Updated: Oct 25, 2021
When it comes to investing in commercial, industrial or residential properties, there are some
questions to ask yourself – What kind of investor do you want to be? Do you have sufficient investment funds to take appropriate risks? A suitable investment choice for you will highly depend on your answers to these questions. Let’s take a look at the pros and cons of each property type and see which one emerges as the winner for each consideration!
A brief recap of what each type of property entails:
Residential properties can be divided into public housing (HDBs), private housing (condominiums and landed properties) and executive condominiums (ECs).
Non-residential properties include both commercial and industrial properties. Commercial properties include offices, retail shops, medical suites and hotels. Industrial properties include factories, warehouses and workshops that involve manufacturing, as well as business and science parks.
Here’s an overview of the 8 considerations that will be discussed in this article:
Use of CPF and GST Exemption
Use of CPF
As opposed to commercial and industrial properties, you might require less capital for a residential investment because you can use your CPF Ordinary Account (CPF OA) to make the mortgage repayments. In turn, you can receive rental income in cash. This grants you indirect access to your CPF savings which you otherwise cannot touch. Check for your eligibility here.
On the other hand, you cannot use your CPF for commercial or industrial properties, which means that you need more cash on hand.
Goods and Services Tax (GST)
You are required to pay 7% GST for both commercial and industrial properties in Singapore, which is not subjected to residential property owners. Moreover, the GST must be paid in cash, unlike ABSD, which can be paid using CPF.
Higher Loan-to-Value Ratio
The current Loan to Value (LTV) ratio for commercial and industrial properties are up to 80%, as compared to residential properties, which is up to 75% for your first loan, 45% for your second loan and 35% for third loan and above. In this case, assuming they both have the same price quantum, you might require lower cash outlay for the commercial or property investment as compared to the residential property. Though, it is crucial to take note that
loans for commercial property tend to command a higher interest rate compared to residential property loans.
Exemption from Additional Buyer’s Stamp Duty (ABSD) and Seller’s Stamp Duty (SSD)
You are required to pay the Buyer’s Stamp Duty for any type of property located in Singapore. However, the Additional Buyer’s Stamp Duty (ABSD) is applicable for both residential and industrial properties. For those who are looking to purchase your second residential property, the ABSD rate depends on your residential status, ranging from 12% for Singapore Citizens, 15% for Permanent Residents (PRs) and 20% for foreigners. For industrial properties, you are still required to pay for ABSD, though exemption is possible if the property is bought under a company instead of an individual. Fortunately, commercial properties are fully exempted from the ABSD.
For industrial properties acquired after Jan 2013, you are required to pay for the Seller’s Stamp Duty (SSD) if you decide to sell it within the property’s holding period. Similarly for residential properties acquired after Feb 2010, SSD will also be applicable. SSD is not applicable for commercial properties.
Higher Rental Yields
Winner: Industrial, but depends
Commercial and industrial properties are known to have higher rental yields as compared to residential properties, with industrial properties standing out as the winner. While rental yields for residential properties range from 2-3% and commercial properties enjoy an average yield of 5-6%, industrial properties can give you a whopping average of 6-7.5% yield. With the e-commerce industry experiencing increasing growth, demand for warehouses and distribution centres will certainly rise as well.
However, a higher rental yield doesn’t necessarily mean it’s a better investment choice. In general, commercial and industrial properties may require higher maintenance costs as compared to residential properties. For example, landlords for commercial or industrial properties are expected to constantly maintain and upgrade the facilities to fulfil the demands of commercial tenants who are running businesses. As a result, additional time and monetary costs are expected to be incurred, which might affect overall rental yields. Hence, potential maintenance costs should be taken into account when you are calculating rental yields.
Lower Property Tax Rates
Flat Tax Rate vs Tiered Tax Rate
In Singapore, commercial and industrial properties tend to be taxed lower than residential properties. Residential properties are subjected to a tiered tax rate based on the AV of the property ranging from 0-16% for owner-occupied properties and 10-20% for non-owner-occupied properties.
On the other hand, non-residential properties are subjected to a flat 10% of the property’s Annual Value (AV).
Longer Lease Terms
Rental Income Security
One of the factors that affect the value of a commercial or industrial property is the length of its lease terms, which is generally far longer than those attached to residential properties. In Singapore, private residential properties have a minimum 3-month lease while HDB flats have a minimum 6-month lease, which usually spans 1-2 years. On the other hand, since commercial and industrial tenants are companies, it is not uncommon to see much longer leases ranging from 3-5 years.
A shorter lease means that rental prices cannot be locked in and this might signify a more volatile tenant-landlord relationship. A longer lease term therefore equates to higher rental income security. In the long run, a long-term commercial lease might be a much more secure asset than a short-term lease for a residential property.
Volatility Due To Industry Performance
The performance of an industry will inevitably affect the capital appreciation of commercial and industrial properties, unlike residential properties. For instance, the booming e-commerce industry will certainly affect the profitability of brick and mortar stores in shopping malls, causing both rental and property prices to fall. Similarly, the Singapore industrial property market also experienced declines in rental and prices in Q2 2020, following the impact of COVID-19 pandemic on manufacturing industries. On the other hand, residential properties are more immune to industry performances and economic crises, since housing is always in demand.
Volatility Due To Leasehold Tenure
In general, the shorter the leasehold tenure of a property, the more volatile its value.
Residential properties in Singapore usually have a lease of either 99 years, 999 years, or freehold. In contrast, commercial and industrial properties usually have shorter leases of 30 – 60 years only.
In the long run, as commercial and industrial properties have shorter leaseholds, their values tend to depreciate faster. Capital appreciation is also highly volatile depending on location as well as the property market. Hence, they will likely see their valuation fluctuate more.
Less Knowledge and Experience Needed
For commercial and industrial properties, it usually requires a thorough research process to understand the respective industries and their tenant demographics. For example, commercial tenants tend to have diverse needs depending on their industries. Accessibility of a location might seem like a crucial deciding factor, but a tenant in a niche industry might not prioritise the accessibility of the location because they have loyal customers who will travel to them. On the other hand, factors considered by residents are rather standard, such as being situated close to a school, MRT station and other amenities.
The complexity that comes with commercial property investment may be a problem for those without sufficient background as a business owner. For instance, commercial and industrial investors will likely need to manage issues such as urgent maintenance needs and logistics requirements for factories and warehouses. These are problems you can avoid for residential properties and allow you to sit back as a more passive investor.
In general, while investing in commercial and industrial properties requires a higher level of industry knowledge and business expertise, it also usually comes with higher rewards. If you are more risk-averse, you might want to consider investing in residential properties instead. That being said, if you possess the relevant expertise and are hungry for higher yields, commercial and industrial investments still remain highly suitable options for you.