Since the last quarter of 2012, the residential property market has taken a pounding. Seven rounds of cooling measures have taken a toll, and even now, we are seeing a slowdown in the resale market. As such, some investors are turning their eyes toward commercial properties. But they should be aware of the vast differences between residential and commercial investments, especially in the context of 2012 – 2013:Commercial Properties: No Longer a Second Choice
Since the boom days of 2008, residential properties have been the most popular investment choice.
But after seven rounds of cooling measures, there are now signs of slowdown in this market. A combination of tight loan restrictions, ABSD*, and already high prices have made residential properties too capital intensive for many.
*Additional Buyers’ Stamp Duty. This is a variable fee levied on residential property buyers. You can work out your ABSD with this calculator.
On the other hand, commercial properties (with the exception of industrial property types) are untouched by cooling measures. In addition, the commercial market never overheated like its residential counterpart; most commercial properties are reasonably priced. As such, they have become the new target of speculators.
Even if their locations are similar, commercial and residential units can have widely different costs.
This is a twist as, up till now, commercial properties have been “second choice” investments. Many investors initially shied away from them, due to the complex rules for different types of commercial properties (e.g. retail, industrial, office).
Now, over the long term, commercial and residential properties are equally viable investments. But investors should understand the key differences, and vary their expectations accordingly:
1. Buyer Intentions
For residential properties, buyers could have two intentions: To live in the property (owner-occupancy), or investment (rent it out, sell for profit, and so on)
Likewise, buyers could have two intentions for commercial property. They might seek to operate the property (for example, buy a shophouse and open their own store in it), or use it purely for investment. Despite the prevailing norm for businesses to rent space, many industry experts will encourage businesses to actually own their commercial space if they can afford it. Lower monthly payments and potential capital appreciation are obvious reasons.
For the purpose of this article, we will address only the buyers whose intention is to invest their money in either residential or commercial properties. We will highlight some of the main differences to look out for when investing in either type.
If you are interested in the nuances of buying vs. renting commercial properties (maybe for your start-up), then follow us on Facebook. We will cover the issue in future.
2. Regulatory Differences
Residential properties are generally more straightforward, in terms of financing regulations. For example, HDB loans can finance up to 90%, bank loans can finance up to 80%, etc. These rules are roughly similar across the board (the only big difference is HDB vs. Private). Otherwise, condominiums, landed properties, public housing etc are all treated the same.
If you need more on housing loans, check out some of our previous articles, or contact a mortgage specialist on MoneySmart.
Commercial property is however more complex. There are many commercial property types and they can be divided mainly into:
- Industrial
- Retail
- Office
- Shophouse
- Mixed Development
The financing restrictions and regulations are different for each category. We will not go into the regulations here (doing so would turn this article into a full length book), but the financing restrictions are discussed in point 5 below.
For now, understand that commercial property buyers are faced with added inconvenience: They must educate themselves on the various rules of each commercial property type. To make a sound commercial property investment, they also need to understand the economy, markets and demand that would directly concern each commercial property type. More details explained in the following section.
3. Pricing Issues
Commercial properties might be cheaper per square foot. But don’t forget higher maintenance costs, a bigger cash down payment, and GST.
Compared to residential, most commercial properties are:- Cheaper Per Square Foot
- More volatile
- Quicker returns
Why Cheaper Per Square Foot?
Commercial properties usually have a lower psf (price per square foot) than residential properties. Market sentiment aside, this is also because commercial properties tend toward shorter leases.
Residential properties typically have leases of 99 or 999 years, or are freehold. But commercial properties (due to the Government’s intention to control and regulate land use) often have leases of just 30 – 60 years. There are of course freehold commercial properties, but rarely will you find them in prime central locations where most business operate.
At present, however, commercial property prices are rising. As interest grows, buyers can expect to see raises of 5% – 10% between 2013 and 2014.
Why More Volatile?
The performance of a commercial property is tied to its related industry. For example, if you have an industrial property used mainly by tenants to manufacture hard drives, then you must understand and keep an eye on electronics exports. If the industry tanks, the tenant might have to “close shop” or relocate to a cheaper facility or country. Conversely, if the economy is booming, businesses are growing, and consumers are spending, demand for offices and retail shops might be a safe bet to make in the coming years. You can expect to take in higher rents to service a larger market.
Why Quicker Returns?
Most investors hold commercial properties for 5 – 10 years. Returns are generally quicker than from residential properties.
However, some investors do treat commercial properties as long term investments. They may be more interested in rental yields than in capital gains.
4. Rental Yields
Yields from commercial properties average 5%, compared to 2% – 3% for residential properties. This is due to their lower overall cost.
However, bear in mind that unlike residential properties, commercial property owners need to consider the need for constant asset enhancement. It’s much easier to rent out (or sell) an empty, non-renovated and unfurnished 3 bedroom condominium than an office with just 4 concrete walls. Having to tailor the property to suit different tenants’ businesses means higher capital outlays. Rental yields can end up much lower, if the landlord is not savvy when picking tenants.
5. Financing Issues
One obvious difference is that CPF cannot be used for commercial properties. Buyers will need to make a significant down payment.
Also, unlike residential properties (where all residential property types pretty much follow the same set of rules), different banks have different loan policies for different commercial property types. For example, some banks will finance only specific types of commercial property (e.g. only office and retail, never industrial). Other differences are:
- The Loan-to-Value ratio (LTV) for commercial properties ranges from 60% – 75%. For residential properties, a 70% – 80% LTV is more common.
- Loan tenure for commercial property is typically 20 – 30 years, whereas loan tenure can be up to 35 years for residential. The loan tenure for commercial properties will further differ based on the age of the commercial property.
- Interest rates for commercial property loans are higher by around 0.5% – 1%.
It’s important to note that banks will also grant a higher loan (up to 10% more) should the commercial property be used for owner-occupancy (as opposed to investment).
Stamp Duty Costs
There is no ABSD for commercial properties. However, there is SSD (Seller’s Stamp Duty) for industrial properties. This was recently implemented by the government in the Budget 2013 announcement to curb speculation in the Industrial property sector.
This is 15% of the sale price if sold on the first year, 10% for the second year, and 5% for the third year.
Taxation
Commercial property tax is 10%.
Residential property tax is variable. Taxes are based on the Annual Value (AV) of the house, and whether the house is owner-occupied or rented out. This comes to:
- 10% – 20% (depending on AV), if the house is rented out
- 0% – 15% (depending on AV), if the house is owner occupied
While it does seem (so far) that commercial property investors are paying lower taxes, note that…
You May Need to Pay GST for Commercial Properties
If you are purchasing commercial property from a GST registered company (which is going to be more common than you think), you will need to factor in the 7% GST. So a $300,000 property, when bought from a GST registered company, would cost an additional $21,000.
This applies even if the buyer is an individual.
If you own a GST registered company yourself, you can buy the commercial property through your company, and claim back the amount.
Disclaimer: Please check the IRAS website for the latest updates on taxes, policies and regulations for commercial properties.
Our Conclusion…
Investing in commercial properties is a much more complex process that requires higher involvement by the owner.
Apart from the various rules and regulations, commercial landlords have more difficult tenants. After all, their tenants are business owners with exacting needs. Changes and upgrades to the property will be constant, compared to just renting out a condo.
Commercial landlords must also keep an eye on tangential interests (e.g. if you rent out retail space, you need to also keep an eye on the retail industry in the area).
If you are buying commercial property, be sure the original owner has fixed any structural problems or defects. Go over the area with a fine-toothed comb to ensure you don’t end up buying those problems along with the property. Also, do some market research and see what businesses the location is viable for.
Ref:http://blog.moneysmart.sg/property/commercial-vs-residential-properties-in-singapore-2013/
No comments:
Post a Comment