Should You Invest In Commercial Or Industrial Property To “Escape” ABSD?

·8-min read
Should You Invest In Commercial Or Industrial Property To “Escape” ABSD?
Should You Invest In Commercial Or Industrial Property To “Escape” ABSD?

Our fascination with property ownership in Singapore may stem from the fact that as a small island nation, land will always be in limited supply.

While property prices have shot up in the early years of our independence, many of us have also witnessed it first-hand – what with the en-bloc craze in 1997, 2007 and more recently in 2016. Looking forward, we are already expecting the next one in 2021.

Singapore Property Cooling Measures for Investors

Due to rising property prices in the early 2010s after the Global Financial Crisis (GFC), the government introduced several rounds of cooling measures. One such measure was the Additional Buyer’s Stamp Duty (ABSD), which required Singapore citizens buying their second and subsequent residential properties to pay additional stamp duty tax, on top of the Buyer’s Stamp Duty (BSD) that they already have to pay on all residential property purchases.

The current ABSD is 12% for Singapore citizens buying their second residential property and 15% for those buying their third and subsequent property. PRs and foreigners also have to pay ABSD, which is higher, for their first residential properties.

To ‘escape’ having to pay ABSD while still fulfilling their aspirations of owning multiple properties in Singapore, some Singaporeans have started turning to commercial or industrial properties in recent years.

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Are Commercial and Industrial Properties More Affordable than Residential Property?

Besides avoiding ABSD, banks can also allow buyers to borrow a higher quantum of up to 80% when it comes to commercial or industrial property. In contrast, banks will not finance more than 75% of the value of a residential property. If it is a second residential property loan, the loan-to-value (LTV) limit drops to up to 45%, which means that buyers have to fork out at least 55% down payment in cash and CPF.

As such, assuming two properties have the same price quantum, the commercial or industrial property may seem to be the more affordable investment compared to a residential property.

For example, suppose you buy a $1 million residential property for investment purpose. In that case, this will mean that you likely already own an existing residential property on your own that and thus will need to pay the 12% ABSD.

This would cost you $120,000 for ABSD, on top of the existing $24,600 BSD. At the very least, you will also need $250,000 as a down payment. In such instances, your initial cash outlay will be $394,600 to invest in a $1 million residential property. If you have an existing residential property loan, you have to fork out 55% or $550,000 in down payment, increasing your cash outlay to nearly $700,000. This can be prohibitive to investing in a second property, which is why many have to clear their existing housing property loan before investing in their second residential property.

In contrast, if you invest $1 million in a commercial or industrial property, you will need to pay a 20% down payment and a BSD of $24,600. While there is also a GST payment of 7% ($70,000) required, you won’t need to pay any ABSD. In total, your initial cash outlay is $294,600, or about $100,000 less.

So is investing in commercial and industrial properties a good way to avoid ABSD?

Be Careful, Commercial and Industrial Property Investment is a Whole New Ballgame

Investing in commercial and industrial properties is a different real estate investment market from residential properties. The only similarity between the two is that as an investor, you are 1) aiming to rent it out for rental income and 2) hoping to enjoy capital appreciation over time.

Here are some of the key differences to consider.

1. Your Target Markets are Businesses and No Longer Individuals and Families

When you invest in a commercial or industrial property, your target market would be businesses rather than individuals or families. This also means that your rental yield can fluctuate significantly depending on the state of the economy.

In a recession, rental yields can fall quickly as businesses downsize or even close down. When this happens, the rental demand for commercial and industrial properties will decline more quickly as compared to residential properties, which would drive down rental returns.

2. You Can’t Use Your CPF Savings to Pay the Mortgage Repayments

Investing in a residential property can sometimes be attractive because while you can pay the mortgage repayments via your CPF, you enjoy rental income paid to you in cash. This is attractive as it allows you to access money that you otherwise wouldn’t be able to use.

When it comes to commercial or industrial properties, this is no longer applicable. Mortgage repayments for commercial or industrial properties have to be paid for using cash only. So this means you need to have rental income to pay for the monthly mortgage repayment, and/or need to top it up with your cash.

3. The Lease on Commercial and Industrial Properties May Sometimes Be Shorter

Some buyers may take for granted that the lease on a new property would typically be at least 99 years. However, when investing in commercial or industrial property, this is not always the case.

In fact, most industrial properties are sold in Singapore with a 30-year or 60-year lease. So while the average rental yield may look good on paper compared to residential properties, you have to take into account that you are also getting a lease that can be nearly 60% shorter on your property investment.

4. When You Invest in Commercial and Industrial Properties, You’re Competing with the Big Boys

Unlike residential properties, which are usually owned by private individuals, many commercial and industrial properties in Singapore are owned by big developers and even government agencies such as the Jurong Town Council (JTC). In other words, if you are investing in a commercial or industrial property, you are indirectly competing against these organisations to attract tenants.

These larger organisations not only have a wider network to attract the tenants they want but can also afford to undertake additions and alteration (A&A) works at a high cost to ensure that their properties remain desirable over time. In contrast, as an individual who owns just a single unit in a commercial or industrial building, you will have very little control over the management of the building.

So Who Should Consider Investing in Commercial and Industrial Property?

While there are pitfalls to consider when investing in commercial and industrial properties, it could still make financial sense for some people.

The first group are business owners themselves. If you are a business owner, it might make sense to own your property so that your business can pay ‘rent’ to yourself. In such an instance, you could buy the property as an individual and rent it to your own company, or to invest in it through your company. This way, your business underwrites the risk of being able to rent out the property.

While either option may require you to take a commercial property loan, after full repayment has been made, you will own the property and can continue using it in the future for ‘free’, or rent it out for additional income.

Even if you are a non-business owner, you can also invest in commercial properties as long as you can accept the higher volatility that comes with such properties. The yield for commercial and industrial properties can be very attractive but it’s also significantly influenced by the state of the economy. If you have enough cash flow to ride out these volatile periods, the returns on your investment can be rewarding.

If you already have an existing residential loan, you also have to pay a down payment of 55% for your second residential property investment compared to 25%. This is going to be a substantial amount for any individual property investor in Singapore. On the other hand, it does not matter if you have existing residential or commercial property loans if you want to buy a commercial or industrial property – you can still fork out a down payment of 20%.

Not sure whether to go for residential, commercial or industrial property for your next purchase? PropertyGuru Finance can help. For personalised property financing recommendations and guidance, reach out to our home finance advisors (it’s free!).

Think you’ll stick to residential property then? Browse homes for sale on PropertyGuru.

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