Commercial property Buyer Guide

Making the right choice.

You should first apply for an in-principle approval for a loan. This helps you to narrow down the type of commercial properties you can afford.

To buy commercial properties, you have to fork out more in cash.

Why? One of the main reasons is that you are unable to use CPF for commercial properties, unlike residential properties.

A Commercial property is deemed non-essential, unlike a home.

Loan To Value (LTV) for commercial properties tend to have bigger cash downpayment. Typically, the bank is able to loan you up to 80% to 90% of the property value, depending on whether you are buying the property for your own use or for investment/rental purposes. The latter will be subjected to more stringent criteria by certain banks.

The sale of non-residential properties is a taxable supply subject to GST if the seller is a taxable person under the Goods and Services Tax Act, Chapter 117A of Singapore. The sale of residential properties is an exempt supply not subject to GST.
GST is currently levied at a rate of 7% on the sale price or, if the sale is not conducted at arm's length, on the open market value of the property at the time of sale. The government has announced that the GST rate will be increased from 7% to 9% sometime between 2022 and 2025.
Relief from GST may be available if the real estate is transferred as or as part of a going concern (for example, transfer of a leasing business with the leased property as an ongoing business), if certain conditions are met.
The seller is responsible for accounting to the Inland Revenue Authority for GST, but the parties can contractually agree who is to bear the GST and it is common for the buyer to pay it.
You can claim back the GST if you register a company. However, you will need to be GST registered first. There are requirements to be met by Inland Revenue Authority of Singapore (IRAS) before you are able to claim. You can read up more at www.iras.gov.sg .

If you prefer a location like Jurong, most likely the choices available to you are mostly industrial properties with 60 years tenure.

The location within the specific area is also important. How accessable is it from the main road? Is a bus stop blocking the view of your shop?

Is there sufficient parking along the stretch of shophouses you chose? If there’s insufficient parking, chances of people not living nearby visiting is slim. And therefore, this factor will affect your tenant’s business.

Within the shopping mall, is your shop near the escalator, lift or toilet?

Within the development, is your shop on groundfloor which means its clearly visible with your signage? or on higher level where its more suitable for storage?

The yield for commercial property is usually healthier than for residential property. Residential property rental yields are between 1-3% compared to an average of 5% for commercial properties.

The yield will vary according to the location of property, tenure (affecting the price you buy at) and the infrastructure surrounding the property.

Some commercial tenants may want more foot traffic if they are retail, but it also depends on what type of retail. Some retail shops do not depend on foot traffic and they already have a following of customer base who will travel to where they are located.

Before buying a commercial property, one should study the history of prices in the area and potential developments in the next ten years in the area. For example, if the shop is located within an old HDB estate and if the estate goes enbloc, almost all the potential traffic will disappear.

If you purchase under the company name, TDSR will still apply on the individual director’s income (if the company is an investment holdings company/ if the company is loss-making or if the company is not turning enough profit to service the loan instalments).

If the company is doing well financially and has a healthy business operation, TDSR may be waived on the individual. But in this scenario, the director has to take on being the personal guarantor of the loan the company undertakes. This may affect his other purchases, be it residential or commercial, because of the TDSR loading for being a guarantor to the loan.

Unlike residential properties, purchasing commercial properties will not incur Additional Buyer Stamp Duty (ABSD) or Seller’s Stamp Duty (SSD).

This is one of the main reasons to consider commercial properties. However, bear in mind that for Industrial properties, SSD is still applicable. The SSD is 15% if the industrial property has been sold in the first year, 10% in the second year and 5% in the third year.

For commercial properties, owners are taxed a flat 10% of its Annual Value (AV) for property tax.

You have to factor this in when calculating your yield.

In an unusual crisis like Covid-19, a lot of retail tenants are suffering from having to close their shops for a month.

If the tenants that you rented your shop do not have a healthy cash flow, they will be unable to pay rent. For which, they may become late in paying rent or totally skip out on paying rent. If your shop has to be vacant for a few months, will you be able to have holding power?

If you are a foreigner:

According to the Singapore Land Authority (SLA), Foreigners are allowed to purchase commercial properties in Singapore. Foreigners are a person or entitle who are not:

1) Singapore Citizens
2) Singapore Companies
3) Singapore Limited Liability Partnerships
4) Singapore Societies

Foreigners can purchase the following types of commercial properties without applying for approval from SLA:

Shophouse (for commercial use)
Industrial and commercial properties
Hotel (registered under the provisions of the Hotels Act)

There are 4 main types of commercial properties here:

Retail Commercial Property:

Examples include shopping malls, stores (e.g. clothing stores, convenience stores, electronic stores, etc.), F&B premises, salons, spas, gyms, shophouses, etc.

Industrial and Commercial Properties:

Examples include offices, warehouses, and factories.

These properties are classed into two sub-categories:

  • B1 Commercial Property: Offices, warehouses
  • B2 Commercial Property: Factories

Hotel Commercial Properties:

Examples include hotels and hostels of all types. These could be 2-star budget hostels all the way up to 5-star hotels.

Take note that hotels require specific permits to run. For starters, you will need a valid hotel licence from the Hotels Licensing Board (HLB) to operate a hotel. You will also need various permits from the Fire Safety Bureau, National Environment Agency (NEA), and Building ad Construction Authority (BCA).

Depending on how many services you offer in your hotel, you may need to apply for a fair number of permits. If your hotel has F&B outlets within the hotel that are run by you, you will also need Food and Beverage licenses for each eating establishment. If you have a bar, you will need a Public Entertainment License. If you offer massage services, you’ll need a Massage Parlour License.

Steps and procedures

Once you have settled and decided on buying a property, the seller will usually grant you an Option to Purchase (“Option”) in exchange for your payment of an Option Fee. This Option Fee is usually 1% (or more) of the property sale price and will usually be payable by cheque directly to the sellers. Once the Option is granted, the sellers cannot grant another Option to another prospective buyer until the current Option expires.

 

The Option will contain several terms and conditions, including crucially, the mode of exercising the Option and the deadline for doing so. You should note that a failure to exercise the Option in accordance with the prescribed mode and before the stipulated deadline would result in you losing your right to exercise the Option. You would forfeit any Option Fee paid and the property can then be put up for sale to another buyer.

 

Please do note that once the Option Fee is paid and the Option granted, the terms and conditions contained in the Option cannot be varied or changed unilaterally. The seller has no legal obligation to vary terms in the Option once granted to you as the buyer.

 

Prior to the exercise of the Option, your lawyers will conduct various legal searches to protect your interest. These include title searches, and bankruptcy and course book (litigation) searches on the sellers.

 

Your lawyers will also carry out several legal requisitions, which are basically formal enquiries to various government bodies such as the LTA, URA and PUB to ensure that there are no future government plans which would affect the property. If any of the legal requisitions are unsatisfactory, there is usually a term contained in the Option which allows you to not proceed with exercising the Option and to allow you to obtain a refund of the Option Fee.

 

Assuming all searches are satisfactory, your lawyers would usually exercise the Option on your behalf. In order to exercise the Option, the deposit sum (usually 4% of the purchase sum or more) would have to be paid by cashier’s order. Such a deposit would usually be held by the sellers’ law firm as stakeholder until Completion, and would not immediately be paid to the sellers. As an alternative, the deposit can also be held by the Singapore Academy of Law as a stakeholder. However, the latter is less common in practice as it is more inconvenient and also attracts higher bank charges.

 

The stamp duties payable by both parties should be paid within 14 days of signing the sales and purchase agreement.

Leading up to completion, your lawyers will advise you on various cashier’s orders you would need to prepare for payment of the balance sum.

Your lawyers will also liaise with the bank to execute the mortgage (if a bank loan has been taken out).

keys collection is usually at 6pm on the completion date itself.

Timeline