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Commercial Real Estate Loan 101

53 Serangoon North Unit / Source: CapitaLand

According to a Business Times report dated 1st December 2020, investments in the Singapore commercial real estate market is expected to pick up in 2021. After the expected decline in 2020 due to the COVID-19 pandemic, activities should pickup with the availability of the COVID-19 vaccine and easing of some travel restrictions. Interest in the local commercial real estate market has become increasingly popular ever since the government implemented cooling measures on the private residential properties in 2011 and 2013. After the 2018 implementation of the Additional Buyer's Stamp Duty or ABSD for private residential properties, there is even greater interest in commercial properties.

Commercial properties in Singapore are seen as attractive investments to many right now. The average rental yields for commercial properties is about 5% on average, whereas private residential properties rental yield generally is between 2% to 3% on average. So if you are looking to invest your money for the long term, commercial properties could be an option. Today, we take a look commercial property loans and how it works.

Fixed Rate vs Floating Rate Loans

Quite similar to residential property loans, commercial property loans can be taken as fixed interest rate loans or floating interest rate loans. Fixed rate loans have a fixed interest rate for a specified number of years before the interest rate becomes floating. Floating rate loans, on the other hand, have no fixed interest rates from the beginning and the interest can vary from month to month.

However, lenders of commercial property loans will take into considerations more factors before determining the loan amount.

Factors to Consider

Generally, commercial property loans have a lower maximum Loan-to-Value (LTV) than residential property loans. Normally, lenders can provide financing of up to 80% of your commercial property value if it is for own occupancy. If you are buying a commercial property for investment purposes, the LTV would typically be at 70%. Also, the loan amount will be lower for properties that only have 60-year leases, which is very common for most commercial properties.

You also have to bear in mind that the maximum commercial property loans tenure is 30 years and may be shorter, depending on the remaining lease.

Other factors considered are your Company’s finances. Banks will need to ensure your company’s finances are sound and have the ability to repay the loan. Banks usually calculate your company’s total debt servicing ratio (TDSR), which is your company’s annual nett operating income divided by its total annual debt burden. If your company is in the red, or if cash flow is insufficient to service payment, TDSR will also apply to individual directors’ incomes. In short, the stronger your company’s financials are, the better your chances of securing the loan.

The property that you are investing in also matters, as it acts as a collateral that the bank can seize if you are not able to repay your loan on time. When you are applying for the loan, lenders will also look at several other factors, such as, what the property will be used for; projected returns from the property; location; property size and type; as well as prevailing market conditions. Before committing to the loan, you should look at these factors carefully, and choose a loan that best meets your needs and requirements.

One very important point to note is that you cannot use your CPF savings to purchase a commercial property or repay a commercial property loan. In addition, if you are buying a commercial property from a GST-registered company, you will need to pay 7% GST. You must absorb this if you are buying as an individual or on behalf of a non-GST-registered entity. However, if you are buying the property on behalf of a GST-registered company, you can make a claim for the GST paid on the property purchase.

Commercial property loan rates are not published in Singapore and can vary greatly across the board depending on the particulars of your transaction. Each deal is customized according to the details of your property transaction, and your interest rates may vary accordingly. This means that you would have to check beforehand if the respective banks’ board rates fluctuate and find out from them how often do their rates change before deciding on taking up a loan from them. Before proceeding in taking up a commercial loan, you would have to check with the bankers what type of documents would be needed to process the loan.

The plus point in investing in a commercial property, unlike residential property is that there is no Additional Buyer’s Stamp Duty (ABSD) is charged on commercial property. This can make commercial property investments more affordable despite the more stringent loan requirements and higher interest rates.


Commercial Properties for Sale

Our team recently visited two commercial properties for sale: Holland Road Shopping Centre and Orchard Towers. Read our in-depth review of the property HERE.

Holland Road Shopping Centre

Orchard Towers


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