, could also see increased expenditures, potentially reducing their internal rate of return (IRR).
Concurrently, 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.
There is currently no guideline on how it applies to contracts entered into before 1 July but billed thereafter, or whether it is only applicable to new contracts signed after 1 July.
'To avoid margin erosion stemming from rising construction costs, we believe developers are likely to pass on these additional costs to buyers though subject to prevailing market demand,' said MIB.
A slower economic growth trajectory and weak market demand could however constrain pricing power. —June 11, 2025
Main image: Cleango
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