All Cash Flow Are Evaluated On A Value Basis Things You Should Be Aware of in Commercial Property Purchases

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Things You Should Be Aware of in Commercial Property Purchases

As Singapore’s government cools the residential market to prevent property price inflation, investors are gathering more investment potential in commercial properties. This segment of properties is exempt from Additional Buyer’s Stamp Duty (ABSD), Seller’s Stamp Duty (SSD) and restrictions on foreign ownership – all of which affect the residential market.

In Singapore, there are two ways to buy commercial property:

  • as an individual or;
  • As a corporation [via private limited or limited liability partnership (LLP)]

Subsequent sections will go on to highlight key points that budding investors in the commercial property landscape should keep in mind.

No use of Central Provident Fund (CPF).

If you are buying as an individual, remember that you cannot settle the down payment or monthly loan installments for commercial property in your Central Provident Fund General Savings Account.

This means the downpayment must be made entirely in cash.

To repay the loan, you need to be prepared to spend cash if the rental income is insufficient (assuming you plan to rent the property).

Property tax

As with another residential property, or a sole residential property that is fully rented out or kept vacant, the tax is 10% of the property’s annual value.

But if you fail to rent commercial space, you can apply for a vacancy refund of property tax. This vacancy refund also applies to residential properties.

Goods and Services Tax (GST)

Unlike residential property, buying commercial property from a GST-registered company is subject to 7% GST. The person making the purchase will have to bear the GST himself.

However, if you are a GST-registered company – all companies with a turnover of more than S$1 million must register for GST – you can make claims for GST incurred on your purchases. Thus shrewd individual investors can set up companies ostensibly for financial transactions known as Special Purpose Vehicles (SPVs) to avoid paying GST.

For companies with a turnover of less than S$1 million, GST-registration is on a voluntary basis, subject to certain requirements. Remember that being GST-registered comes with responsibilities. See what these are in IRAS.

Notably, GST cannot be financed through property loans. For this, buyers have to deposit cash.

Rental income and capital gains opportunities

Colliers International estimates that commercial properties have an annual average gross return of approximately 5% compared to 2-3% for residential properties. However, this higher profit can be offset by the maintenance costs and renovation works that tenants usually require. Generally, maintenance charges for commercial units are expected to be higher than residential properties. Also, a few more things may be required over the basic setup especially for shop units leased for business.

The exception is HDB shops with low maintenance fees of S$170 to S$250. But these properties come with more restrictions like the type of businesses allowed. An application must also be made for renewal.

Still, tight supply and strong demand can drive up the property values ​​of commercial properties at this level, making them profitable purchases.

In land-scarce Singapore, strata-titled shops/offices are limited as most commercial spaces are owned by real estate investment trusts (REITs) and many of these REITs are owned by the government by proxy. As of 4Q2011, the supply of strata-titled offices in Singapore is estimated at 11.05 million square feet, constituting 14.2% of the total office stock (A bright spot in the Singapore property market: Strata-Title Office, Colliers International, pg 2). The stock of strata-title shops also faces a similar short supply.

Additionally, several regulations in the residential market have shifted investors’ attention to the commercial sector. Both have increased demand with today’s low interest rate environment.

In this way investors can earn capital gains through direct sales.

Some investors are also looking at en-block sales to generate profits. In April 2012, in combined sales, level office units at Parkway Center and Burlington Square sold for $1,043 per square foot and $1,318 per square foot, respectively.

In addition to capital gains, investors may be looking to capitalize on rental income. However, official statistics on occupancy rates for class-titled shops and offices are not available. This makes it difficult to reliably predict past, present and future rental demand. So investors should be careful if they are looking to profit from this route.

Overall, as more supply comes on-board – either through strata or non-strata developments – downward pressure on property values ​​and rents is possible. Therefore, only selective purchases are recommended.

Tenure

Commercial/retail space in Singapore typically comes on 30-, 60-, 99-, or 999-year leases. Some may be freehold. For 99-year and shorter leasehold units, buyers should be aware that financing institutions may quote lower loan amounts for units that are shorter on their leases.

loan

Lenders are allowed up to 80% loan-to-value ratio (LTV) for commercial properties, even with outstanding residential mortgages. The maximum loan tenure is generally 30 years. However, commercial property loans carry higher interest rates than residential property loans. As with the latter, these loans come with:

  • Fixed rate package
  • Variable (Floating) Rate Package

However, the requirements for commercial loans are stricter. For example, the LTV ratio depends on whether the property is for owner-occupation or investment, the latter being subject to stricter criteria by some banks. The following section describes the terms of approval in more detail.

Credit eligibility and approval for business loans in Singapore

Only your income, outstanding debts and credit history will be evaluated for purchases made under your name. The maximum LTV ratio for commercial mortgages is set at 80%, even with existing home mortgages. But financing institutions will take a holistic approach to decide whether to give you an 80% loan or not.

For purchases made under a private limited or LLP company, financiers will assess whether the company has a cash flow record over the years to fund the investment. For example, a company with a monthly profit of S$15,000 makes timely deposits into the company account, thus, lenders can lend 60 to 80% (typically) of this S$15,000. In other words, you can get a loan of 60 to 80% of Debt Servicing Ratio (DSR). This is much higher than the DSR for a residential property purchased by an individual.

Conversely, buying under a private limited or LLP company without sufficient cash flow or profits (or if the companies are special purpose vehicles) may require banks to guarantee loans taken by the company in their personal capacity. Directors must be permanent residents or Singaporeans. In most cases, these directors will have to submit documentary evidence that most of their income is derived from that company. If they earn their income from other places, some banks will not lend to them even with a guarantor. Others might.

From time to time, credit officers of financiers will apply new rules and examine additional documents. Often, credit officers may ask for more supporting documents if they want to do strict cross checks.

context

Michelle T and Koh Siok Hui, A bright spot in the Singapore property market: Strata-Title OfficeColliers International White Paper March 2012, Web

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