Embracing a Shift: Navigating Commercial Property Investments Amidst New Regulations
Property investment in Singapore has always been a preferred avenue, with residential properties taking the lead due to their perceived ease. However, recent adjustments to the Additional Buyer’s Stamp Duty (ABSD) rates in the April 2023 property cooling measures have tilted the scales, making subsequent residential purchases more financially demanding. In light of these changes, the spotlight turns to an alternative: commercial properties in Singapore.
Thus, you as an investor might be contemplating whether it is more prudent to invest in a commercial property in Singapore. Considering that there is no ABSD for commercial property acquisitions, this fact may seem appealing. However, it’s crucial not to solely rely on this aspect when making your decision.
Understanding the potential risks associated with purchasing a commercial property is paramount. Keep in mind that this is a substantial investment requiring significant financial commitment. For individuals exploring the prospect of acquiring a commercial property, the following is a fundamental guide to assist you in navigating the process.
Decoding Commercial Properties: A Diverse Landscape
Understanding commercial properties is crucial before delving into investment decisions. Unlike residential spaces designed for living, commercial properties serve business purposes, aiming to generate profit through rental income or capital gains. They encompass three primary types: retail, industrial and commercial, and hotels.
A Global Perspective: Foreign Investment in Commercial Property
The absence of ABSD for commercial property purchases makes them an attractive proposition, particularly for foreign investors. Contrary to residential property limitations for foreigners, commercial properties welcome international buyers with open arms. This equality in privileges between locals and foreigners underscores the international appeal of Singapore’s commercial real estate.
TYPES OF PROPERTY FOR WHICH A FOREIGN PERSON CAN PURCHASE
- Shophouse (for commercial zoned and use);
- Hotel (registered under the provisions of the Hotels Act)
Key Considerations: A Roadmap for Prospective Buyers
1. Choosing the Right Commercial Property Type
The diversity of commercial properties ranging from retail shops to industrial buildings and F&B space to office space, etc. demands careful consideration. For instance, heritage shophouses, although pricey, can promise high rental yields and substantial capital gains due to their limited availability and heritage conservation status.
Investing in a shophouse may make sense because they’re high in demand, and you can expect to get good rental yields. They also hold well in value, so you can also expect to get good capital gains should you sell them in the future.
But, shophouses aren’t cheap and they can be as expensive as a landed property. Depending on the type of shophouse, their usage may be restricted to their zones; some shophouses are for commercial use only, while others can be both residential and commercial.
Thus before deciding which commercial property to buy in Singapore, focus on one that has the potential to generate good rental income or capital appreciation.
2. Navigating Zoning Regulations
Zoning regulations, akin to residential properties, govern the use of commercial spaces. Adherence to guidelines or seeking approval for changes in intended use is crucial, ensuring a seamless transition in property function. In Singapore, commercial properties are also zoned according to their uses on the URA Master Plan.
3. Location and Location within Location
Location influences property type, tenure, and future developments. You will need to be aware of lease limitations in specific areas and potential government decisions on the locations which impacts future property values and business operations.
Also a location within location plays a big part especially for a retail space. For example, a shop facing the main road will have higher demand and thus value to a one that is tucked behind in a corner and away from the crowd.
4. ABSD Exemption: A Financial Edge
Unlike residential purchases, commercial property acquisitions do not incur ABSD, offering substantial savings up to 60% based on residence status. However, do check if the property is of full commercial status before committing to buy.
5. Navigating Seller’s Stamp Duty (SSD)
You don’t need to pay SSD for commercial properties but SSD obligations vary for residential and industrial properties. Understanding the SSD rates based on the holding period is crucial for effective financial planning. According to IRAS, the SSD amount you need to pay depends on the holding period (the number of years that you own the property before you sell it).
6. CPF Limitations
Unlike residential properties, CPF funds cannot be utilized for commercial property downpayments and mortgages. Cash transactions become imperative.
7. Financing (How Much Can You Borrow)
While commercial property loans allow borrowing up to 80% of the property’s value, higher initial cash outlays and stricter Loan-to-Value ratios for investment properties necessitate careful financial planning.
Depending on whether you’re buying for investment or for your own use, the LTV may be lower if you are buying for investment because banks consider commercial properties to have higher risks.
Do note interest rates for commercial properties are generally higher, the loan tenure for commercial loans is also shorter (capped at 30 years), compared to home loans (up to 35 years).
8. Unveiling Hidden Costs
Several additional costs come into play post-purchase, including property tax, Buyer’s Stamp Duty (BSD), GST charges, furniture expenses, and renovation costs.
9. Lease Dynamics
Unlike residential properties with leases of 99 years, 999 years or freehold tenures, some commercial or industrial properties often have shorter lease durations, impacting their resale value and future investment potential.
While freehold and 999 years leasehold commercial properties do exist, they’re rarely located in prime areas and usually command a premium.
10. Evaluating Rental Yields
While some commercial properties boast good rental yields, they come with increased maintenance costs. Balancing the potential returns with operational expenses is key to a successful investment.
If you are looking to buy a commercial or even a residential property in Singapore, we invite you to engage us as your property consultant. Contact us today to schedule a consultation and let us help you fulfill your real estate priorities .
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