Things You Should Be Aware of in Commercial Property Purchases

With the host of cooling measures rolled out in the residential market by the Singapore’s government to avert a property price bubble, investors are gleaning more investment potential in commercial properties. This segment of properties is exempted from Additional Buyer’s Stamp Duty (ABSD), Seller’s Stamp Duty (SSD) and restrictions on foreigners’ ownership – all of which affect the residential market.

In Singapore, there are two ways to buy a commercial property:

  • As an individual or;
  • As a corporation [via private limited or limited liability partnership (LLP)]

The subsequent sections proceed to highlight key points a budding investor in the commercial property landscape should take note of.

No utilisation of Central Provident Fund (CPF)

If you are making the purchase as an individual, do bear in mind that you cannot dip into the savings in your Ordinary Account of the Central Provident Fund to settle the downpayment or monthly loan instalment for the commercial property.

This means the downpayment has to be wholly funded by cash.

For the loan repayment, you will have to be prepared to incur cash outlay if the rental yields are inadequate (assuming that you are planning to lease out the property).

Property tax

Same as for a second residential property, or an only residential property that is wholly rented out or left vacant, the tax is a flat 10% of the annual value of the property.

But if you fail to lease out the commercial space, you may apply for a vacancy refund of the property tax. This vacancy refund also applies to a residential property.

Goods and services tax (GST)

Unlike for residential properties, the buying of commercial spaces from a GST-registered company is subjected to a 7% GST. An individual making the purchase will have to bear the GST himself.

However, if you are a GST-registered company – all companies with a turnover exceeding S$1million have to register for GST – you can make claims for the GST incurred on your purchases. Thus shrewd individual investors may set up companies expressly for a financial transaction, termed as Special Purpose Vehicles (SPVs), to circumvent the GST payment.

For companies with turnovers below S$1million, GST-registration is on a voluntary basis, subjected to certain requirements. Do note that being GST-registered comes with responsibilities. Check out what these are at IRAS.

Notably, the GST cannot be financed by the property loan. Buyers will have to stump up cash for this.

Rental yield and capital gains opportunities

It is estimated by Colliers Internationals that the yearly average gross yield of commercial spaces approximates 5%, compared to 2-3% for residential property. However, this higher gains can be offset by the steeper maintenance cost and renovation works generally required by tenants. 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 property, 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.

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.

All in all, with more supplies coming on-board – either from strata or non strata developments – downward pressure on property values and rental is possible. Hence, only selective buys are recommended.

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 properties 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 property 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% 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% (typically) of this S$15,000. In other words, you can obtain a loan up to 60 to 80% 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.

References

Michelle Tee and Koh Siok Hui, Bright Spot in Singapore Property Market: Strata-titled Office, Colliers International White Paper March 2012, Web

Why Use a Commercial Property Management Company

If you are the owner of commercial property, you may be interested in looking into hiring a commercial real estate management company. There are many reasons to turn to the professionals to handle the management of your commercial property. A few of those reasons are listed below:

  • Commercial property management can make the stress of owning a property disappear

Sometimes, investors are reluctant to become landlords or to own investment properties because they feel that the task of renting and managing a property will be too time consuming. You may have visions of late-night calls due to emergencies or of spending your days showing the property to perspective tenants or dealing with tenant complaints.

When you trust a commercial management company, you don’t have to worry about any of these issues. The property management professionals that you hire can handle all of the day-to-day tasks and obligations involved in renting and maintaining a commercial real estate. Not only that, but if you develop an ongoing long-term relationship with the property management company, the managers can get to know your building and tenants and can make recommendations to you on improvements or operating policies.

  • Commercial property management can help to keep your tenants happy

Many tenants, especially in commercial buildings, like to know that they have an expert available to help them with issues. Rather than dealing with an inexperienced landlord or with a landlord working on his own, those renting commercial real estate like to have a professional available as a manager. Commercial real estate management companies can get to know your tenants and can handle any issues or concerns, keeping things running smoothly at all times.

  • Commercial property management can involve an expert approach to maximizing profits

When you place your trust in a commercial Real estate management company, they may be able to provide important device on keeping your investment profitable. This may include suggesting improvements to the property or changes to the lease agreement or rental terms that will allow you to better maximize your profits. Your commercial management company can also keep you up-to-date on the financial situation of your rental property so you will know at a glance what the numbers look like and whether you are making a good profit on your real estate investment.

  • Commercial property management companies can help to keep your rental space in good shape

By handling emergency situations quickly, commercial property management companies can help to ensure repairs are done before any damage to the building occurs. Further, commercial real estate management professionals can keep an eye on what is going on in the building on an ongoing basis, suggesting repairs or maintenance that will prevent problems from developing. It is a good idea to keep your building maintained at all times and it is helpful to have experts advising you on what needs to be done.

Hiring a Commercial Property Management Company

Hiring a commercial property management company is important for all of these reasons. The bottom line is, when you have a commercial property, it can be a great investment- but only if it is managed well. Put your trust in the experts to ensure that your investment pays off.

Commercial Property Agents – What Are Your Property Management Fees Today?

A real estate agent that is to be managing a commercial or retail property will need to cover operational costs and make a profit. That is where the fees charged are so important. It might sound a bit crazy, but some agencies never make a profit from commercial or retail property management; that is because they do not understand what they are really to be doing and do not set up the systems to support the special skill sets. Commercial or retail property management is quite special; the simple rules of residential real estate do not apply.

Many real estate agencies can also regard the property management service in the office as the ‘poor cousin’ to the sales and leasing division. Whilst that concept may work in residential property management, the same does not apply in and with commercial or retail property. Commercial and retail property management is just far too specialised and complex to be a ‘poor cousin’ to anything.

If you run a real estate agency and want to start a commercial property management division, then here are the basic rules:

  • Employ good people for the commercial and retail services you are to provide. They need intelligence and drive to specialise.
  • Gather the commercial and retail market knowledge and trends so you understand what is required to build your division and business.
  • Make sure that everyone that you employ on commercial or retail property really understands what they are doing, and get them trained to pick up on any shortcomings.
  • Charge reasonable fees that are reflecting the complex and special tasks of the property management job

So what are the fees for managing commercial or retail property today? To answer the question you should first find out what other agents are charging locally for the management services. You will soon see those that are ‘cheap’ with their fees; the reality is that they do not take the tasks of the job seriously. Low fees do not apply if you are a serious and professional commercial agent. In saying that, it is necessary to supply excellent services to the clients that you serve to justify your fee.

Here are some fees to consider in providing your property management services to commercial and retail property:

  1. A base management fee should be set for managing the property on a day to day basis. That will include rent collection, income and expenditure management, tenant and lease management, and maintenance management. You should also include an allocation of time for reporting to and communicating with all the tenants and the landlord, given the demands and operation of the property.
  2. A fee should be set for negotiating the various types of lease rent reviews when and if they fall due. Given that the rent reviews are of different types, it pays to set fees for each type. Market rent reviews are the most time consuming and should attract the higher fees.
  3. A fee for negotiating new leases and renewals of leases with sitting tenants should be set. It is common to negotiate leases with your sitting tenants.
  4. New leases with businesses seeking to occupy your vacant space in the property will also attract its own fee. This will be higher than the fees that you set with your sitting tenants, as more work is required.
  5. Set an hourly fee for special tasks that are outside of normal management duties. This can be out of hour’s property attendance, court attendance, project management, and business planning or budgeting of the property once per year.

As a general observation, retail property is far more demanding on the property manager’s time given the nature of the tenancy mix and the operations of the property. Take care when setting a fee for a retail property management and give due regard to your office and staff costs.

So how much profit should you make in running your commercial or retail property management division? The answer is about 30% to 40% on top of your gross operational costs of running the division. When you know this number, setting the other fees is not a problem.

There may be other fees for you to consider in addition to the main ones above, so be aware of what the property needs in daily management, and what the local property market is doing. Do not discount your property management fees to win the business; a quality service requires a fair and reasonable fee.