Things you want to know before you invest in commercial properties
There are two types of real estate to invest in Singapore: commercial or
residential real estate and each of them have their very own distinctive
characters and traits especially the land use. On the profits and yields,
commercial properties may reach 5% on average, whereas residential units
typically have more modest rental yields of 2 to 3% which makes commercial
property investment is attractive to many. However, due to the unique traits of
each property type, everyone has their preference and suitability to their
preferred property type. Some may find it difficult to invest in residential
property due to their HDB
loan eligibility (better rates than banks) or hassles with the selling
processes and documents. Some may find commercial property will burn their
pockets deeper and challenging to find tenant or buyer. This in-depth analysis
for commercial properties investment that we are going to share will help you
make sounder and concrete investment decisions.
The main differences between commercial and residential investments in
Singapore:
- Bigger cash outlay
- Flat tax rate
- Common shorter leases
- Different tenants, different considerations
- Tied to industry-specific cycles
- More hands-on management
Bigger cash outlay
Investing in commercial properties, you will need to have more capital
as opposed to residential properties. Here’s why you need more capital in this
investment.
First issue about this is that you cannot use your Central Provident
Fund money (CPF) for commercial property investments. CPF money can only be use
to pay for your property through your CPF Ordinary Account (CPF OA) under the
private properties scheme as long as it is within prescribed limits such as the
value of your property.
Second issue is about loans for commercial properties tend to have
larger amount of down payment. The maximum loan to value (LTV) ratio for
commercial properties is the same as for residential properties where banks
allows to lend up to 80% of the property’s value. But, borrowers typically can
get the LTV between 70% to 75%. This is due to banks consider commercial
properties to have higher risk compared to residential properties.
Lastly, the Goods and Services Tax (GST) of 7% is applicable for
commercial properties. Meanwhile there is no Additional
Buyers Stamp Duty (ABSD) for commercial properties, the GST makes up for
it. Unlike the ABSD however, the GST cannot be paid through your CPF, adding
onto the higher cash outlay.
Flat tax rate
When it comes to tax, both are taxed differently where commercial
properties have a flat 10% of the commercial property’s Annual Value (AV).
Meanwhile, for residential properties, they have a tired tax rate that is based
on the AV of the property with the rates ranging from 0 to 16% for owner -
occupied properties and 10 to 20% for non - owner - occupied properties. In
all, commercial properties for investment has the tendency tends to be taxed
lower than its residential counterpart. Click here
to check the tax rates for commercial properties.
Common shorter leases
The lease tenure for residential properties are 99-years, 999-years or
freehold. On the other hand, commercial properties is otherwise, the leases
tend to be much shorter. Besides, it is quite common to find leases of just 60
years. Though freehold commercial properties are rare but they do exist and the
catch is the location of the commercial properties is situated in more obscure
or inaccessible areas. Hence, it may be more suited for light industrial uses
than retail (that if it’s permitted by URA).
Different tenants, different considerations
Commercial properties tenants’ needs are more diverse compared to
residential properties. Residential properties tenants’ needs tend to be quite
common and universal where almost everyone wants to stay near MRT station and
surrounded with plentiful of eateries and retail nearby. As for commercial
properties tenants’ needs can differ greatly even within the same industry.
For example, a design agency may need an office space that is
individualistic and shows flair, signaling them to pick a shop house over a
typical office building. You may also think that all retail tenants care
greatly about the foot traffic but you could be wrong; some niche businesses,
such as companies that sell car decals or sound systems that have customers who
are willing to travel to them and they are not reliant on passing trade at all.
It is rewarding in terms of the yield when invest in commercial
properties but they are less forgiving to landlords who don’t know their tenant
demographic in depth.
Tied to industry-specific cycles
The fate of a commercial property is tied to its tenants, which also
tied to certain industries. Retail is currently taking a beating due to the
business lost with e-commerce and rise of online shopping. Likewise, a slump in
certain manufacturing sectors can impact industrial properties and economic
recessions can hit office properties real bad. The capital appreciation of a
commercial property are intertwined with the relevant industry sectors and are
affected by market conditions for these sectors.
More hands-on management
Generally, landlords of commercial properties are called upon to do more
than residential landlords where they are required to renovate and upgrade the
facilities or property more often because of the frequent use that causes the
wear and tear. Most importantly, the tenants are business entities so they tend
to be more calculative with everything. Remember, a successful commercial
landlord are go-getter and business minded to keep tenant happy while
optimizing rental yield.
