When it comes to investing in a property, most people would prefer to buy a residential over commercial property because it’s just so much easier. However, with the implementation of tighter Additional Buyer’s Stamp Duty (ABSD) rules in the 2018 cooling measures, it has become even more restrictive to buy a second or subsequent residential property.
As such, you may be wondering if it makes more sense to invest in a commercial property instead. After all, you may have heard whispers that you won’t have to pay ABSD for commercial property purchases. While this is true, this shouldn’t be the main basis for your decision as it’s important to understand the risks of buying a commercial property, because remember, it’s a big-ticket item that involves a lot of funds.
So, if you’re interested in investing in a commercial property, here’s a basic guide to help you out.
What is a Commercial Property?
Unlike a residential property where you can reside and live in, a commercial property is a building mainly for business purposes or work. For the property owner, it is used to generate profit, either through rental income or capital gains.
There are three types of commercial properties: retail, industrial and commercial, and hotel:
Type of commercial property
Shopping malls, pet shops, gyms, restaurants, bars, shophouses, HDB shophouses
Industrial and commercial
B1 (Offices, warehouses), B2 (factories)
Since commercial properties are mainly for rental income or capital gains, interested buyers are usually investors or businessmen. As there is also no ABSD involved, they’re also attractive to foreign buyers.
Can Foreigners Buy Commercial Properties in Singapore?
Yes. While there are restrictions for foreigners when it comes to buying residential properties (generally, foreigners can only buy non-landed private homes and landed properties in Sentosa Cove), there are no such restrictions for commercial properties.
In fact, according to the Residential Property Act, foreigners can buy the following commercial properties:
- Shophouses (for commercial use);
- Industrial and commercial properties; and
- Hotels (registered under the provisions of the Hotels Act)
(Note that foreigners may be allowed to buy landed properties if they manage to obtain special approval from the Singapore Land Authority (ahem, James Dyson)).
In other words, foreigners have the same privileges as locals for commercial property purchases.
For locals, there are no income caps or eligibility restrictions. However, buying a commercial property is quite different from residential as there are several key considerations to take note of:
Things to Consider Before Buying a Commercial Property
1. Which Commercial Property Type Should You Choose?
As explained above, there are various different types of commercial properties available, ranging from B1 industrial buildings and retails shops to office buildings and restaurants. Not only do they vary in costs, but each also has its own traits and risks.
For example, heritage shophouses are limited and prized in Singapore as they’re conserved by the government. They are also mostly located in the Central Areas and often have lower rents, making them popular among startups and small businesses who value the location but cannot afford the high rent costs of traditional offices.
Therefore, investing in a shophouse may make sense because they’re highly 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.
However, shophouses aren’t cheap (they can be as expensive as a landed property), and 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.
So before deciding which property to buy, choose one that has the potential to generate good rental income or capital appreciation.
2. Can You Change the Property’s Intended Use?
Like residential properties, commercial properties are also zoned according to their uses on the URA Master Plan. Depending on the type of property and its uses, you may need to apply for planning permission from URA.
For example, if you plan to convert a retail shop into a commercial school, you need to adhere to URA’s guidelines or seek approval from them. Each commercial property has its own guidelines and regulations, which you may refer here.
3. Does the Location Matter?
Location plays an important role because it affects the type of property that you’re interested in and its tenure.
For example, if you’re interested in buying an industrial property in Woodlands or Punggol, you may only be limited to those with 60 years lease.
Additionally, while investing in a commercial property near MRT stations and densely populated residential areas may have a good track record, the location is also highly dependent on the developments in the area.
For example, if there’s an en bloc sale or if the government decides to redevelop the land, it could potentially affect human traffic and therefore also your business.
4. Do You Need to Pay ABSD?
As mentioned above, unlike residential property purchases, you won’t have to pay ABSD when buying a commercial property even when you already own a residential home. Depending on your residence status (i.e. whether you’re a Singapore citizen, permanent resident or foreigner), it means saving between 12 to 20% ABSD, which is a substantial amount.
Suggested read: Should You Invest In Commercial Or Industrial Property To “Escape” ABSD?
5. Do You Need to Pay Seller’s Stamp Duty (SSD)?
You don’t need to pay SSD for commercial properties except when buying industrial properties such as factories. According to IRAS, the SSD amount you need to pay depends on the holding period (number of years that you own the property before you sell it).
SSD rate (on the actual price
1 to 2 years
2 to 3 years
More than 3 years
No SSD payable
6. Can You Use Your CPF to Finance The Property?
While you can use your savings in your CPF account to pay the downpayment and mortgage for a residential property, you can’t do the same for a commercial property; the mortgage and downpayment must be paid in cash.
7. How Much Can You Borrow?
You can borrow a bank loan of up to 80% of the loan-to-value (LTV), which is higher than residential properties (up to 75%). But since you can’t use funds from your CPF account, you need to fork out at least 20% of the downpayment in cash.
Also, depending on whether you’re buying for investment or for your own use, the LTV may be lower and stricter if you’re buying for investment because banks consider commercial properties to have higher risks.
Like residential property loans, there are also fixed rate and floating rate loans. However, interest rates for commercial properties are higher, even though the loan tenure for commercial loans is also shorter (capped at 30 years), compared to home loans (up to 35 years).
8. What Other Costs Do You Need to Consider?
When buying a commercial property, you also need to pay 7% GST. Note that you also can’t use your CPF funds or the bank loan to pay for it, so you must fork it out on your own.
Like residential properties, you also need to pay property tax for commercial properties. However, the difference is the tax rate for residential properties varies from 0% to 20% depending on whether you’re an owner-occupier. For commercial properties, you pay a flat rate of 10% of the annual value, which is the estimated gross annual rent if it were rented out. It is based on the market rental value of similar properties in the area.
When buying a commercial property, the cash outlay required is dependent on the property type. For example, small offices and independent shops are cheaper, but bigger properties such as factories require more funds.
Apart from that, prices are also influenced by economic conditions. For example, tenants and rental demand will increase if the sector is doing well and the opposite is also true during a recession, which would drive down rental yield.
9. Lease for Commercial Properties
Residential properties usually have a lease of either 99 years, 999 years, or freehold.
In contrast, commercial properties usually have shorter leases and it’s not uncommon to see properties with 30 years or 60 years lease. Though freehold commercial properties do exist, they’re rarely located in prime areas and usually command a premium.
10. Do Commercial Properties Have Higher Rental Yields?
On average, commercial properties have a rental yield of around 5%. This is higher compared to residential properties, which is usually around 2 to 3%.
However, remember that commercial properties also have higher maintenance costs, such as utility bills and general maintenance.
How to Finance A Commercial Property
You can apply for a commercial property loan as an individual or as a company. Like residential property loans, you will be subjected to Total Debt Servicing Ratio (TDSR).
If you’re buying as an individual, then TDSR will apply to your individual income. In other words, your total debt obligations can’t be more than 60% of your monthly income.
For companies, banks will evaluate the TDSR based on the company’s annual net operating income and annual debt. If the company’s financial health isn’t well, then banks may also take the directors’ annual incomes as part of TDSR evaluation.
Where to Find Data on Commercial Properties
To check for information such as commercial property projects in the pipeline, median rentals, vacancy rates, and commercial transactions in the last few years, you may refer to URA’s site.
How Do You Check for Upcoming Sites for Sale?
The URA will announce Government Land Sales (GLS) sites for sale twice a year. There will be a mix of both residential and commercial sites that are on the Confirmed List and Reserved List. The land will be awarded via an open tender process. If you’re looking for White Sites or Hotel Sites, then you should check URA’s website for the latest sites for sale.
Need Help to Apply For a Commercial Property Loan?
The loan process for commercial property loans tends to be more personalised than residential property loans.
Banks have their own eligibility conditions and processes for commercial loans. Applicants usually have to get in touch with specific banks in order to discuss their commercial property transactions. Based on the particulars of the situation, the bank will advise on what documents to submit in your application.
If you need to find and compare commercial loans across different banks, or get unbiased recommendations on the best loan to take, speak to our Home Advisors on PropertyGuru Finance for free now.
Other common FAQs Related to Commercial Property
1. How Much is Commercial Property Tax in Singapore?
Commercial properties are taxed 10% of the Annual Value.
2. Can You Use CPF to Buy Commercial Property?
Unlike residential properties, you can’t use your CPF funds to buy/pay for a commercial property.
3. How is The Annual Value Calculated?
The Annual Value is based on the market rental value of surrounding properties in the area. If the rental value is up, so will the AV rate. Similarly when the rental value heads south, so will the AV rates. The Annual Value is calculated based on the rental value minus reasonable furniture rental and maintenance fees.
4. How Much Is The Downpayment for Commercial Property?
The LTV for commercial properties is 80%, meaning that you need to pay the remaining 20% downpayment in cash (you can’t use CPF funds).