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Complete Guide To Buying Commercial Property In Singapore
When looking to purchase property for investment purposes, residential properties are the default option. However, commercial property has become increasingly popular as well in recent years, especially after the implementation of Additional Buyer’s Stamp Duty (ABSD) made it more restrictive for Singaporeans to purchase another residential property if they already own one.
Other reasons to purchase a commercial property include wanting to own your own business space, or perhaps to lower the amount of taxes you have to pay (more on that later).
If you are considering buying a commercial property in Singapore, here is all that you need to know before you make a decision.
What is commercial property?
While residential properties are clearly for living in, a commercial property’s purpose is mainly for business or work. For the property owner, it is used to generate profit, either through rental income or capital gains.
Retail properties include retail shops, restaurants, gyms, bars, HDB shophouse and shophouses
Industrial pertains to workspaces such as yout B1 (offices, warehouses), B2 (factories).
Commercial Office include office buildings, hotel, commercial conservation shophouse, and business park
Advantages of buying a commercial property
There are pros and cons to buying a commercial property either for own use or for investment purpose. Here are some reasons why buying a commercial property would be desirable.
1. No Additional Buyer’s Stamp Duty (ABSD)
As mentioned above, buying residential properties in Singapore involves paying ABSD if this is your second or subsequent property. This was introduced as a cooling measure to discourage people from purchasing additional properties for speculative purposes. Accordingly, this duty is set at between 7 to 20 percent, depending on a variety of factors (such as your residential status), which represents a significant outlay.
Commercial properties do not have this requirement, which means they can be much cheaper to purchase as an investment asset.
2. No Seller’s Stamp Duty (SSD) either (potentially)
SSD is a property tax that a property seller has to pay when they sell a property within a certain number of years of owning it (capped at three). This tax is only applicable for residential properties bought on or after 20 February 2010.
This tax can go as high as 15 percent if a property owner is looking to sell the property within one year of having bought it.
This does not apply to commercial properties except for some industrial properties such as your B1/B2 industrial factories based on the holding period.
SSD payable to be rounded down to the nearest dollar.
3. Higher rental yields
For commercial property investors, yields are typically much higher than residential property. It can be anywhere between 5-10% compared to 2-3% for residential property.
This is due to the difference in lease agreement where Residential tenancies tend to run between 1-2 years while commercial properties are occupied by businesses where lease agreements usually run for multiple years with some as many as 10 years lease agreement as businesses sought stability.
4. Lower taxes
If you are buying commercial property purchase through a company rather than in your own name, you may lower your tax burden. This is because the corporate tax rate in Singapore is a flat 17% while personal tax can go much higher depending on what your income is.
And from 2020 onwards, all companies in Singapore will be granted a 25% corporate income tax rebate subject to an annual cap of S$15,000 thus newly registered Singapore companies buying a commercial property can enjoy this if the property is let out for rental income.
Corporations also get other tax incentives such as the Partial Tax Exemption (PTE) as well as Corporate Income Tax (CIT) and Rebate on capital gains tax
5. Easier Transfer of Ownership - Buying Under Corporate Entity (Pte. Ltd.)
Compared to property ownership under Individual names, the process of transferring commercial property to another party is easier as the property belongs to the company.
A special purpose vehicle for holding commercial properties has more flexibility while transferring ownership, as one can simply sell the shares of the holding company to potential buyers without incurring additional Seller Stamp Duty (if property type is industrial property).
With this special purpose vehicle, one can have multiple owners of the property equated by the number of shares each holds in the company which will lead to less dispute of profit-sharing in the future.
Potential drawbacks to buying commercial properties
Some downsides to purchasing commercial properties instead of residential are the higher bank interest rates (commercial property loan rates are higher than Residential rates), as well as the fact that banks may have more conditions that need to be fulfilled before a commercial property loan can be provided.
In addition, while commercial properties potentially have higher rental yields, they also have higher maintenance and utility costs, which buyers will have to take into account.
What’s more, while the sale and lease of residential properties are exempted from GST, the sale and lease of non-residential commercial properties are subject to GST. That means an additional 7% is added to the cost, although if you are buying the property through a company there are some instances where the GST is able to be claimed back. (If buyer's use a corporate entity that is GST registered)
Read also: 5 Key Things SMEs Need To Know About Being GST-Registered 2021
And perhaps most importantly, while you can use your savings in your CPF account to pay the downpayment and mortgage for a residential property, you are not allowed to utilize your CPF funds to purchase a commercial property.
Things to consider before buying a commercial property
Types of commercial property
As explained above, there are different types of commercial properties in Singapore. From shopping malls to factories to heritage shophouses, each type of property has its own risks and benefits, and can also vary widely in cost.
Choose a property type that fits your initial budget, and ensure that it has the characteristics that you want or are most comfortable with.
Location plays an important role because it affects the type of property that you’re interested in and its tenure. For example, if you are looking at investing somewhere in Woodlands or Punggol, the only types available to you may be Industrial properties with 60 years of leasehold.
Meanwhile, choosing commercial property in densely populated residential areas may be desirable, but be aware that developments in the area may change, such as if there is an en-bloc sale, which could affect human traffic as, by extension, your business.
If you are looking to purchase a commercial property to rent out, then location is also a critical consideration. Properties located in highly dense areas that are also close to MRT stations and bus terminals will certainly be subjected to higher demand from potential retail tenants.
Most banks provide up to 90 percent loan of the property value, which is higher than what they would provide for residential properties (up to 75 percent). However, since Business Owner cannot utilize your CPF funds, buying a commercial property could still represent a higher initial cash outlay.
Moreover, the loan-to-value (LTV) could be lower if you are buying for investment purposes because banks consider commercial properties to have higher risks.In addition, interest rates for commercial properties are higher than home loans, even though the loan tenure for commercial loans is also shorter (capped at 30 years), compared to home loans (up to 35 years).
Typically if the borrower is an operating company, the assessment will be on the company financial profile while buying under an individual will be subject to the Total Debt Servicing Ratio (TDSR) calculation
Like any residential property, leaseholds for commercial property typically range from 30 years leasehold, 60-year leasehold, 999- years leasehold, and Freehold.
Nowadays any commercial property's new launch projects are typically 30 years leasehold, the reason being in the year 2012, the Ministry of Trade and Industry or MTI announced that more sites with shorter tenure and smaller sizes will be released.
The reason for the shorter leasehold is to make industrial sites more affordable for business owners in Singapore and to curb investors speculating in the commercial properties space where most would prefer industrial properties with longer leases, this also gives flexibility for the government in terms of redevelopment of land.
It is usually also easier to land a mortgage with a bank for Industrial properties with a longer leasehold.
Goods and Services Tax (GST)
The sale and lease of properties in Singapore are subject to GST except for residential properties. Thus compared to your residential purchase, commercial property depending on the seller if they are GST-registered, potential buyers might incur GST on their purchase.
But if the buyer is GST-registered, they will be able to claim the GST portion on the purchase or like many others, may incorporate a Private Limited Company and get it voluntary GST registered to claim the GST portion.
Other costs need to be taken into consideration as well. This includes the aforementioned 7% GST as well as property tax, which is a flat rate of 10% for non-residential properties. Additional costs might include maintenance and renovation fees.
Read also: Property Tax In Singapore – What Are The Rates And How Are They Calculated?
Frequently Asked Questions
Can foreigners buy commercial properties in Singapore?
Yes. According to the Residential Property Act, foreigners can buy the following commercial properties without needing to seek any special approval from the Singapore Land Authority:
Shophouses (for commercial use);
Industrial and commercial properties; and
Hotels (registered under the provisions of the Hotels Act)
Can I change the Property’s Intended use?
Commercial properties are zoned according to the uses on the URA Master Plan, any change of property usage will need to apply for planning permission from URA.
E.g. converting a retail shop into a childcare center. For commercial property guidelines and regulations, you can refer here.
Can I buy a commercial property investment or Non-Residential Property under an individual’s name instead of a company?
Yes, you can but do note that buying commercial property under an Individual name is subject to the Total Debt Servicing Ratio (TDSR) calculation which is total debt obligations can’t be more than 60% of your monthly income.
Can I use my Central Provident Fund (CPF) to buy commercial property?
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.
If I buy a property that consists of both residential and non-residential portions (shophouse), will I be charged GST on both?
For properties that consist of both residential and non-residential portions, only the non-residential portion is subject to GST.
Can I live in commercial property if I owned it?
No, you cannot live in a commercial property unless it is mixed zoning i.e shophouse that has an upper floor zone as Residential Zoning. By living in non-residential zoning, you are changing the use of the property without obtaining the required consent from URA.
How do I find commercial property for sale in Singapore?
Just like residential properties, one can either find commercial property listings online or seek out local property agents, who are usually able to facilitate both residential and commercial property transactions.
But before committing to any commercial property, do seek an experienced commercial mortgage banker or broker for financial advice on your commercial loan so that you can determine the cash outlay required and the rate package you can enjoy (as typically a higher purchase amount can enjoy preferential loan interest rates deviation)
Smart Towkay’s Tips:
1. Get an indicative valuation for your intended purchase so that buyer will not be paying any cash over valuation
2. Get an In-Principle Approval from the banks or financial institutions before committing to any Option To Purchase signing
3. Choose a trustworthy and efficient conveyancing lawyer to do your mortgage conveyancing works as you would not want to pay late penalty fees for late completion
Commercial property loan application tends to be more complex and personalized than residential loans.
Unlike residential loan, where a standard Total Debt Servicing Ratio (TDSR) calculation is constant among all banks, banks have their own eligibiity criteria and process for commercial property loan.
If you need to compare commercial loans across different banks, you may access our commercial property rates comparison here or contact our commercial loan specialist here
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