Guide To Buying A Commercial Property For Your Business In Singapore

For many business owners, the idea of paying rent to yourself can seem more attractive than having a landlord. There may also be other sensible reasons for your business to purchase a commercial property in today’s landscape. 

Reasons To Buy In A Commercial Property In Singapore

Singapore’s property market is very stable, at least when compared to our neighbouring property markets. Thus, it can make financial sense to invest in a commercial property. For many businesses, you will be using a space in any case, and owning that space may make sense. 

There could be many reasons to invest in a commercial property too:

#1 Buying The Commercial Property Your Business Is Operating In

Being able to underwrite the risk of renting out the property with a stable business is great. You now pay yourself rent rather than someone else.

As a business, this also gives you certain other privileges, including making rent into a fixed cost. In normal circumstances, rents are variable costs that you have to renegotiate with your landlords every few years. You also have more freedom to renovate and use your commercial property to your liking.

Furthermore, businesses (like individuals) that own property enjoy tax deductions on the interest you pay on your commercial property loan, and cost of maintaining the property and more.

Beware of the downsides as well. You are locking your business into the commercial property now. If your team grows larger or an event like COVID-19 changes your workspace requirements, it could leave you with an unnecessary problem to solve. Maintaining a property can also sidetrack you from your primary business. And of course, investing in property always requires a substantial upfront down payment – money that could be used to grow your business instead. 

Read Also: Guide To Understanding The Fair Tenancy Framework For Businesses In Singapore

#2 Reasonable Interest Rates, And Potentially Rising Prices

It is true that interest rates are rising globally. This typically suppresses property prices, as you have to pay more for your commercial property loan. In Singapore, there is a limited supply of land and commercial properties. Furthermore, we’ve already seen residential property prices spiking – which could spill over into the commercial property market.

Even though interest rates are rising, businesses leaving cash in the bank continue to earn a poor interest return. In return, borrowing costs are higher today and may jump even higher in the near future. This must be another consideration before you take on a commercial property loan.

#3 Putting Your Extra Cash To Better Use

If your business operations is strong, and you have idle cash in the bank, it could make sense to invest in a commercial property. Apart from just making better use of your cash, you are also investing rather than taking the funds out of the business.

If you require to unlock cash for your business after buying a commercial property, you can still raise funds using it as collateral. You can typically borrow up to 80% of the commercial property value with a commercial property loan. In some instances, you can even get financing of 120% of the property value.

Of course, you can always sell your commercial property if money is tight as well.

Read Also: 13 Strata-Titled Office Buildings With Units Above 500 Sqft (And Under $1.5 Million) For Small SME Teams

#4 Lower Your Taxes

For business owners, buying a commercial property under your business entity could be most sensible – whether you intend to use the space or rent it out.

To purchase the commercial property, you would need to pay yourself a salary, director’s fee or dividend distribution from your business. Only then you’d have enough money to invest in a property yourself. Doing this, you may end up paying more in personal income tax. This is because corporate taxes are a flat 17%, while personal income tax can go up to 22% at the top tier.

Corporations also get other tax incentives such as the Partial Tax Exemption (PTE) as well as Corporate Income Tax (CIT) Rebate. This further reduces any potential income you receive on your commercial property investment.

Singapore also provides a loss carry-back relief, allowing companies to offset losses by claiming on taxes paid  in preceding years. This means if you had owned a commercial property in 2019 and were earning some rental returns, and incurred a loss in 2020 because of COVID-19. You could have recovered some taxes paid in the previous year of assessment (YA).

Read Also: How Companies Can (Legally) Reduce Their Corporate Income Tax In Singapore

Commercial Property Prices Are Recovering: Attractive Time To Buy?

According to the 4th Quarter 2022 real estate statistics released by Urban Redevelopment Authority (URA), office property prices have reversed their downward trajectory. At the same time, rentals also have recovered to pre-pandemic levels.

Nevertheless, commercial properties provide businesses with strong cash flow and the opportunity to own their own space at an affordable rate today. Rentals may continue going down or up, and purchasing your own space enables you to lock in a price you are comfortable paying.

If you are thinking of buying your own commercial property, you should also ensure that the actual space is zoned for your business type. Otherwise, you may have to pursue a change of use of property or be unable to carry out your business in the space.

Read Also: Change Of Use Of Property for Commercial Spaces – A Complete Guide For Businesses in Singapore

Additional Considerations When Investing In A Commercial Property With Your Business 

Buying a commercial property for your business is typically not just an operational decision. You are also investing in the potential upside or at least using the business to help pay off a lease on a property it will eventually own. It works both ways – prices can also come down and make your investment a poor one.

Investing in property as a business gives you slightly greater flexibility. As an individual investor, you will be limited by the Total Debt Servicing Ratio (TDSR) of repaying only up to 60% of your personal income in a property loan.

As a business owner, you also have to bear in mind that there may be extra responsibilities as a commercial property investor. For one, you would have to pay a property tax of 10% of the commercial property’s Annual Value.

While commercial properties do not incur Additional Buyer’s Stamp Duty (ABSD), the marginal Buyer’s Stamp Duty has increased for non-residential properties with a purchase price or market value above $1,000,000. This change was effected on 14 February 2023 and would affect commercial property buyers.

 Non-Residential Property (before 14 February 2023)Non-Residential Property (after 14 February 2023)
First $180,0001%1%
Next $180,0002%2%
Next $640,0003%3%
Next $500,0003%4%
Amount exceeding $1,500,0003%5%

If you are a GST-registered business, you will also have to charge your tenants GST on their rent each month. This may depress the rental rate you are able to achieve, as individual investors do not have to charge GST.

You also have to service a potentially hefty mortgage each month. However, this can be seen as a replacement for the rent you have to pay. 

Nevertheless, if your business is weak and has to shut down, your commercial property becomes collateral for your creditors.  Similarly, this insulates your personal life as well. If your business goes belly up and you cannot afford to pay for your commercial property, your creditors have no legal claims to your personal assets, including your residential property.

When buying a commercial property for your business, you may also want to create a holding company for the investment. This can provide greater convenience and flexibility in selling it off or transferring ownership in the future.

There are diverse considerations to process when you want to purchase a commercial property for your business. For this reason, you may also want to assemble and keep in close contact with several professionals in helping you keep costs low and giving you good advice. They include your legal advisor, accountant, business relationship manager for your commercial property loan, and a property agent specialising in commercial property.

Read Also: How Small Businesses Can Use The Re-Align Framework To Renegotiate Existing Rental Leases

This article was first published on 11 July 2022 and updated with new information.

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