Written by: Christopher Chitty
With the recent implementation of the Additional Buyer's Stamp Duty or ABSD for private residential properties, foreign investors still interested in Singapore property are entering the less stringent commercial market as they wait to see the long term ramifications this new policy will have on the residential market in the near future.
For a first-time commercial investor, there are a few things to consider before you embark upon your investment. Even though commercial property may provide a higher yield than residential property, it is highly dependent upon factors such as re-zoning, new developments in the area and infrastructure.
For instance, the property you are looking at buying may have a record for strong sales due to its proximity to several densely occupied condominiums and HDB flats, not to mention it is within convenient distance to the nearest MRT station. However, if some of these developments are put through an Enbloc sale, the land is repossessed or the amount of human traffic cut down significantly for whatever reason, the price of the commercial property may drop. This in turn means that the ability for the property owner to churn a profit to pay for the mortgage and to sustain the business would also deteriorate.
In such a scenario, shop owners/renters may move out due to poor business and the property will eventually lose its ability to make a profit unless its business method is realigned.
With that being said, however, the steady stream of foreigners entering land scarce Singapore offers the perception that more developments will be springing up, especially in areas of the island which were once green and moderately populated. As a result of the growing populace, more New Towns are cropping up and more retail outlets and offices are being built to service this bloom.
Commercial property then seems like a sure bet for investors, new and veteran alike, but as mentioned above, there are a few things you will want to look out for before plunging into this sector.
Ø Types of Commercial Property: Before you even start investing, you will need to determine the property type you want. Are you interested in retail such as shopping malls or do you prefer office buildings? Maybe you want to buy something in the Industrial sector such as a factory or a warehouse. Whatever you choose, ensure that the property is healthy. What this means is that the property should have the potential to be rented out as well as being sold in the future. In this regard, investing in commercial property is similar to investing in residential property; whatever you choose has to make you a profit in the end.
Ø Tenure: Most properties in Singapore are leasehold due to land scarcity although there are some which are freehold. Leasehold properties are naturally cheaper than freehold but if the rental income can cover your mortgage, the tenure should not really be a concern. As most investors intend to sell their property and move on to the next one once they generate profit, it makes sense for you to choose a tenure type matching your initial budget.
Ø Location: This is arguably one of the most important aspects in your decision making. Location is affected by the tenure and type of property you are looking for. Those two are in turn affected by your chosen location. For example, if you are looking at investing somewhere in Woodlands or Punggol, the only types available to you may be Industrial with 60 years leasehold. Pre-determining your location first will help shape your future decisions but you should approach this with the same intention as you would residential property; it must have the potential to be rented out and/or sold at a profit.
Ø Rental Income: Location also as an effect on the rental potential of a property. Properties located in highly dense areas that are also close to MRT stations and bus terminals will certainly see more interest from retail tenants. If they have the ability to make good money from high human traffic, you would too.
Ø GST: If you are an individual buying property, be aware of the 7% GST you will have to absorb in addition to paying the valuation price for the property. If you own a company and are purchasing the property through your company, then you can consider being GST registered to claim back the GST amount. However there are many requirements put forth by IRAS before you can claim, so it would be best to check with them on your eligibility.
Ø Property Tax: This is a flat rate of 10% for all non-residential properties so factor this amount into your rental yield calculation.
Ø Mortgage Loans: Most banks provide up to 80% loan of the property value with a payback period of anywhere between 15 to 20 years. It is because of this that you should pick the best location for you depending on your budget and rental yield as there is a strong possibility that your rental income may not be able to cover the mortgage in the initial period. However, if your property is in a good location, it is possible to command a higher rental yield to bridge the gap quicker.
Ø Additional Costs: All other costs affiliated but not related to obtaining the property are also to be taken into consideration. Such costs are incurred from but not limited to maintenance and renovations fees. As owner of the property, you are responsible for the daily upkeep and workability of the property. In order to churn a profit and keep a steady income, you will need to maintain your investment in the best condition.
Investing in commercial real estate engages the investor a lot more than residential properties. This is largely due to the fact that in order to be viable, you will need to identify your business goals along with the type of business owner you are and just where you intend to grow this business. For example, if you plan to open up a retail outlet selling branded clothes, acquiring a property which used to sell computer parts might not be conducive to your long-term goals as the location and market in that area may not be favourable to your target demographic.
It is also prudent to properly evaluate the building before you buy it. Obtain a proper valuation and ensure that the building is structurally sound before you put pen to paper.
The original owner will be responsible for the upkeep and maintenance of the building and is obligated to fix any defects before he sells. Do not make the mistake of being too anxious to buy before all of this is sorted out otherwise you will be inheriting all of the potential defects and will be legally obligated to fix it yourself amounting to additional unnecessary costs for you.
It is always best to do your market research and gauge the long term viability of the property with your business goals before you commit to anything.