What you need to know before investing in commercial property


Thinking of investing in commercial property? Here are six major factors to consider.

June 13, 2016

So you’ve heard that nearly half of Singapore’s top 10 richest people made their billions from real estate. And you know in land-strapped Singapore, sinking your funds into this scarce resource has been known to pay off, big time.

The question is, what kind of property should you invest in?

There’s a strong case for commercial property, according to Mr Kelvin Chuang, PropNex Group Division Director and one of its top realtors since 2004. He specialises in commercial and industrial real estate.

“Investing in commercial property helps to diversify your property investment portfolio,” he said. “[Spread] across a number of different investment types, your overall financial position will be less volatile.”

So if you’re looking to venture into the commercial property market, Mr Chuang has some tips to give you the confidence you need to take the plunge.

1. Regulations

First of all, can you even own a piece of commercial property, as an individual investor? Yes, you can! While most shopping malls and office buildings are bought and sold in their entirety, look out for rare strata-titled developments, which offer investors the chance to own individual units.

Next, do your homework on the regulations. Different rules and duties apply to different types of commercial property (offices, industrial space, retail units and so on). You may want to read up more before you invest – the Inland Revenue Authority of Singapore (IRAS) website is a good place to start.

Few restrictions apply when it comes to retail. “There is no ABSD (Additional Buyer Stamp Duty). There are also no tie-up periods, so you can sell any time when you receive the right offering prices. Plus there is no SDD (Seller Stamp Duty) when you sell, so it is easier to divest whenever you want,” Mr Chuang said.

2. Price

Good timing can make all the difference to the price of the property you are eyeing.

For example, retail property investment in Singapore was off to a slow start in 2016. “The lack of strata-titled retail project launches in the city fringe further exacerbated the decline in overall retail property sales,” Mr Chuang said.

But he expects the investment activity to pick up in the next few quarters. Meanwhile, this may be the perfect time to snag a bargain and reap healthy rewards when the property reaches its TOP date.

“For interested investors, now is a good time to take advantage of the favourable pricing to enter into the commercial property investment,” he advised.

While on the topic of costs, it’s good to note that commercial properties generally require fewer expenses because they are usually rented out empty (unlike residential property).

For business owners, buying your own strata-titled unit has the added advantage of affording protection from rising rents, saving you costs in the long run.

3. Location

The adage “location, location, location” rings true in any type of property investment. Pick commercial properties in growth areas or densely populated places near MRT stations and amenities.

“The potential growth surrounding the property will increase the rent,” Mr Chuang said.

For retail in particular, there’s an extra factor to consider.

“Look out for retail developments with at least two anchor tenants. Supermarkets and food courts are a must,” Mr Chuang said. Makes sense, since besides shopping, Singaporeans are known to love eating.

At the upcoming strata-titled shopping mall City Gate, there will be F&B and retail outlets spanning 155,000 sq ft of space. The supermarket is located on the second level, while a food court occupies the basement. Spreading out the anchor tenants with a good mix of eateries and retail is also a smart move – it helps stimulates footfall and draws traffic throughout the entire mall, which is essential for healthy sales.

4. Rental yield

Rental yield for commercial property averages at around 4 per cent, typically higher than that of residential property (2 to 3 per cent). Tighter supply in 2016 has also driven rents up. This makes commercial property a sound investment when it comes to reaping returns.

Insiders will know that not all commercial properties were created equal. Some offer better rental yield than others.

“According to the Singapore Real Estate Exchange (SRX), 99-year leasehold properties consistently outperform freehold ones in rental yield, especially properties that are located near MRT stations and amenities,” Mr Chuang said.

5. Capital gain

While commercial property is generally bought and sold after a few years, Mr Chuang suggests holding on to property to enjoy longer-term appreciation.

“Holding on to commercial properties will likely provide you with possible long-term capital appreciation and better cash flow as a result of higher rental rates over time. The increased cash flow can lead to long-term passive income, with appreciation as the frosting on the cake,” he said.

Strata-titled shops perform particularly well. Due to their limited supply, they provide excellent opportunities for capital gain through direct sales.

6. Market conditions

How commercial property fares is closely linked to the growth of the sector. So look carefully at the market as a whole and look beyond the short term. Don’t just go for the tried-and-tested route – consider the options and keep your eyes open to possibilities.

You will need to do your research and have confidence in the prospects of both the sector and the location you’re looking at. Fortunately for potential investors in city fringe malls like City Gate, both aspects look promising.

The retail sector is showing signs of good health – in fact, suburban and city fringe malls are doing better than ever. As for location, City Gate will benefit from rejuvenation around its immediate vicinity as well as a much wider catchment area in the years to come.

And this is how you know what’s worth investing in.