Ravi Chandran
With active leasing activity gathering pace, the commercial spaces in Singapore showed continued signs of recovery in Quarter 4 2017. Knight Frank reported this in their Asia-Pacific Prime Office Rental Index report. The report added that the price increase is 1.8 percent quarter-on-quarter (qoq) in Q4 2017.
The global property consultancy forecasted that the prime office rent in Singapore will increase over the next 12 months. Across the region, prime office rental increased 0.7 percent quarter-on-quarter and 1.1 percent year-on-year in Q4 2017.
Compared to 2-3 percent for residential property, the yearly average gross yield of commercial spaces approximates 5 percent. However, this higher gains can be offset by the steeper maintenance cost and renovation works generally required by tenants.
https://www.icompareloan.com/resources/10-things-know-property-buyers-buy-rent-commercial-property/
Generally, the maintenance charge for a commercial unit is expected to be higher than for a residential property. Also, more may need to be splurged on basic setup, particularly for shop units leased out for business.
An exception are HDB shops with their lower maintenance fees of S$170 to S$250. But these properties tend to come with more restrictions such as the type of businesses permitted. Applications must also be made for renovation.
Still, small supply and strong demand can drive up the asset value of strata commercial spaces, making them worthwhile buys.
In land-scarce Singapore, strata-titled shops/offices are in limited quantity because most of the commercial spaces are owned by real estate investment trusts (REITs), and many of these REITs are in turn owned by the Government through proxies. As of 4Q2011, the supply of strata-titled offices in Singapore is estimated to be of 11.05 million sq ft, making up 14.2% of the total office stock (Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International,pg 2). The stock of strata-titled shops also faces a similar small supply.
Table of Contents
In addition, the slew of regulations in the residential market has diverted investors’ attention to the commercial sector. Together with today’s low interest rate environment, the two have fuelled demand.
Thus investors can make capital gains through direct sales.
Some investors are also looking toward en-bloc sales to make profit. In April 2012, in collective sales, strata office units at Parkway Centre and Burlington Square sold for $1,043 per sq ft and $1,318 per sq ft, respectively.
Besides capital gains, investors maybe hoping to profit from rental yields. However, official statistics on the occupancy rates for strata-titled shops and offices are not available. This makes reliable estimation of rental demand in the past, present and future difficult. Hence investors should be cautious if they are looking to profit from this avenue.
Tenure
Commercial/shop spaces in Singapore usually comes with 30-, 60-, 99-, or 999-year lease. Some may be freehold. For 99-year and shorter leasehold units, buyers should be mindful that financing institutions may quote a lower loan quantum for units running low on their lease.
Loans
Borrowers for commercial spaces are allowed to take a loan-to-value ratio (LTV) of up to 80%, even with outstanding residential mortgages. The maximum loan tenor typically stands at 30 years. However, loans for commercial spaces tend to command a higher interest rate relative to residential property loans. Like the latter, these loans come in
- Fixed Rate Package
- Variable (Floating) Rate Package
The requirements for a commercial loan, however, are more stringent. For example, the LTV ratio is contingent on whether the property is for owner-occupation or investment, with the latter subjected to stricter criteria by some banks. The next section explains the approval conditions in greater detail.
Credit worthiness and approval for commercial loans in Singapore
For purchases made under your name only your income, outstanding debts and credit history will be assessed. The maximum LTV ratio for a commercial mortgage is set at 80%, even with existing housing mortgages. But financing institutions will take a holistic approach in deciding whether to grant you a 80 percent loan.
For purchases made under a private limited or LLP company, the financiers will evaluate if the company has a cash flow record over the past few years that is sufficient to fund this investment. For instance, a company earning a monthly profit of S$15,000 deposits it into the company’s account in a timely manner, the lenders can, thus, lend up to 60 to 80 percent (typically) of this S$15,000. In other words, you can obtain a loan up to 60 to 80 percent of the debt servicing ratio (DSR). This is much higher than the DSR for residential property bought by an individual.
Conversely, buying under a private limited or LLP company without adequate cash flow or profit (or if the companies are special purpose vehicles), may result in the banks requiring that the directors guarantee any loans taken by the company under their individual capacity. The directors may also need to be Permanent Residents or Singaporeans. In many cases, these directors will need to furnish documentary proof that most of their incomes are derived from that company. If they earn their income from elsewhere, some banks will not grant the loan even with them as guarantors. While others may.
From time to time, credit officers of the financiers will impose new rules and conduct additional documentation checks. Often, credit officers may ask for more supporting documents if they want to do tighter cross checks.
