When investing in property, most people prefer buying residential over commercial properties because they are easier to buy and sell. However, with the implementation of cooling measures in December 2021, stringent Additional Buyer’s Stamp Duty (ABSD) rules have made it more restrictive to purchase a second or subsequent residential property.
That said, you might be wondering if it makes more sense to invest in commercial real estate. After all, you may have heard that you don’t need to pay ABSD when buying commercial property. While this is true, it shouldn’t be the primary basis for your decision, as it’s crucial to understand the risks of buying commercial real estate. Remember, buying property is a major decision involving a significant amount of money.
So, if you’re still interested in investing in commercial property, here is a beginner’s guide to help you.
Table of Contents
What is Commercial Property?
Unlike residential properties where one can live, commercial properties are buildings primarily used for business purposes or as workplaces. For owners, purchasing a commercial property can generate profits through rental income or capital gains.
Commercial properties are divided into three categories: retail, industrial/commercial, and hotel:
| Type of Commercial Property | Examples |
| Retail | Shopping malls, pet shops, gyms, restaurants, bars, shophouses, HDB shophouses |
| Industrial/Commercial | B1 (offices, warehouses), B2 (factories) |
| Hotel | Hotels, inns |
Since the primary goal of commercial property is to obtain rental income or capital gains, interested buyers are typically investors or business owners. Moreover, because no ABSD is required for purchasing commercial property, it is also attractive to foreign buyers.
Can Foreigners Buy Commercial Property in Singapore?
Yes. While there are restrictions on foreigners buying residential properties (foreigners can generally only purchase non-landed private properties and landed private properties in Sentosa Cove), there are no such restrictions for commercial properties.
In fact, under the Residential Property Act, foreigners can purchase the following categories of commercial properties:
- Shophouses (for commercial use);
- Industrial and commercial properties;
- Hotels (registered under the Hotels Act)
⚠️ Please note that if foreigners obtain special approval from the Singapore Land Authority (SLA)—a recent example being James Dyson’s property purchase journey in Singapore—they may also be allowed to purchase landed properties.
In other words, foreigners enjoy the same rights as locals when purchasing commercial properties.
For locals, there are no income caps or eligibility restrictions on purchases. However, buying a commercial property is very different from a residential one, as there are several key considerations:
Things to Consider Before Buying Commercial Property
1. Which type of commercial property should you choose?
As mentioned above, there are various types of commercial properties to choose from, ranging from B1 industrial buildings and retail shops to office buildings and restaurants. Not only do the costs differ, but each type has its own characteristics and risks.
For example, Singapore’s heritage shophouses are under government conservation, making them subject to buying and selling restrictions and highly valued. Most of these heritage shophouses are located in the central area, and their rents are generally lower, making them popular with startups and small businesses that value the location but cannot afford the high rental costs of traditional offices.
Therefore, investing in shophouses can be quite meaningful, as there is high demand for this type of property, and you can get a good rental yield. These properties also have high value, so you can also achieve good capital gains if you plan to sell in the future.
However, shophouses are not cheap (they can be as expensive as landed properties). And depending on the type of shophouse, their use may be limited to their designated zone; some shophouses are only for commercial use, while others can be used for both residential and commercial purposes.
Therefore, before deciding which type of property to buy, choose one that has the potential to generate good rental income or capital appreciation.
2. Can you change the intended use of the property?
Like residential properties, commercial properties are zoned according to their use in the URA Master Plan. Depending on the property type and its intended use, you may need to apply for planning permission from the Urban Redevelopment Authority (URA).
For example, if you plan to convert a retail shop into a commercial school, you need to comply with URA’s guidelines or seek their approval. Each commercial property has its own guidelines and regulations, which you can view on the official URA website under Home—Property Business—Changing the Use of Your Property—Considerations for Property Use.
3. Does location matter?
Location is very important as it affects the property type and its tenure.
For example, if you want to buy an industrial property in Woodlands or Punggol, you may only be able to purchase a property with a 60-year lease.
Furthermore, while investing in commercial properties near MRT stations and in densely populated residential areas may benefit from a good track record, such locations are also highly dependent on the area’s development.
For example, if there is a possibility of an En Bloc sale, or if the government decides to redevelop the land, it could affect foot traffic to the location and, in turn, your business.
4. How much Buyer’s Stamp Duty (BSD) do you need to pay?
Whether you are a Singapore citizen or a foreigner, you need to pay Buyer’s Stamp Duty when purchasing commercial property in Singapore.
The BSD rate is tiered based on the total price of the property. The following table shows the BSD rates in Singapore (the property price is based on the higher of the actual purchase price or market value):
| Property Price | Stamp Duty Rate |
| First $180,000 | 1% |
| Next $180,000 (i.e., from $180,001 to $360,000) | 2% |
| Next $640,000 (i.e., from $360,001 to $1,000,000) | 3% |
| Next $500,000 (i.e., from $1,000,001 to $1,500,000) | 4% |
| Remaining amount above $1,500,000 | 5% |
5. Do you need to pay ABSD?
As mentioned above, unlike purchasing residential property, you do not need to pay ABSD when buying commercial property, even if you already own a residential property. Depending on your residency status (i.e., Singapore Citizen, Permanent Resident, or foreigner), this means you can save 17% to 30% on ABSD fees, which is a considerable amount.
Cooling measures only apply to residential properties:
Citizens buying a second property are subject to an Additional Buyer’s Stamp Duty (ABSD) of 17%.
Permanent Residents buying a second property are subject to a 25% ABSD.
Foreigners buying their first property are subject to a 30% ABSD.
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6. Do you need to pay Seller’s Stamp Duty (SSD)?
Unless you are buying an industrial property like a factory, you do not need to pay SSD for commercial property. According to the Inland Revenue Authority of Singapore (IRAS), the amount of SSD you need to pay for an industrial property depends on the holding period (the number of years you have owned the property before selling it).
| Holding Period | SSD Rate (based on actual price) |
| 1 year | 15% |
| 1 to 2 years | 10% |
| 2 to 3 years | 5% |
| More than 3 years | No SSD payable |
7. Can you use CPF to finance a commercial property?
While you can use savings from your CPF account to pay the down payment and mortgage for a residential property, you cannot do so when purchasing a commercial property; the mortgage and down payment for a commercial property must be paid in cash.
8. How much can you loan?
The Loan-to-Value (LTV) ratio for a bank loan can be up to 80%, which is higher than the LTV for residential properties (up to 75%). However, since you cannot use funds from your CPF account, you will need to pay at least a 20% down payment in cash.
Furthermore, the amount you can borrow will also differ depending on whether you are buying the commercial property for investment or for your own use. If it’s for investment purposes, the LTV may be lower and more stringent, as banks consider commercial properties to have higher risks.
Like residential property loans, commercial property loans come with both fixed and floating interest rates. However, the interest rates for commercial properties are higher, although the loan tenure is also shorter (capped at 30 years) compared to housing loans (up to 35 years).
9. What other costs do you need to consider?
Goods and Services Tax (GST)
When purchasing a commercial property, you also need to pay a 7% Goods and Services Tax (GST). Please note that you cannot use your CPF or a bank loan to pay for the GST, so you must pay for it yourself.
Property Tax
Like residential properties, you also need to pay property tax for commercial properties. However, the difference is that property tax rates for residential properties range from 0% to 20%, depending on whether you are buying for owner-occupation.
For commercial properties, you must pay a fixed rate of 10% of the Annual Value—the Annual Value is the estimated gross annual rent if the property were rented out. The Annual Value is based on the market rental value of similar properties in the area.
Price
When purchasing a commercial property, the required cash outlay depends on the property type. For example, small offices and standalone shops are cheaper, while larger properties like factories require more capital.
In addition, prices are also affected by economic conditions. For example, if the industry is performing well, tenant and rental demand will increase, thus pushing up property prices. Conversely, an economic recession will also depress rental yields, thereby pulling down property prices.
10. Commercial Property Tenure
Residential properties typically have tenures of 99-year leasehold, 999-year leasehold, and freehold.
In contrast, commercial properties usually have shorter tenures, and properties with 30-year or 60-year leases are not uncommon. Although freehold commercial properties do exist, they are rarely located in prime areas and usually come with a premium.
11. Will the rental yield of commercial properties be higher?
On average, the rental yield for commercial properties is about 5%. This yield is higher compared to residential properties, which typically have a yield of about 2% to 4%. However, keep in mind that commercial properties also incur higher maintenance costs, such as utilities and routine upkeep.
According to a report by Lianhe Zaobao in October 2022, office rents in Singapore have risen for the fifth consecutive quarter. Rents in the third quarter of this year increased by 1.8% quarter-on-quarter, surpassing pre-COVID levels.
How to Finance a Commercial Property Purchase?
You can apply for a commercial property loan as an individual or a company. Like residential property loans, you will be subject to the Total Debt Servicing Ratio (TDSR).
If you are buying as an individual, the TDSR will be calculated based on your personal income. In other words, your total debt cannot exceed 55% of your monthly income.
For a company, the bank will assess the TDSR based on the company’s Annual Net Operating Income and Annual Debt. If the company’s financial standing is weak, the bank may also consider the director’s annual income as part of the TDSR assessment.
Where Can You Find Data on Commercial Properties?
To view information such as commercial property projects, median rents, vacancy rates, and commercial transactions from past years, you can refer to the URA website.
How to Check for Upcoming Land Parcels for Sale?
The URA announces the Government Land Sales (GLS) programme twice a year. Both residential and commercial sites will be available on the Confirmed List and the Reserve List. The sites will be sold through a public tender process. If you are looking for White Sites (where developers can flexibly decide on the land use with government permission) or Hotel Sites, you can check the URA website for the latest information on sites for sale.
Need Help Applying for a Commercial Property Loan?
The process for a commercial property loan tends to be more personalized than for a residential property loan.
Banks have their own eligibility criteria and processes for commercial property loans. Applicants must contact a specific bank to discuss matters related to the commercial property transaction. The bank will inform you of the necessary documents to submit for your application on a case-by-case basis.
If you need to find and compare commercial loans from different banks, or get advice on the best loan packages, please contact us immediately for professional consultation.
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