When we hear the word “property investment”, most of us would probably think about the usual purchase of a condominium and turn it into a rental property to earn rental income.
We probably automatically jump to a conclusion that commercial property investing is only for the Big Boys – property developers and such without thinking we’ll be able to participate in this market in our lifetime.
That’s where some of us thought wrong. You don’t need to have billions of dollars to buy the entire office building.
In fact, much like how you buy an apartment in the whole condominium block, you can do the same with an office! The name for such a unit is called a strata-titled unit.
There are of course various types of commercial properties available, with each having its own regulations. The more common ones are retail and office spaces, with office spaces further classified into Grades A, B and C.
Then there are shop houses such as those you see along the “hipster” areas of Chinatown, Amoy Street and Duxton Hill. These are highly sought-after for their rich heritage, unique architectural designs and their rarity.
Because of their limited supply, they command higher premiums as well.For this article, we’ll focus more on strata-titled commercial properties.
What’s The Advantage Of Commercial Over Residential Property?
There are loads of it actually. For starters, commercial properties have become more attractive in investors’ eyes after the implementation of cooling measures on residential properties.
There are no Additional Buyer’s Stamp Duty(ABSD) or Seller Stamp Duties (SSD) to pay, which means you already save a minimum of 7%. What’s more, there are no restrictions on foreigners’ ownership as well!
Other advantages are listed below:
• Limited Supply
Compared to residential properties, commercial properties are more limited in supply and hold a generally shorter land lease.
As you might know, most residential properties here are on a 99 or 999-year lease, while commercial office buildings’ leases are usually 30 to 60-year-old.
The limited supply would mean that you’d have more chance in leasing out your property, especially if the location is good with convenient transport connectivity.
It is estimated that rental yields for commercial properties are usually around 5%, whereas the average for residential is more around 3%.Taking into consideration that Singapore remains one of the best choices in Asia to set up offices and headquarters for international companies, you can be assured that demand should be pretty constant.
• Higher Potential Returns
At first glance, the prices of commercial properties may appear more expensive than that of residential properties. However, if you look at the price per square foot you will realize that they are actually cheaper.
Those who want to invest in commercial properties though may require a bigger risk appetite, compared to the traditional residential property investor since the industry is more volatile.
Imagine this – if the space you’ve acquired is within an office building which consists of mostly Fintech companies and the government announced a law to regulate them heavily, tenants may move out en-masse and affect you indirectly.
Other than higher potential returns, you can also expect investing in commercial properties to have a quicker turnover compared to residential properties.
Due to their shorter lease, most investors generally sell their commercial properties in 5 to 10 years, unless they are mainly focusing on getting rental yields.In Part 2 of this topic, we’ll cover the key considerations you should think about before investing in a commercial property.