If you are reading this article, you may be considering an investment other than residential properties in Singapore. Or you would like to add a commercial property as part of your investment portfolio.
Before you jump into buying a commercial property, you may want to consider the following factors:
1) Investment Yield and Potential Capital Appreciation
2) Outright Cash Payments
3) Taxation Rate
4) Tenure of Property
5) Type of Commercial Property
6) Location
7) Insider Information
8) Personal name or Company Name?
9) No ABSD and SSD
10) Holding Power
1) Investment Yield and Potential Capital Appreciation
The yield for commercial property is usually healthier than for residential property. Residential property rental yields are between 1-3% compared to an average of 5% for commercial properties.
The yield will vary according to the location of property, tenure (affecting the price you buy at) and the infrastructure surrounding the property.
Singapore is constantly developing and improving its infrastructure, towns are getting more densely populated and this density of population will affect how much traffic a retail shop, for instance, will be getting.
Some commercial tenants may want more foot traffic if they are retail, but it also depends on what type of retail. Some retail shops do not depend on foot traffic and they already have a following of customer base who will travel to where they are located.
Before buying a commercial property, one should study the history of prices in the area and potential developments in the next ten years in the area. For example, if the shop is located within an old HDB estate and if the estate goes enbloc, almost all the potential traffic will disappear.
2) Outright Cash Payments
To buy commercial properties, you have to fork out more in cash.
Why? One of the main reasons is that you are unable to use CPF for commercial properties, unlike residential properties.
The Non-Residential Properties scheme was stopped on 1st July 2006. For buyers who had used their CPF to service their housing loans before 1st July 2006, they will not affected by this change.
A Commercial property is deemed non essential, unlike a home.
Loan To Value (LTV) for commercial properties tend to have bigger cash downpayments. Typically, the bank is able to loan you up to 80% of the property value, depending on whether you are buying the property for your own use or for investment/rental purposes. The latter will be subjected to more stringent criteria by certain banks.
Goods Services Tax (GST) will need to be paid when purchasing a commercial property. GST has to be paid in cash, and will not be able to be covered by the loan.
You can claim back the GST if you register a company. However, you will need to be GST registered first. There are requirements to be met by Inland Revenue Authority of Singapore (IRAS) before you are able to claim. You can read up more at www.iras.gov.sg .
3) Taxation Rate
For commercial properties, owners are taxed a flat 10% of its Annual Value (AV) for property tax.
In contrast, residential properties have a tiered property tax based on the AV ranging from 0% to 16% for owner occupied properties. For non-owner occupied properties, the tax ranges from 10% to 20%.
You have to factor this in when calculating your yield.
4) Tenure of Property
For residential properties, tenure tends to be either 99 year leasehold, 999 year leasehold or freehold. For commercial properties, 60 year leasehold is quite a common sight.
Freehold commercial properties are rarer to find and they are situated in more obscure or inaccessible areas and thus may be more suited for light industrial usage than retail.
5) Type of Commercial Property
Are you more interested in shophouses or retail in shopping mall? Or office or industrial type of space? Do you have any business ownership experience?
All these can help you decide what type of commercial property you should get.
If you have experience in F&B, you may prefer to buy a F&B space in a shophouse, for example.
Having experience in the industry will help you understand the industry cycle (peaks and off peaks) and specific nuances that might affect your rental. This can help you tailor your rental needs to the tenant. E.g. tying a portion of your rental to the monthly sales of your tenant.
6) Location
You can either start off with the budget you have or choose the type of commercial property or you can narrow down by location.
If you prefer a location like Woodlands, most likely the choices available to you are mostly industrial properties with 60 years tenure.
Like choosing a residential property, the commercial property you choose should have the potential to be rented out and have a good chance of appreciating in value.
The location within the specific area is also important. For example, is the shophouse along the main road? Is a bus stop blocking the view of your shop?
Is there sufficient parking along the stretch of shophouses you chose? Are your neighbours "famous" eateries located in a residential area? If there's insufficient parking, chances of people not living nearby visiting is slim. And therefore, this factor will affect your tenant's business.
Within the shopping mall, is your shop near the escalator, lift or toilet?
7) Insider Information
Retail has been hit hard by the online retail space. Shopping malls are experiencing the highest vacancy rates in years.
If you are going to buy a retail space, you have to weigh the potential risks of traditional retail spaces going out of style completely against the nice returns.
If you have an exit strategy, a target amount you wish to make then exit, then you can go in with both eyes open.
Otherwise, with online retail spaces threatening to take over traditional retail, you may not want to invest in retail.
8) Personal Name or Company Name?
If you purchase under company name, TDSR (Total Debt Servicing Ratio) will still apply on the individual director's income (if the company is a investment holdings company/ if the company is loss making or if the company is not turning enough profit to service the loan instalments).
If the company is doing well financially and has a healthy business operation, TDSR may be waived on the individual. But in this scenario, the director has to take on being the personal guarantor of the loan the company undertakes. This may affect his other purchases, be it residential or commercial, because of the TDSR loading for being guarantor to the loan.
9) No ABSD and SSD
Unlike residential properties, purchasing commercial properties will not incur Additional Buyer Stamp Duty (ABSD) or Seller's Stamp Duty (SSD).
This is one of the main reasons to consider commercial properties. However, bear in mind that for Industrial properties, SSD is still applicable. The SSD is 15% if the industrial property has been sold in the first year, 10% in the second year and 5% in the third year.
10) Holding Power
In an unusual crisis like Covid-19, a lot of retail tenants are suffering from having to close their shops for a month.
If the tenants that you rented your shop do not have a healthy cash flow, they will be unable to pay rent. For which, they may become late in paying rent or totally skip out on paying rent. If your shop has to be vacant for a few months, will you be able to have holding power?
If you are a foreigner:
According to Singapore Land Authority (SLA), Foreigners are allowed to purchase commercial properties in Singapore. Foreigners are person or entitles who are not:
1) Singapore Citizens
2) Singapore Companies
3) Singapore Limited Liability Partnerships
4) Singapore Societies
Foreigners can purchase the following types of commercial properties without applying approval from SLA:
Shophouse (for commercial use)
Industrial and commercial properties
Hotel (registered under the provisions of the Hotels Act)
If you wish to look for a commercial property in Singapore, do contact me as I personally have rented and sold commercial properties in Singapore. I am also available via video call if you wish to discuss during this Phase 2 of Covid-19 period.
Schedule a 1-time free 30-min Property Wealth Planning (PWP) consultation via online video call.
A PWP consultation includes:
- An in-depth financial affordability assessment
- Highly relevant investment insights
- A clear and customised investment road map for your real estate investment journey ahead.
About the Author, Susanna Wong:
Susanna has been in real estate since 2006. She has transacted many private properties including GCBs (Good Class Bungalows) and Sentosa landed properties and of course HDBs. She is married with two lovely girls, Sophie, 6 and Sage, 2. Her husband, Roger and her share an obsession for MMORPGs and scrabble (before they had kids!). They met on OKCupid (dating app) while challenging each other on Words with Friends (iphone App game). She loves watching binge watching Netflix in her free time (very rare with two children!) with a tub of Ben and Jerry's.
