By Lynette Tan
If you’ve only got a minute:
- Commercial and industrial properties can be alternatives to residential homes in real estate investing.
- Each type of commercial property carries its own set of characteristics, risks, and potential returns. Thorough due diligence is required based on an investor's goals and risk appetite.
- Commercial real estate presents several compelling benefits that attract investors – higher rental yields, lease stability and asset diversification.
When it comes to property investment in Singapore, most investors are likely to lean towards residential properties, largely due to the perceived ease of acquisition and management. However, with the implementation of higher Additional Buyer's Stamp Duty (ABSD) rates on the second and subsequent residential properties, investors are looking for alternatives.
Commercial and industrial properties come to mind and may indeed present an attractive proposition for some due to the absence of ABSD on commercial property purchases. While this holds true, there are many factors to consider before investing in commercial properties.
Understanding the inherent risks associated with commercial property acquisition is important, given that such investments typically involve substantial capital. This guide aims to provide an understanding of factors to consider and how to go about it.
What is considered commercial property?
A commercial property is largely defined by its purpose which is usually used for business or work. Singapore's commercial property landscape is diverse, catering to a wide array of business needs. Understanding these categories is crucial for potential investors.
The main types of commercial properties include retail, industrial and commercial.
Type of commercial property | Examples |
|---|---|
Retail | Cafes,restaurants, bars, gym,tuition centres, shophouses |
Office |
Strata units in office buildings
|
Each type of commercialproperty carries its own set of characteristics, risks, and potential returns. As such, it is necessary to perform thorough due diligence based on an investor's goals and risk appetite.
Why Invest in Commercial Real Estate?
While residential property is a familiar territory for many, commercial real estate offers a distinct set of advantages and disadvantages that warrant careful consideration. Understanding these differences is crucial for making an informed investment choice aligned with your financial goals and risk appetite.
Commercial real estate presents several compelling benefits that attract investors seeking different types of returns and portfolio diversification:
- Higher rental yields: One of the most significant draws of commercial properties is the potential for generally higher gross rental yields (up to 8% for office and 3.3% for residential) compared to residential units. While this can vary by sector and location, many commercial segments, such as industrial or specific retail units, often offer a more attractive return on investment purely from rental income.
- Longer lease terms & stability: Unlike the typical 1- to 2-year residential leases, commercial leases can range from 3 to 5 years or even longer. This extended lease duration provides greater income stability for landlords and significantly reduces vacancy risks, offering a more predictable cash flow. For tenants, this also provides certainty to support their business and operational planning.
- Tenant responsibilities (Triple Net Leases): A notable advantage in some commercial leases, particularly in the industrial or standalone retail sectors, is the "Triple Net" (NNN) lease structure. Under an NNN lease, the tenant is responsible for property taxes, building insurance, and maintenance costs. This significantly reduces the landlord's ongoing financial burden and management responsibilities, allowing for a more hands-off investment approach. Both landlord and the tenant should discuss if this arrangement is aligned with their needs and business intentions.
- Diversification: For investors with existing residential property holdings or a portfolio heavily weighted in traditional financial assets, commercial real estate offers a valuable alternative asset class. Adding commercial properties can help diversify investment portfolios, spreading risk across different market segments and economic cycles.
- Capital appreciation potential: Singapore's strong economic growth, continuous infrastructure development, and inherent land scarcity contribute to the potential for significant capital appreciation in commercial properties. As businesses expand and demand for commercial space grows, property values can rise, offering attractive long-term returns.
Navigating the challenges: Key disadvantages
While the advantages are appealing, commercial real estate also comes with its unique set of challenges and risks that investors must be prepared for:
- Cannot use CPF savings: Unlike residential properties, buyers are not allowed to use their CPF savings for purchases of commercial properties.
- More complex management: Managing a commercial property often requires specialised knowledge beyond that of residential properties. Understanding business cycles, commercial tenancy laws, specific industry needs of tenants, and more intricate lease agreements can be challenging and time-consuming. Seeking the professional advice from your realtor and/or lawyer will be important.
- Longer vacancy Periods: If a commercial tenant vacates a property, finding a suitable replacement can take significantly longer than filling a residential unit. Businesses require specific fit-outs, zoning approvals, and strategic locations, leading to extended downtime and lost rental income during vacancy periods. It would be crucial to factor in these rent-free periods as part of overall computation of returns on investing in the property.
- Market Sensitivity: Commercial real estate is inherently more susceptible to broader economic downturns and specific business cycles. During recessions or periods of industry-specific contraction, demand for commercial space can decline sharply, impacting rental rates and property values more severely than residential properties.
- Lower Liquidity: Selling a commercial property can be a more prolonged and complex process than selling a residential one. The pool of potential buyers is typically smaller, and transactions often involve more extensive due diligence and financing arrangements, leading to lower liquidity.
- Maintenance & Upkeep: While Triple Net leases can shift some maintenance responsibilities to tenants, major structural issues, system failures or common area upkeep (for strata properties) often remain the owner's responsibility. These can incur significant, unforeseen costs.
Current Market Outlook
The prices of commercial property market have been rising since 2023, presenting opportunities for appreciation. Leasing activity remains strong for both office and retail spaces. Industry experts predict a 2-3% rise in prime retail rents in 2025, particularly in central areas. Grade A office rents in the central business district are also expected to grow.
Selecting the Right Commercial Property
Step 1: Define Your Target Tenant: Before you start your search, identify the type of business you want to attract. This will help you narrow down the suitable property types and locations. For example, a property ideal for an F&B establishment will differ significantly from one suited for a medical practice.
Step 2: The Importance of Location:
3 key factors influence a commercial property's desirability:
- Accessibility: Convenient access to public transport and major roads is essential for attracting customers and employees.
- Amenities: The presence of nearby amenities, such as restaurants, shops, and banks, enhances the appeal of a location for both tenants and their customers.
- Foot Traffic: High foot traffic is particularly important for retail businesses, as it directly impacts visibility and sales potential.
Step 3: Finding Your Property
- Online Listings: Property portals offer a convenient way to browse available commercial spaces and compare features, prices, and locations.
- Real Estate Agents: Engaging a reputable real estate agent can provide valuable market insights, access to off-market listings, and assistance with negotiations and paperwork.
- Developers: Consider monitoring new residential developments directly from developers, as they often include ground-floor retail spaces for sale.
Step 4: Budgeting and Financing
Acquiring a commercial property in Singapore requires careful financial planning. Prices typically range from S$500,000 to S$8 million for individual buyers, depending on factors such as size, location, and leasehold tenure. As CPF funds cannot be used for the down payment, ensure you have sufficient capital or explore financing options. DBS offers competitive commercial property loans with loan-to-value (LTV) ratios up to 80%, contact us here.
Leasehold Considerations
A key factor to consider is the leasehold duration. Most commercial properties in Singapore have shorter leases (30-60 years) compared to residential properties (typically 99 years or freehold). A shorter lease impacts resale value and financing options. Banks may offer shorter loan tenures for properties with expiring leases, potentially leading to higher monthly repayments. DBS provides financing solutions for up to 25 years, subject to eligibility. To maximise your investment potential and minimise financing constraints, prioritise properties with longer leaseholds.
Consult our mortgage specialist to help you with a financing strategy that aligns with your investment goals and risk tolerance.
Interested in commercial property loans? Check out our page here.
