Credit: PropNex Research
In view of the latest cooling measures announced in December 2021, investors are shifting their attention to commercial properties which are not subjected to Additional Buyer Stamp Duty (ABSD), or not yet.
Now before you start looking at commercial properties, here's a list of pros and cons of investing in commercial properties, which include strata office space, strata industrial space, retail shops and shophouses.
PROS | CONS |
May not face as much policy risks compared to the housing sector: Commercial properties are not affected by the ABSD, and only industrial properties are subjected to seller’s stamp duty. The commercial real estate sector is less likely to attract government intervention to influence the market dynamics - unlike in the residential market where the government is committed to making sure it remains sustainable and meet the population’s housing needs. | Larger price tag: Prices of some commercial properties may be higher than an average apartment - particularly in the shophouse segment. Hence, commercial properties may not be suitable for retail investors who are working with a tighter budget of under $2 million. Buyers cannot use CPF funds to finance the purchase of commercial properties unlike residential properties. |
Differences in financing: Purchasers of commercial properties who are buying under company/investment vehicle will not be subjected to the total debt servicing ratio (TDSR). However, TDSR still applies if the buyer is purchasing the property as an individual. For commercial property loans, financial institutions can offer a loan-to-value limit of 80%, as opposed to 75% for residential loans*. (*the first home loan for the borrower) | Downside risks: Prices and rents of commercial properties are closely tied to economic factors and may be more susceptible to economic downturn, uncertain industry outlook, and other global events / geopolitical risks, which may not hit the residential sector as hard. Rental returns from commercial properties may be more volatile and uncertain. |
Limited supply of new strata retail / industrial / office space and lack of new supply of shophouses could support pricing and secure a better upside in capital appreciation potential in the future. | Dependent on tenant’s success: The rental performance of commercial properties will depend on the success of the tenant. Investors looking at buying into commercial real estate should engage an experienced salesperson to source for a suitable tenant and provide insight into the industries that may be attracted to the property. |
Stable rental income: Commercial tenants usually sign a longer lease - e.g. 2 years or 3+3 years or some even longer – ensuring a steady income stream from the commercial property. On the other hand, residential tenants tend to seek shorter leases of 1 year, resulting in searching for new tenants and lease negotiation. | Asset enhancement and maintenance: Commercial property landlords will need to do more regular maintenance of the premises and every once in a while, undertake asset enhancement works to ensure the space continues to meet the tenant’s needs. The costs for such works tend to be heftier compared to that of residential properties. |
The above points are some of the key considerations when investing in commercial properties. More importantly, investors should note that commercial properties may be more affected by economic changes compared to residential properties.
As many factors come into play when investing in commercial properties, investors should engage a reliable and experienced commercial real estate salesperson to guide and advise you on the opportunities and threats. Let's meet for a coffee and discuss!
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