Pros And Cons of Investing in Commercial Properties

29 Jun 2022

With the implementation of various cooling measures targeting private residential properties, investors may be thinking about shifting their attention to commercial properties. As the recent implementation of the Additional Buyer’s Stamp Duty or ABSD towards private residential properties may dampen investment thoughts, some may want to invest in commercial properties instead – these which are not subjected to the additional buyer’s stamp duty (ABSD).

If you are one of these investors and you are a first-time commercial investor, here are some pros and cons to consider before you dive into commercial real estate.

Here, we discuss a list of pros and cons of investing in commercial properties – including strata office space, strata industrial space, retail shops and shop houses.

 

PROS OF INVESTING IN COMMERCIAL PROPERTIES

 

1. Less policy risks

As discussed above, commercial properties are not affected by the ABSD and only industrial properties are subjected to seller’s stamp duty. This presents less policy risks for those who are looking at investing in commercial properties. For many, the market even looks attractive and encouraging as such investments come with less policy risks compared to private properties.

Also, the commercial real estate sector is less likely to attract government intervention to influence the market dynamics – unlike in the residential market where the government needs to ensure it remains sustainable and meet the population’s housing needs.

 

2. Stable income stream

With commercial tenants, you can expect a longer lease. Especially those renting for their businesses. If you think about it, business owners who are spending to move or revamp their businesses will certainly want to sign a longer lease to ensure they cut cost and minimise losses. Plus, tenants who found a favourable location will usually want to stay in an area for a longer period of time.

Thus, commercial tenants usually sign a longer lease – e.g. 2 years or 3+3 years and some may even request for a longer tenure. This in turn ensures a reliable and steady stream of income from your invested commercial property. On the other hand, residential tenants tend to seek shorter leases of 1 year, meaning that there is a need to look for new tenants or negotiate lease renewal more regularly.

 

3. Supply limit

A limited supply of new strata retail/industrial/office space and a lack of new supply of shophouses means better pricing and capital appreciation potential for commercial property investors.

Especially in townships and highly concentrated residential areas, a limited supply of retail space means you get to secure a better deal with your tenant. If you have a strategic lot with good potential, you will not have to look for tenants – they will come to you naturally.

 

4. Higher financing limit

The good news with investing in commercial property is that its loan-to-value limit is higher as opposed to those for residential loans. For instance, financial institutions can offer a loan-to-value limit of 80% for commercial property loans, as opposed to 75% for residential loans*. (*the first home loan for the borrower)

Additionally, purchasers of commercial properties who are buying under company/investment vehicle will also not be subjected to the total debt servicing ratio (TDSR). Although the TDSR still applies if the buyer is purchasing the property as an individual.

 

CONS OF INVESTING IN COMMERCIAL PROPERTIES

 

1. Pricier tags

The first and foremost setback for investors of commercial properties is this – a larger price tag. Prices of some commercial properties may be higher than an average apartment – particularly in the shophouse segment.

Hence, commercial properties may not be suitable for retail investors who are working with a tighter budget of under $2 million, for instance. In 2021, the median transacted price for shophouses was $5.5 million – probably well above the budget of many retail investors.

 

2. Substantial cash outlay

In purchasing commercial properties, buyers cannot use their CPF funds to finance the purchase, unlike residential properties. This makes it harder for those looking at commercial property investments to pool their funds for a start.

 

3. Uncertainty and risks

As prices and rents of commercial properties are closely tied to economic factors and may be more susceptible to cyclical factors, rental returns from commercial properties may be more volatile and uncertain.

Take the Covid-19 pandemic for example, many rental returns were affected during the period of time and in future, many uncertainties are still present. Circumstances such as an economic downturn, uncertain industry outlook and other global events/geopolitical risks may impact the market.

 

4. Rental depends on tenant’s success and difficulty in looking for tenants

The rental performance of commercial properties depend very much on the success of the tenant/ business operator. If you are looking at buying into commercial real estate, you need to engage an experienced salesperson to source for a suitable tenant and provide insight into the industries that may be attracted to the property.

This is because if you are new to commercial real estate, you may not be able to find a suitable tenant – given a smaller pool of suitable candidates for the space as businesses tend to be highly selective about location. Thus, some investors may opt to purchase commercial space that are already tenanted rather than a vacant unit.

 

5. More responsibilities and boxes to tick

As a commercial property investor, you need to tick more boxes in order to make a quality choice for investment – especially in locational attributes. This is because locational attributes are critical for commercial properties, especially those leased by services sector businesses – i.e. retail and shophouse properties which house retail or food & beverage (F&B) tenants. These businesses require high visibility, high footfall traffic, and sizable population/workforce catchment nearby to support their business.

And to mention, as landlords, you naturally need to do more regular maintenance of your premises. Every once in a while, you will need to undertake asset enhancement works to ensure the space continues to meet the tenant’s needs. Such costs for enhancement works tend to be heftier compared to that of residential properties and you may need to fork out a considerable sum of money from time to time.

Now, with all points said – these are just some of the key considerations you will need to thoroughly assess if you wish to invest in commercial properties or make the switch to commercial real estate.

But more importantly, you should note that commercial properties is always more severely affected by economic changes and uncertainties compared to residential properties. Thus, if you are confident you can ride out the waves, jump on the bandwagon of commercial real estate. But if you think the cons are weighing on, you may want to reconsider your options.

And alas, if you find yourself stuck in a rut even after weighing all possible options, you may need a professional’s opinion. In this case, schedule a visit with us or book a free consultation with our trusted and renowned representatives.

Lastly, don’t forget to like, subscribe and share our articles with your friends if you think our content is useful to you. And if you would like us write a review for any property projects, have a blast in the comment section below.

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