Investors look to commercial property

Straits Times: Sun, Dec 25

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. [e-mail] Returns trimmed '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 light of economic fundamentals.' R'ST Research director Ong Kah Seng, on the non-residential property market which has recently seen a run-up in prices More volatile There is a higher risk in non-residential assets... 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. Source: The Straits Times   Types of investments Straits Times: Sun, Dec 25 RETAIL Strata-titled retail spaces are not as common and are mostly found in older shopping centres such as Far East Plaza, Lucky Plaza, Sim Lim Square, Peninsula Plaza and Centrepoint. A 344 sq ft unit at Sim Lim Square, a 99-year leasehold block, sold recently for $1.25 million - or $3,629 per sq ft (psf) - while a 355 sq ft freehold unit at Katong Plaza was snapped up at $497,000, or $1,399 psf. A good retail space is one that is easily accessible with heavy foot traffic, experts say. Savills' Mr Cheong says factors like frontage to the main road, traffic flow, availability of carparks and accessibility to public transport should also be considered. Investors also must look into a mall's tenant profile to understand how it is positioned and the type of business it is likely to attract. Shophouses are another investment option. The supply is limited and yields can reach about 5 per cent, R'ST's Mr Ong noted. OFFICES Experts note that strata-titled offices are less common, with many in ageing buildings, as prime office buildings tend to be held by developers, funds, or Reits. International Plaza, The Central and Suntec City are some of the strata-titled offices in the city. Two sales last month give an idea of value. A 3,498 sq ft unit at Suntec City sold for $8.92 million - or $2,550 per sq ft (psf) - and a 1,270 sq ft unit at The Central brought in $2.75 million, or $2,165 psf. A new project, Paya Lebar Square, next to Paya Lebar MRT station, is likely to start selling next month. The office component will comprise 570 strata units, about half of which will be about 480 sq ft each, with indicative prices ranging from $1,650 to $2,000 psf, according to earlier reports. In absolute terms, the cheapest will be $800,000 for a 480 sq ft office on the fourth level. Occupiers or investors may combine various units into larger offices. INDUSTRIAL Industrial property is generally more affordable - with prices ranging from $300 to $500 psf, valuing many units below $1 million. But investors must know the type of trade allowed for the industrial unit they purchase as this can vary according to how the space is zoned. DTZ's Ms Chua noted that industrial properties are mostly on a 30- or 60-year lease. Like homes, an investor will have to consider the ease of leasing and rental income. The size, location - such as the proximity to an MRT station - and quality are important considerations, she added. The options available include strata-titled multiple user factories and warehouses, which are much cheaper than offices and shops. An investor can also consider landed factories and warehouses. With limited supply and stronger demand for such properties, these are more expensive than strata- units, said Ms Chua. Some strata-titled industrial projects include Oxley Bizhub, TradeHub 21 and Midview City. But R'ST's Mr Ong cautioned that the manufacturing and technological-related service sectors - which qualify as users of industrial space - are set to slow. 'The property may find some difficulties in getting suitable tenants unless rents are priced competitively in the economic slowdown,' he said. Savills' Mr Cheong added that the strict enforcement or rule changes to ensure that industrial properties are occupied solely for designated users is also a risk. SOHO Experts caution that investors need to be careful, in particular with properties marketed as Soho in the light of the new curbs. Soho is a marketing term used by developers and their property agents, and does not refer to a specific development type granted approval by the URA. These developments can be classified either as commercial or residential depending on the land's original zoning, SLP's Mr Mak said, and research should be done before any purchase. Soho units at The Central are marked as commercial while those at Far East's Woodhaven in Woodlands are considered homes and will be subject to the cooling measures. So as in every property deal, residential, commercial or industrial, tread carefully. Source: The Straits Times