Investing in commercial property in Singapore – factors to consider

commercial property

Table of Contents

Did you enjoy playing monopoly? I bet the thought of owning multiple properties and having tenants pay you a monthly pay cheque sounds enticing. Then one common enemy stands between us and our rent seeking aspiration, and that is ABSD.

As a pretext, consider the following two key events that unfolded.

First, ABSD was further heightened as part of the recent cooling measure, it now stands at 20% for Singaporean citizens and 60% for foreigners.

Next, post pandemic, foreign property investors developed a strong appreciation of Singapore’s economical and political stability. This resulted in a migration of investment capital into Singapore in the form of family offices.

These two key events serve as motivation for us to examine the case of whether investing in commercial real estate as an alternative to residential property, can be the solution to avoid ABSD while benefiting from increased foreign investor demand.

We intend for this article to serve as the gateway article leading you on to deeper research into the specific class of commercial real estate that interests you.

Types of commercial property

Commercial properties is a broad definition of all real estate that serves a business purpose. Unlike residential property which are used primarily for residence, commercial properties exist to facilitate retail, office work, manufacturing, warehousing and other business activities.

As the viability of a commercial property is unique to the different types of commercial properties, it is important to first get ourselves initiated to the different types of commercial properties

Retail
Retail properties range from high-end shopping malls to small retail shop houses in your neighbourhood. Prospective tenants range from cafes, retail stores to beauty salons.

Industrial
Industrial properties are used for industrial activities ranging from the production to warehousing of goods.

They are classified into Business 1 and Business 2 zoning in Singapore. B1 industrial properties are meant for clean and light industrial activities and can be located in close proximity with residential properties. While B2 industrial properties are zoned for heavy industries that require a nuisance buffer of more than 50 metres away from residential development.

Office
Offices serve as a place for executive work for companies. They are classified into 3 different grades, with each grade representative of the property’s architectural, functional qualities and its proximity to the central business district

Grade A offices are generally located in the central business district and offer top notch amenities and facilities. Grade B offices feature older buildings, further away from the CBD. While Grade C offices comprise makeshift spaces that aren’t actually office buildings like the upper levels of a shophouse units.

Hotel
Hotel includes all properties used for commercial lodging purposes like hotels, serviced apartments and resorts.

Shophouses
Deserving of a category on its own. Shophouses are now in vogue, due to foreign investor interest in recent years. These are heritage buildings with unique architecture, conserved under URA guidelines.

Strata titled property vs non strata titled property

Pragmatically, as we write with the average property investor in mind. We should understand the difference between strata titled property versus non strata titled property.

Strata titled properties are property jointly developed by a developer and sub divided into smaller units, each with its individual title for sale to different investors. While a non strata development is a property that is wholly owned by a single owner.

Examples of a strata titled office development would be Paya Lebar Square and Shenton house while developments like Capita Green and One Raffles Quay would be considered non strata titled development.

Hence, from an average investor perspective, aside from heritage shophouses. You would most of the time be restricted to looking at a more affordable strata titled commercial property instead of owning an entire non strata development.

Advantages for owning commercial real estate

No ABSD

Back to the point that initiated this article, unlike its residential counterpart, commercial properties are not subjected to ABSD. This makes it an appealing option for investors that have already owned two residential properties and are looking for ways to add a third property into their portfolio.

While we are on the topic of stamp duties, it is important to note that buyer stamp duty (BSD) is still applicable for the purchase of commercial properties. Specifically for industrial properties, seller stamp duty is taxable when the property is sold within the 3 year holding period from the date of purchase.

As a side note, if you are interested to read more about the 2 most practical way on how to buy second property in singapore without absd. Check out article inline.

The following rates are applicable

Seller Stamp Duty for commercial property purchased on and after 11 Mar 2017Duty (%)
Up to 1 year12%
More than 1 year and up to 2 year8%
More than 2 years and up to 3 years4%
More than 3 yearsNo SSD Payable

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Open for foreigner purchase

Commercial properties make for a compelling investment option for foreigners.

Unlike residential properties that impose a 60% ABSD charge on foreigners and only allow foreigners to purchase non-landed private homes and landed properties in Sentosa Cove.

Foreigners do not need to pay ABSD and are free to buy most commercial properties in Singapore. They will only need to seek approval from URA, if the commercial properties comprise a mixed commercial and residential land use zoning.

From a Singaporean investor perspective, it would be interesting to consider owning the right commercial property to capture future capital appreciation from the up swing in demand from foreign investors.

High rental yield

Due to the fact that commercial properties exist to facilitate revenue generating businesses. Tenants who are business operators, are able to pay a higher rental rate than that of a residential property.

The average rental yield of a commercial property ranges between 5% to 6% while a residential property yields an average of 2% to 3%.

Under the backdrop of an optimistic economic environment. When a mortgage can be secured at an appropriate interest rate, coupled with an optimal rental rate. Commercial properties make for a good cash flow generating asset.

Lower property tax

Commercial properties are taxed at a flat rate of 10% based on its annual value, which is the estimated gross annual rent of the property. While an owner occupied residential property is taxed on a tiered model, between 0% to 16% and a non owner occupied residential property is taxed between 10% to 20%.

In short, you will pay a lower property tax for a commercial property than a residential property.

Build equity in property instead of paying rent

Relevant to business owners. Instead of incurring expenses in renting a place of work for your business, the monthly expenses can be channelled towards the payment of mortgage for owning a commercial property.

As the business scales, you can consider switching to a bigger space and repositioning the current property into a rental property generating monthly rental income for the business and eventually selling it with a capital appreciation.

It is also helpful to note that, the financing criterias are normally more favourable for business operators financing a property for their own use. Banks will normally offer a higher loan quantum with better interest rate to a business operator compared to a pure investor.

Disadvantages for owning commercial real estate

Financing – bigger cash outlay and higher interest rate

These are the factors that lead to a larger cash outlay to finance a commercial property compared to a residential property.

Firstly, CPF cannot be used to finance the downpayment of a commercial property, hence the initial cash down payment has to be finance fully with cash.

Next, even though the loan to valuation ratio for financing a commercial property is higher at 80% versus 75% for residential property. Depending on whether you are purchasing the property for your own business use or investment purposes, banks will normally offer a loan quantum lower than 80%. As they deemed commercial property to be a riskier asset class than residential property.

As a side note it is worth noting that the 55% total debt servicing ratio is also applicable when qualifying for a commercial property loan. This means that your existing debt obligation including your residential property mortgage, coupled with the commercial property mortgage should not exceed 55% of your monthly income.

Lastly, due to the risk profile of commercial properties, banks will normally offer loans at a higher interest rate than residential properties.

GST – 8% GST is chargeable on both the purchase and rental income

For all commercial properties in Singapore, a 8% GST is chargeable to the buyer on the purchase of the property and the rental income derived from it. Under the condition that the property is purchased from a GST registered seller.

A point relief is that these costs are claimable if you incorporate a GST registered company to make the purchase.

However, the 8% GST charges have to be paid up front prior to making claims, adding up to the initial cash requirement.

Shorter Lease

While residential properties usually come with a 99 year lease, commercial properties feature a much shorter lease of either 30 years or 60 years. Freehold commercial properties are few and far between, and are normally located in sub optimal fringe location.

With the announcement of commercial sites with shorter tenure and smaller sites in 2012, the land tenure of all future industrial government land sales programmes have since been capped at 30 year tenure. This further limited the supply of commercial properties with 60 years lease.

It is important to consider the lease of the commercial property you are investing in as it brings about the following two impacts.

The lease life of a property affects your loan tenure, a property with a shorter lease life will result in a shorter loan tenure, resulting in a higher monthly mortgage payment and taking your monthly rental income into consideration, this could result in challenges in generating positive cash flow monthly.

Next, a shorter lease life limits your opportunity to resell the property to another buyer for capital gain. There will be limited buyers for a property with a 10 year lease remaining, and you would most probably have to position the property as a source of rental income till the end of its tenure.

Less Liquid – harder to sell a commercial property

In times of economic difficulties, it would be much harder to find a buyer for a commercial property compared to a residential property.

Prospective investors and business owners will refrain from purchasing a commercial property due to concerns over rentability and business viability.

On the flipside, despite economic downturns, there will still be a ready pool of buyers for residential property purchasing for own stay purposes.

Hence, it is important to take this into consideration and ensure sufficient holding power to endure through periods of downturn.

Other Factors to Consider

Exposure to industry specific cycles

Setting the context for the other factors to come, let’s establish the fact that the success or failure of your commercial property investment is largely tied to the bust and boom of your tenant’s business.

Unlike residential property when there is always a ready pool of buyers and tenants looking to buy or rent your property. The demand for your commercial property can be severely impacted when your client’s industry faces a downtrend.

Using retail properties as an example, during the pandemic period when retail shopping, food and beverage consumption were severely restricted. Retail tenant business suffered resulting in depressed rent renewal and dampened buyer’s demand for retail properties.

Similarly for industrial properties, an economic recession could lead to a slump in manufacturing activities leading to a period of low demand and price depreciation for industrial properties.

Hence, prior to investing in a commercial property it is important to first develop an intimate knowledge of the industries that your property is catering to.

Choosing the right type of commercial property

As mentioned earlier, commercial property encompasses several different categories of properties each with its own industry and business dynamics.

Hence, in order to choose the right type of commercial property, you would need to develop a view on the future prospect for a certain class of commercial properties, based on the future trends shaping it.

Taking B1 industrial properties as an example. These industrial properties are normally used by local small medium enterprises engaging in light manufacturing, warehousing or media production work.To confidently invest in this property type, you must first be bullish on the future development of your future tenants business.

Consider the complementary businesses around the property

Businesses normally like to be located in areas with other businesses that are complementary to its services. Hence investing in a commercial property with the right type of complementary businesses surrounding it will help increase the rentability and buyer demand for your property.

Consider the fact that you are looking to own a retail shop house, it would be important to ensure that the businesses surrounding it will help bring in the right kind of foot fall that your future tenant is interested in.

Location matters

Similar to residential property, location plays a large part in the attractiveness of a commercial property. It will be important to place yourself in the shoes of a business operator and consider the ease how their employees, customer and supplier can access their office or retail outlet.

In line with location as a factor, it is also important to consider the supply of the similar property type within the same location versus the demand for the property from future buyers and tenants.

Consider the example of Oxley Bizhub, a B1 Industrial property in the Tai Seng area. Granted it is located in an optimal city fringe location, there is a vast supply of competing developments with B1 industrial properties in the area.

commercial property, oxley bizhub 2

Image credit – Oxley Bizhub2 

Compared to Midview City, a B1 industrial development situated in the Sin Ming area, It is the only development situated next to MRT serving the area.

commercial property, midview city

Image credit – Midview City

Hence, it is important to incorporate location and its related supply and demand dynamics into consideration when selecting a commercial property.

Final words

Ultimately it is important to invest in something that you understand. Based on your insights in the particular business or industry, develop a case for investing into a selected type of commercial asset.

We hope this gateway article into commercial properties will spur you on to do further research into the specifics of each class of commercial property and get you started on adding a commercial property to your portfolio. Happy monopolying.

If you are considering other methods to avoid ABSD while owning multiple properties, check out this article.

More reads, more gains ?

Kudos on making it this far. The fact that you have invested the last 5 mins reading this article. We believe you are a like minded real estate investor looking to beat the rat race by getting more out of your real estate investment.

If so, do check out the following articles.

Author

  • Jue Wen

    Jue Wen is the content marketing lead. This means he spend his waking hours researching and writing all things real estate. He believes life is a hustle and there is no joy in grinding away daily in our little rat races. He believes making wise moves in real estate investment can be a game changer. Aside from writing all things real estate, you can find him in your nearest bouldering gym.

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Jue Wen

Author

Jue Wen is the property analyst and content marketing lead at decoupling expertise.
He specialises in helping clients overcome the complexities involved in owning their second private property in Singapore.
He had over 10 years of experience in real estate investing and have written over 40 detail guides on decoupling and minimising ABSD. He is a licensed real estate consultant and holds a Bachelor degree in Business Management from the Nanyang Technological University.

Kenji

Co-Author

Kenji is the Group Division Director of ERA Realty Network.
He have got over 20 years of experience in real estate and have successfully helped over 50 couples purchased their second property. He specialises in helping client achieve the best approach towards acquiring their ideal investment properties while minimising ABSD.