Published on Dec 25, 2011
Cooling measures in residential sector have sparked a search for alternative segments
By Esther Teo
The latest rule changes to cool the property market are again prompting investors to turn away from the residential segment and to look at prospects in the commercial and industrial sectors.
Strata-titled shops, offices and factory space are appearing attractive in the light of the Dec 8 measures that some experts say are the harshest out of five rounds of policy moves since September 2009.
They target largely foreign buyers and local investors and include an extra stamp duty of 10 per cent on a home bought by a foreigner.
Property experts predict sales volumes will be much reduced, while prices could crash by up to 30 per cent next year.
So the residential sector looks to be in for a tough time but, experts say the industrial and commercial sectors, which have escaped unscathed from policy changes, might benefit.
Indeed, it is already happening. Prices of industrial space rose 22 per cent in the first nine months of the year, while those for commercial climbed 13 per cent, according to data from the Urban Redevelopment Authority (URA).
Both sectors have also proven their financial mettle, achieving yields of 4 to 8 per cent against residential yields of 2 to 3 per cent.
But the recent run-up that has driven prices close to, or above, their previous peaks has trimmed the potential returns, experts note.
R’ST Research director Ong Kah Seng said price gains in these alternative segments are now limited.
‘Also, many investors are already aware that such properties are more flexible alternatives compared to residential property,’ he added.
‘The competition is on for buying such properties. Asking prices in the subsale and resale market for non-residential properties are still fairly high in the light of economic fundamentals.’
Mr Alan Cheong, associate director of Savills research and consultancy, said that while he expects prices for industrial space to rise moderately, office prices have peaked and are expected to dip 10 per cent next year.
Experts add that because commercial and industrial properties are often more specialised and bring greater risks, investors need to take more time on research and to secure a reliable agent.
There are other differences to note as well.
Residential property can rack up significant capital gains over a short time, whereas industrial and commercial properties are often rental yield plays. They are less easy to flip and require a medium- to long-term perspective.
Risks such as market volatility, higher borrowing costs and thin trading volumes for these kinds of properties can also make it hard for an investor to sell up if he wants out.
The Sunday Times looks at some of the various differences that mum-and-dad investors should note:
Financing restrictions
Financing is one of the key differences between buying a house and buying a strata-titled office or shop.
Investors will not be able to use cash from their Central Provident Fund to purchase industrial and commercial properties.
Mortgage rates also tend to be higher than for residential with the loan-to-value (LTV) ratio typically lower at 70 to 80 per cent, said SLP International research head Nicholas Mak, depending on whether the unit is for a buyer’s own use or not.
Investors who are more heavily leveraged might have an LTV of just 60 per cent, so that is a lot to be paid upfront in cash.
Residential properties are exempt from goods and services tax but the levy applies to purchases of commercial and industrial property from a GST-registered company.
Experts say investors could set up a company to buy units, paying GST at purchase and then claiming it back from the tax authorities, subject to certain requirements.
Exempt from cooling measures
One advantage of non-residential investments is that they are exempt from the five rounds of cooling measures.
While a home buyer is hit with a seller’s stamp duty of 16per cent if the property is sold within a year, commercial and industrial properties are not subject to these rules.
Investors can also buy such units without having to sell any existing property, unlike buyers of resale HDB flats, who must now sell their private home within six months of the HDB purchase.
Commercial and industrial investors are also not subject to tighter financing rules which impose an LTV cap of 60 per cent on all home buyers who already have a mortgage.
Furthermore, a buyer of commercial and industrial property will not have to pay the additional buyer’s stamp duty regardless of how many other properties he has bought.
Higher yields
Experts say that the commercial and industrial segments typically post higher yields than residential because homes can be owner-occupied and so pose a reduced risk.
R’ST’s Mr Ong said strata- shops have yields of 5 to 6 per cent, strata-offices are at 4 to 5 per cent and industrial units range from 6.5 to 7.5 per cent.
However, DTZ’s head of Asia-Pacific research, Ms Chua Chor Hoon, noted that yields vary according to tenure and market conditions.
When the market is buoyant, for example, sellers will demand higher prices, which will then reduce the rental yield, she said.
Other differences and risks
There is a far smaller pool of potential buyers for commercial and industrial space than for residential so they can be far harder to offload.
Investors must be prepared to hold on to a property for longer, as demand is considerably weaker. This can be a real problem if you need to free up the cash urgently.
The market dynamics are also different.
There is a higher risk in non-residential assets as they are more exposed to the dynamics of the region’s economies, experts say.
They are business spaces, so tend to be more sensitive to economic cycles and are more volatile, particularly in a down market.
If recession hits, the tenants could pull out or go under, leaving the investor with a mortgage to pay.
SLP’s Mr Mak notes that investors should buy a unit in a trade they are familiar with, or one that can be owner-occupied. This will allow them to use the units for themselves even if the economy tanks.
Leasing practices also vary.
Commercial and industrial lease terms are typically three years, with the option to renew for another three years, while residential leases are on shorter terms of one plus one or two plus two years.
If mortgage rates rise, costs can shoot up while rents stay the same, as non-residential tenancies can be signed for up to five years at a go.
esthert@sph.com.sg
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