• Buying Commercial Property in Singapore: The Ultimate Guide

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    If you read this article, you’ve probably understood that residential property is not your only option when investing in Singapore.

    in fact, many believe that commercial property is out of their reach and dedicated to more sophisticated investors.

    That’s not true and something that I will explain more about in this article.

    Today, you’ll learn if foreigners can buy commercial property in Singapore, what the benefits are, about commercial property taxes, if you can get loans when buying commercial property, and more.

    Can foreigners buy commercial property in Singapore?

    Singapore might be one of the most expensive places to buy property in Asia. Yet, it’s also one of the best places in terms of foreign property ownership regulations.

    Here, the government defines foreigners as persons or entities that are not:

    • Singapore citizens
    • Singapore companies
    • Singapore limited liability partnerships
    • Singapore societies

    As shown on the Singapore Land Authority’s (SLA) website, foreigners have no issues to buy commercial property in Singapore.

    According to the Residential Act, you can freely buy the following property types, without seeking approval from the SLA:

    • Shophouse (for commercial use)
    • Industrial and commercial properties
    • Hotel (registered under the provisions of the Hotels Act)

    Thus, you’re free to buy any kind of commercial property and generally treated in the same way as locals.

    Buying strata-titled commercial property in Singapore

    Buying a unit in a condo (strata-title property) is a preferred option when foreigners invest in Southeast Asia.

    Why? Because condos come with a high standard and the buying process is (often) straight forward. At least if you work with reputable developers.

    In addition, foreigners are only allowed to buy condos in many Asian countries.

    However, not only condominiums come with strata-titles in Singapore.

    In fact, you can buy commercial property with strata-titles as well. The concept is the same: you own a unit, share common areas and let someone maintain the whole building.

    One misconception is that people believe that you need to buy the whole structure. But you rarely buy a whole condo building, right?

    Buying strata-titled commercial units can reduce your costs significantly.

    Benefits of buying commercial property in Singapore

    Understandably, there are both benefits and drawbacks when buying commercial property.

    First, let’s have a look at some of the benefits when buying commercial property.

    1. Additional Buyer’s Stamp Duty (ABSD) for commercial property

    As I’ve explained in my separate article about buying residential property in Singapore, you need to pay a hefty Additional Buyer’s Stamp Duty (ABSD).

    The duty is set to 7% to 20% (depending on your residential status, for example). Not surprisingly, it was introduced as a cooling measure and to avoid speculation.

    If you buy commercial property, you’re not subject to any ABSD. This can save you plenty of money, of course.

    Worth mentioning is that the residential market is more overheated by comparison, a reason why you’re subject to high stamp duties when buying property.

    2. Seller’s Stamp Duty (SSD) for commercial property

    You’re sometimes also subject to a Seller’s stamp duty when buying real estate in Singapore, where the rates are as follows:

    • Holding period up to 1 year: 12%
    • 1-2 years: 8%
    • 2-3 years: 4%
    • More than 3 years: No SSD

    A benefit of buying commercial property is that you don’t need to pay any SSD.

    3. Goods and Services Tax (GST) for commercial property

    You normally need to pay a Goods and Services Tax (GST) of 7% when buying commercial property. It’s similar to the Value Added Tax (VAT) that we use in Europe and in the US, for example.

    If you buy commercial as an individual in Singapore, you need to pay GST.

    However, if you buy a property through a company, you can claim back the GST later. Thus, the GST can be avoided.

    Just be sure to talk with the Inland Revenue Authority of Singapore (IRAS) beforehand, to know whether you’ll be able to claim it back later.

    4. Commercial property prices in Singapore

    Many believe that commercial property is more expensive compared to residential property. This is often not the case.

    In fact, to many’s surprise, commercial property is actually cheaper on average compared to residential property.

    5. Rental yields for commercial property

    Singapore is well-known for having low rental yields. At least compared to many other countries in the region, like Vietnam, Philippines, and Cambodia.

    The commercial property market outperforms the residential property market in terms of rental yields. Here, rates average at around 5%, compared to 2% to 3% for residential property.

    Just keep in mind that maintenance costs are higher for commercial property, something you should take into consideration.

    What are the downsides of buying commercial property in Singapore?

    singapore-downtown

    Understandably, there are some disadvantages of buying commercial property as well. Below I’ve listed some of the main drawbacks:

    • Higher down payments required
    • A more volatile market
    • Higher utility costs (internet, electricity, maintenance, etc.)
    • Banks can be more picky and take more factors into consideration before granting loans

    Buying commercial property through companies

    Commercial property transactions are often bigger compared to those in the residential property market. Therefore, it can make sense to acquire property through a company.

    Not only will you share the liability, but it will be easier to cope with the financial outlay.

    Below, I’ve listed other benefits when buying commercial property through a company.

    1. Reduced taxes

    Corporate taxes are lower than personal taxes in Singapore. As such, it can make sense to buy commercial property through a local company, if you want to reduce your tax burden.

    Not to forget, if you buy commercial property through a company, you can claim back more money from direct and indirect expenses.

    Even if you’re subject to a Goods and Services Tax (GST) of 7% when buying commercial property, you’re sometimes able to claim back the GST. This is not the case for individual buyers.

    Be sure to talk with the Inland Revenue Authority of Singapore (IRAS) or a lawyer beforehand, to understand whether you’ll be able to claim back the GST later.

    2. Transfer of ownership

    The process of transferring commercial property is easier compared to if you would own it as an individual.

    3. Total Debt Servicing Ratio (TDSR) exemption

    Individual buyers are subject to the Total Debt Servicing Ratio (TDSR) when buying commercial property.

    In short words, the TDSR is expressed as a percentage and shows your total debt burden in relation to your yearly income.

    Example:

    TDSR = (Annual mortgage payments + Property taxes + Other debt payments) / Gross family income

    As of 2017, the maximum TDSR allowed is 60% in Singapore.

    Yet, established companies who can prove positive cash flows and good financial records can be exempt from the TDSR.

    With that said, banks generally require that there are personal guarantors for the loans.

    What kind of commercial property can I buy?

    You have a number of options if you decide to buy commercial property. Different regulations apply, something that we’ll review in greater detail later.

    Let’s have a look at some of the options you have when buying commercial property.

    Parking lots

    Hong Kong has been in the headlines as local investors snap up parking lots in the millions of Hong Kong dollars. That said, Hong Kong’s property market is more crowded and less regulated than Singapore’s.

    Investing in car parks is treated as low-risk investments, but the yields aren’t significantly high either.

    Unfortunately, there are no strata-titled car parks in Singapore either. This means that you often need to buy big complete car parks, that can cost you tens of millions of Singapore Dollars.

    Retail property

    singapore-houses

    Properties that go under the definition retail property include shopping malls, gyms, shop houses, restaurants and more. These are often acquired through takeovers, hence the buyer doesn’t open the business from scratch.

    Buying retail properties, such as shophouses, can truly pay off. First of all, these are not in a big supply. At the same time, old shophouses are seen as a cultural heritage, not to be demolished.

    Many of them are located in the central areas, for example, close to the Central Business District. Rents are often lower compared to newly built units in the vicinity. Thus, buying and renovating a shop house can be a great option for smaller companies.

    Not long ago, a Spanish tycoon paid an astonishing amount of SGD 22.1 million for a three-story conservation shophouse, located at 29 Stanley Street in the Central Business District (CBD).

    Hotels and hostels

    Singapore caters a large number of tourists and people going on business trips. Naturally, this drives the demand of hotels and hostels.

    However, buying a hotel is a big financial undertaking and you also need to have the right permits and licenses in place.

    For example, you need to submit a Certificate of Registration to the Hotels Licensing Board, in order to use the premises. You’ll also need a Hotel-Keeper’s License to manage the hotel.

    Also, buying hotels is usually not the cheapest option on hand. Prices usually start in the millions and can range up to SGD 1 billion.

    Industrial property (warehouses and factories)

    Industrial properties can be everything from warehouses, factories and R&D facilities.

    Worth mentioning is that industrial properties are more expensive in general and 60% of the floor area needs to be dedicated to industrial activities.

    Industrial property are divided into two different categories:

    • B1: Used for light industry
    • B2: General industry

    The main difference between the two is that properties that go under B2 need to have safety areas.

    As you can hear by the names, properties under B1 are often used for warehousing or offices, while the latter is used for manufacturing, car repair garages and more.

    Commercial property taxes in Singapore

    Singapore is famous for having low corporate taxes, unfortunately, that doesn’t apply in the real estate market.

    Below I’ve listed the most notable taxes you need to pay when buying commercial property.

    Buyer’s Stamp duty for commercial property

    Even if you don’t need to pay the Additional Buyer’s Stamp Duty (ABSD), a Buyer’s Stamp Duty (BSD) applies.

    The rate decreases progressively, depending on how long you hold the property.

    The rates are currently as follows:

    • 1% of the first SGD 180.000
    • 2% of the second SGD 180.000
    • 3% of the remaining value

    Annual property tax for commercial property

    A property tax is levied at 10% of the annual value. The annual value is calculated based on the yearly estimated rental income.

    If you want to check your property’s annual value of the current or previous five years, you can visit IRAS’s website.

    Capital gains tax for commercial property

    Capital gains tax is normally not charged for residential or commercial property.

    You might be subject to capital gains tax, in case you “trade” or speculate on the property market. Each case is treated individually.

    Commercial property loans in Singapore

    buying-commercial-property-singapore

    The same as it goes with residential property, many investors prefer to use a property loan when buying commercial property.

    There are a number of banks that offer loans. However, the process and criteria are somewhat different compared to when applying for residential loans whatsoever.

    This is not strange, as the commercial property market is more volatile, relying more on the economic climate.

    A number of factors are taken into consideration here.

    For example, what the estimated future value will be on the property, how you intend to use the property, the geographical location, how that specific industry is performing, and more.

    Some of the biggest and most popular banks in Singapore are:

    • OCBC
    • UOB
    • DBS
    • Maybank
    • Citibank

    I recommend that you contact each bank individually to see what loans they have to offer. They normally cover up to 80% of the property value.

    Be prepared to present a waterproof business plan, get a decent credit score and prepare a number of other documents to prove your credibility.

    You can also find information about interest rates offered by visiting websites that have so called loan calculators.

    Down payment for commercial property

    Banks require a higher down payment compared to residential housing loans. The commercial market is more sensitive and volatile, it’s simple as that.

    As mentioned above, you normally need to pay at least 20% in down payment, as banks provide loans of up to 80% of the value.

    What are En Bloc sales?

    Sometimes, strata-units are put on so-called En Bloc sales, which means that all units are sold to a developer or a different company. It’s common if the homeowners are facing an ending leasehold period.

    It’s also a common practice in land-scarce places like Singapore, where developers simply want to get rid of the homeowners, to use the land for other purposes.

    An En Bloc sale can be an indicator telling what developers believe about the market, for example, for the purpose of land banking.

    En Bloc sales can be done in three ways:

    • The homeowners jointly decide (through majority voting) that all units should pass through the en bloc sale
    • A developer approach the homeowners and comes up with an offer
    • A different company approaches the homeowners and comes up with an offer

    90% of the homeowners need to agree to the en bloc in case the properties are less than 10 years old. If the properties are more than 10 years old, 80% need to ‘vote yes’.

    Can I use my Central Provident Fund (CPF) when buying commercial property?

    At the moment, you cannot use your CPF to finance a commercial property purchase.

    You can only use it when buying residential real estate and to repay interests, for example.

    If you don’t know what a CPF is, it’s an employment-based savings scheme supported by employers and employees.

    It’s important for Singapore’s social security system, and serves to meet the retirement, housing and healthcare needs.

    How can I find commercial property in Singapore?

    The same as it goes with residential property, you can find commercial property through different listing sites. Real estate agencies are often involved in both residential and commercial property transactions, meaning that they have professionals on both sides.

    The biggest site is probably Commercialguru, which is the equivalent to Propertyguru, used for residential property.

    Other big websites include edgeprop.sg, Colliers, KnightFrank, iProperty and more.

    Real estate agent commission

    Agent commissions usually land at 2-4%, depending on the property value.

    If you want to know more, you can visit Propnex website which has a lot of helpful information.

    Conclusion

    Commercial property has become increasingly popular in Singapore, especially since the government introduced its Additional Buyer’s Stamp Duty (ABSD) for residential property, trying to cool down the market.

    Buying commercial property brings you higher rental yields, averaging at around 5%. Even if the market is more volatile, the commercial property market is less crowded and offers more opportunities for investors.

    One of the greatest benefits of buying commercial property is that taxes are either reduced or removed. You can also reduce taxes further by investing through a local company.

    Just be sure to hire a credible real estate agent and solicitor that can guide you and help you through the buying process.

    I’ve not covered co-living spaces in this article. I also recommend you to read my separate article, if you’re interested in investing in co-living spaces in Singapore.

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