When it comes to investing in a property, most people would prefer to buy a residential over commercial property because it’s just so much easier. But with the implementation of higher Additional Buyer’s Stamp Duty (ABSD) rates, as announced during the September 2022 property cooling measures, it has become even more expensive to buy a second or subsequent residential property.
As such, you may be wondering if it makes more sense to buy a commercial property in Singapore for investment instead. After all, you don’t have to pay ABSD for commercial property purchases. While this is true, this shouldn’t be the main basis for your decision.
It’s important to understand the risks of buying a commercial property, because remember, it’s a big-ticket item that involves a lot of funds. For those interested in buying a commercial property, here is a basic guide to help you out.
What Is a Commercial Property?
Unlike a residential property where you can reside and live in, a commercial property is a building mainly for business purposes or work. For the property owner, it is used to generate profit, either through rental income or capital gains.
There are three types of commercial properties: retail, industrial and commercial, and hotel:
| Type of commercial property | Examples |
| Retail | Shopping malls, pet shops, gyms, restaurants, bars, shophouses, HDB shophouses |
| Industrial and commercial | B1 (Offices, warehouses), B2 (factories) |
| Hotel | Hotels, hostels |
Since commercial properties are mainly for rental income or capital gains, interested buyers are usually investors or businessmen. As there is also no ABSD involved, they’re also attractive to foreign buyers.
Can Foreigners Buy Commercial Property in Singapore?
Yes. While there are restrictions for foreigners when it comes to buying residential properties (generally, foreigners can only buy non-landed private homes and landed properties in Sentosa Cove), there are no such restrictions for commercial property in Singapore.
In fact, according to the Residential Property Act, foreigners can buy commercial properties in Singapore such as:
- Shophouses (for commercial use);
- Industrial and commercial properties; and
- Hotels (registered under the provisions of the Hotels Act)
In other words, foreigners have the same privileges as locals for commercial property Singapore purchases.
For locals, there are no income caps or eligibility restrictions. However, buying a commercial property is quite different from a residential property as there are several key considerations to take note of.
Things to Consider Before Buying a Commercial Property
1. Which Commercial Property Type Should You Choose?
As explained above, there are various different types of commercial properties available, ranging from B1 industrial buildings and retail shops to office buildings and restaurants. Not only do they vary in costs, but each also has its own traits and risks.
For example, heritage shophouses are limited and prized in Singapore as they’re conserved by the Government. They are also mostly located in the Central Areas and often have lower rents, making them popular among startups and small businesses who value the location but cannot afford the high rent costs of traditional offices.
Therefore, investing in a shophouse may make sense because they’re high in demand, and you can expect to get good rental yields. They also hold well in value, so you can also expect to get good capital gains should you sell them in the future.
However, shophouses aren’t cheap; they can be as expensive as a landed property. Depending on the type of shophouse, their usage may be restricted to their zones; some shophouses are for commercial use only, while others can be both residential and commercial.
So before deciding which commercial property to buy in Singapore, choose one that has the potential to generate good rental income or capital appreciation.
2. Can You Change the Property’s Intended Use?
Like residential properties, commercial properties are also zoned according to their uses on the URA Master Plan. Depending on the type of property and its uses, you may need to apply for planning permission from URA.
For example, if you plan to convert a retail shop into a commercial school, you need to adhere to URA’s guidelines or seek approval from them. Each commercial property has its own guidelines and regulations, which you may refer to here.
3. Does the Location Matter?
Location plays an important role because it affects the type of property that you’re interested in and its tenure.
For example, if you’re interested in buying an industrial property in Woodlands or Punggol, you may only be limited to those with 60 years lease.
Additionally, while investing in a commercial property near MRT stations and densely populated residential areas may have a good track record, the location is also highly dependent on the developments in the area.
For example, if there’s an en bloc sale or if the government decides to redevelop the land, it could potentially affect human traffic and therefore also your business.
4. Do You Need to Pay ABSD for Commercial Property Singapore?
As mentioned above, unlike residential property purchases, you won’t have to pay ABSD when buying a commercial property even when you already own a residential home. Depending on your residence status (i.e. whether you’re a Singapore citizen, permanent resident or foreigner), it means saving between 17 to 30% ABSD, which is a substantial amount.
5. Do You Need to Pay Seller’s Stamp Duty (SSD)?
You don’t need to pay SSD for commercial properties except when buying industrial properties such as factories. According to IRAS, the SSD amount you need to pay depends on the holding period (the number of years that you own the property before you sell it).
| Holding period | SSD rate (on the actual price |
| 1 year | 15% |
| 1 to 2 years | 10% |
| 2 to 3 years | 5% |
| More than 3 years | No SSD payable |
6. Can You Use Your CPF to Buy Commercial Property in Singapore?
While you can use your savings in your CPF account to pay the downpayment and mortgage for a residential property, you can’t do the same for a commercial property; the mortgage and downpayment must be paid in cash.
7. How Much Can You Borrow for Commercial Properties
When taking a bank loan, you can borrow up to 80% of your property’s value, which is higher than the Loan-to-Value (LTV) limit for residential properties (up to 75%). But since you can’t use funds from your CPF account, you need to have a higher initial cash outlay.
Also, depending on whether you’re buying for investment or for your own use, the LTV may be lower and stricter if you’re buying for investment because banks consider commercial properties to have higher risks.
Like residential property loans, there are also fixed-rate and floating-rate loans. However, interest rates for commercial properties are higher, even though the loan tenure for commercial loans is also shorter (capped at 30 years), compared to home loans (up to 35 years).
8. What Other Costs Do You Need to Consider?
Property Tax
Like residential properties, you also need to pay property tax for commercial properties. However, the difference is the tax rate for residential properties varies from 0% to 23% depending on whether you’re an owner-occupier. For commercial properties, you pay a flat rate of 10% of the annual value, which is the estimated gross annual rent if it were rented out. It is based on the market rental value of similar properties in the area.
Buyer’s Stamp Duty (BSD)
| Purchase price/Market value | Rates for residential properties | Rates for non-residential properties |
| First $180,000 | 1% | 1% |
| Next $180,000 | 2% | 2% |
| Next $640,000 | 3% | 3% |
| Next $500,000 | 4% | 4% |
| Next $1.5 million | 5% | 5% |
| In excess of $3 million | 6% | 5% |
You will also need to pay Buyer’s Stamp Duty (BSD), as this is a tax levied on any property purchase you make in Singapore. The Budget 2023 announcement on 14 February 2023 saw the BSD rates being adjusted. Here is how much you would need to pay.
Price
When buying a commercial property, the cash outlay required is dependent on the property type. For example, small offices and independent shops are cheaper, but bigger properties such as factories require more funds.
Apart from that, prices are also influenced by economic conditions. For example, tenants and rental demand will increase if the sector is doing well and the opposite is also true during a recession, which would drive down the rental yield.
GST
When buying a commercial property, you also need to pay the 8% GST charge. You also can’t use your CPF funds or the bank loan to pay for it, so you should have enough cash to cover this fee. Do note that GST is also chargeable on the supply of movable furniture and fittings in commercial properties.
Furniture
Speaking of furniture, commercial properties such as offices tend to yield higher rental value when they are furnished. This would, however, necessitate the expenditure of additional funds for the purchase of furniture such as tables and chairs.
Plus, you can’t escape GST charges by getting cheap furniture from overseas sites such as Taobao or AliExpress. All imported goods valued at $400 or below will be subject to the 8% GST charge.
Renovation
Like residential properties, commercial properties also require renovation. This is especially so if you purchase a cheap commercial property that’s rundown.
9. Lease for Commercial Properties
Residential properties usually have a lease of either 99 years, 999 years, or freehold.
In contrast, commercial properties usually have shorter leases and it’s not uncommon to see properties with 30 years or 60 years leases. Though freehold commercial properties do exist, they’re rarely located in prime areas and usually command a premium.
10. Do Commercial Properties Have Higher Rental Yields?
On average, commercial properties have a rental yield of around 5%. This is higher compared to residential properties, which typically see a rental yield of around 2% to 3%.
However, remember that commercial properties also have higher maintenance costs, such as utility bills and general maintenance.
How to Finance A Commercial Property
You can apply for a commercial property loan as an individual or as a company. Like residential property loans, you will be subjected to Total Debt Servicing Ratio (TDSR).
If you’re buying as an individual, then TDSR will apply to your individual income. In other words, your total debt obligations can’t be more than 55% of your monthly income.
For companies, banks will evaluate the TDSR based on the company’s annual net operating income and annual debt. If the company’s financial health isn’t well, then banks may also take the directors’ annual incomes as part of the TDSR evaluation.
How Do You Check for Upcoming Sites for Sale?
The URA will announce Government Land Sales (GLS) sites for sale twice a year. There will be a mix of both residential and commercial sites that are on the Confirmed List and Reserved List. The land will be awarded via an open tender process. If you’re looking for White Sites or Hotel Sites, then you should check URA’s website for the latest sites for sale.
To check for information such as commercial property projects in the pipeline, median rentals, vacancy rates, and commercial transactions in the last few years, you may refer to URA’s site.
Need a Loan to Buy Commercial Property in Singapore
The loan process for commercial property loans tends to be more personalised than residential property loans.
Banks have their own eligibility conditions and processes for commercial loans. Applicants usually have to get in touch with specific banks in order to discuss their commercial property transactions. Based on the particulars of the situation, the bank will advise on what documents to submit in your application.
If you need to find and compare commercial loans across different banks or get unbiased recommendations on the best loan to take, speak to our Mortgage Experts on PropertyGuru Finance for free now.
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