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In a small and densely populated country like Singapore, real estate space will always be valuable, whether it’s for us to live in or to work at. That is why many Singaporeans aspire to invest in properties.
While the spotlight is typically focused on residential properties, commercial properties are also a major component of Singapore’s real estate sector. Commercial properties include retail spaces, like retail shops and F&B outlets, as well as offices.
Similar to residential properties, when we purchase a commercial property, we can either lease it out for rental income, or keep it for our own use if we are running a business that requires the space. For example, if you are running your own small business, you could buy your own commercial property to set up your retail shop or office.
Instead of paying rent to a landlord for your business space, you can take a commercial property loan to purchase the commercial property, and pay “rent” to yourself each month. This is a concept that most of us are already familiar with, when we purchase a residential property for ourselves to live in instead of renting a place.
But before you (or your company) decide to commit to a commercial property investment, here are 5 things that you should know.
#1 Paying For Your Commercial Property
Even if you are purchasing your commercial property under your name, you can’t finance it with your CPF savings, unlike when you are buying a residential property. This is one of the key differences between buying residential and commercial properties.
This means that the entire down payment, monthly mortgage as well as stamp duty and legal fees must be paid using cash only, even if you are purchasing the commercial property as an individual.
While you can’t use your CPF, you can fund your commercial property with a larger loan proportion. For commercial property loans, the maximum loan-to-value (LTV) that the bank can lend you is 80%. This is 5 percentage-points higher than the maximum LTV that you can get for residential property – which is 75%.
However, this is the maximum amount you can borrow. Whether the bank chooses to lend you the full 80% or not is based on how they assess the creditworthiness of you (or your business).
In a situation where you are purchasing a commercial property for $1 million, the minimum down payment you will be required to fork out is $200,000 (in cash – remember, no CPF can be used for commercial properties), and the remaining $800,000 can be financed using a commercial property loan. You can, of course, choose to put up a higher down payment if you prefer to reduce your overall interest incurred.
#2 No Additional Buyer’s Stamp Duty (ABSD)
For property investors, one good thing about commercial properties is that, it does not require you to fork out an Additional Buyer’s Stamp Duty (ABSD). With the current ABSD rate at 12% for a second residential property investment, this can be a very hefty outlay.
So, if you already own a house and still want to invest in a property for rental income, you don’t need to pay ABSD on your commercial property investments.
However, do note that commercial properties incur Buyer’s Stamp Duty (BSD). The rates for BSD are as follows:
|Purchase Price Or Market Value Of Property||BSD Rates for non-residential properties|
This is also lower than residential property investments which top out at 4% for remaining amounts above $1 million. Based on our calculation, a commercial property that costs $1 million will incur a BSD of $24,600.
#3 Property Tax Rate Is A Flat 10%
Unlike residential property tax, which tends to be relatively low for owner-occupied properties, the property tax rate for commercial properties is significantly higher at a flat 10% of the Annual Value (AV). This applies regardless of what your intended usage is, whether you are using it for your own business or renting it out to someone else. If the Annual Value of your property is $30,000, you will need to pay property tax of $3,000 each year.
#4 Choosing The Right Property To Purchase
Whether you are buying a commercial property as an investment or to rent out, you need to choose the right property. This means doing your homework on the property.
Just as location matters when it comes to residential properties, connection to travel nodes such as MRT stations and bus interchanges will determine whether you have an easy time renting it out or convincing your people to work there.
You should also study future developments and any changes to the URA Master Plan for rezoning or plot ratio adjustments. This can be a crystal ball to glimpse into the desirability of the commercial property in the future. If bus interchange is slated to be built nearby or the plot ratio increases, your property could be worth much more.
Looking at the type of property you’re purchasing also matters. If you’re buying an industrial property, its tenure might be more important as older properties tend to come with 60-year leases while newer ones come with 30-year leases. A prudent decision must be made if you’re deciding between an older property with a longer lease VS a younger property with a lower lease.
If you are purchasing the property for your own use, there’s also the hygiene factor to check if you can actually use the space. If you are a gym operator and want to purchase a space in a commercial property, you have to check if the space is already pre-approved or if you have to apply for a change of use.
#5 Build Equity In A Property You Own
If you are a business owner, making the decision to purchase your own commercial property may make financial sense.
As a business owner, you can always use the commercial property for your own business needs, instead of having to pay a monthly rent to someone else and constantly looking out for alternative places if your lease isn’t renewed, or if your landlord decides to hike rental prices just because you are doing well.
Assuming you are currently paying a rental of $3,000 per month, you could use that amount to finance your monthly mortgage repayment if you buy your own commercial property, while making good use of the space for your business. This way, you build up equity value in a property that you (or your company) own, instead of paying rent to someone else. A property, once fully paid off, is also considered an asset that can be used as collateral for further financing.
If the commercial property is no longer suitable for your business in future, you always have the option of renting out the space to other tenants for recurring rental income, which can also be used to repay your monthly mortgage payments.
Renting Or Buying, Which Is Cheaper?
Whether you are a property investor looking for a commercial property to add to your investment portfolio, or a business owner looking to have your own space, the financial figure is something that you can’t ignore. Apart from that, there are also other factors such as your business sector, working trends in the new normal, and others.
The current business climate represents to be a decent time to invest if you find a deal you like. Unlike residential property prices in Singapore, which has ticked upwards since the COVID-19 pandemic first began, both retail and office property prices have gone the other way. According to URA, office property prices in the central region have declined over 16% since the second half of 2019, while retail space in the central region has dipped close to 8% in the same period.
As an investor, you should mainly be concerned about your rental yield and potential price appreciation.
If you purchase a commercial property for $1 million and rent it out for $4,200 a month, your gross yield will be about 5%. However, you will also incur additional costs including property tax, maintenance fee and agent commission charges. With this, your returns will be lower at about 3.7%, or about $36,000 per year.
Assuming you borrow $800,000 (80%) for 30 years at an interest rate of 1.3% p.a., the monthly repayment will be about $2,684, or about $32,208 a year. This means from a cash flow perspective, you may receive an additional $3,000-$4,000 a year. On top of that, you also build up equity value in your property each time you make a loan repayment.
As a business owner, the way to think about whether you should own your property is slightly different. For this scenario, let’s assume that you are currently renting an office for $3,000 a month.
If you buy a commercial office space for $1 million, you will need to pay a minimum down payment of $200,000. You can finance the remaining $800,000 by taking a commercial property loan. Assuming an interest rate of 1.3% p.a. over 30 years, your monthly mortgage repayment will be $2,684, or about $316 lower each month as compared to renting. Of course, as the property owner, you will also need to pay for the maintenance and annual property tax.
However, while the overall amount might be similar each month, the advantage here is that a significant part of the monthly repayment you make each month goes into building up equity value in the property you own, which would ultimately be an asset that you or your company have.
To make a good commercial property investment, you want to secure a good interest rate to finance the purchase of your property. Through OCBC Business Banking, you can enjoy attractive rates for your commercial property loan. From now till 31 December 2021, enjoy exclusive rates when you apply for a Commercial Property Loan online.
Besides being able to borrow up to 80% of your property purchase price or valuation, you can get fast approval for your loan in 72 hours. And as an OCBC business customer, you will also have the flexibility to add on other financing solutions such as term loans, overdraft or trade facilities in the future on top of your commercial property loan.