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Commercial Rental Yields: What Drives It and How Do They Impact Asset Prices?

In a 2020 CBRE Global property report, the Singapore market is the second most expensive in the world behind Hong Kong, therefore, besides residential property, many investors are looking into the commercial sector as well. Singapore’s commercial property market is gaining popularity despite several cooling measures introduced by the government in recent years. This is because commercial properties are largely not affected by the cooling measures.

Another factor is the more relaxed restrictions on foreign ownership of commercial properties in Singapore. According to the Singapore Land Authority (SLA), foreigners have no issues buying commercial properties such as shophouses (for commercial use), industrial and commercial properties, and hotels (registered under the provisions of the Hotels Act).

With banks’ interest rates at an all time low, many investors are looking at commercial properties as they get a better return for their investment. The Singapore residential market rental yield is about 2 to 3%, which is quite low when compared with nearby countries Vietnam, Cambodia and Philippines. Whereas, the commercial property market rental yields here is at an average of about 5 to 10%.

How do you understand yield? Yield is the rate of return a property generates from rental income as a proportion of its current value. So, what drives yield? Business confidence, political stability and occupancy rates are the three most important factors when investing in the commercial real estate market.

All three factors are affected by consumer confidence and the economy, of which Singapore is one of the best in the world. Commercial property yields are more susceptible to market conditions than residential properties as people will always need somewhere to live, whereas businesses often relocate, or go out of business. Therefore, it is important to have confidence in the local business market and economy. Politically, Singapore is well-known for its strong, competent and honest government. Investors will have full confidence when parking their money, knowing that their assets will be preserved.

One way to drive yield and maintain asset price is to buy a commercial property through a corporate entity. As commercial property transactions are often much larger than residential transactions, it may be a good idea to acquire the property through a company. Not only will you share the liability, but it will be easier to cope with the financial outlay.

Also, corporate taxes are lower than personal taxes in Singapore, therefore, you reduce your tax burden and in the process, increase your yield. Not to forget, if you buy commercial property through a company, you can claim back more money from direct and indirect expenses such as Goods and Services Tax (GST). It is best to contact the Inland Revenue Authority of Singapore (IRAS) to confirm that you will be able to claim it back later.

Not only will you save on GST, commercial properties are not subject to Additional Buyer’s Stamp Duty (ABSD) and Seller’s Stamp Duty (SSD) which can be quite substantial. The current ABSD rates are in the table below.

SSD is payable if you sell a property within 3 years if the property is bought on, or after 20 February 2010. However, for HDB flat owners selling after the Minimum Occupation Period (MOP) of 5 years, there is no need to pay SSD.

The current SSD rates are as follows:

It is important to note that yields are a measurement of expected return on your investment and not a guarantee. Potential investors need to take into account all the other factors, such as likelihood of finding and retaining a good, long-term tenant, maintenance and infrastructure costs, suitability and location of a property and all the other factors that can impact on your ability to achieve your expected yield.

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