Sunday, January 23, 2011

Looking beyond the residential market

The recent measures to cool the housing market have taken some of the shine off the buoyant residential property sector.

But this has turned the spotlight on alternative real estate investments often left in the shade.

Buying a home has usually dominated investor interest in Singapore, possibly because of the well-documented procedures involved.

However, there are lots of other options for the savvy investor interested in a slice of the property action. They include the commercial and industrial sectors - comprising mostly strata-titled shops, office and factories.

Such properties are often overlooked by mum-and-pop investors who tend to know little about what is involved.

However, in the wake of the tougher-than-expected cooling measures to rein in prices, these non-residential sectors might be worth taking a second look at.

More importantly, they have also proved their financial mettle, achieving higher yields of 4 to 8 per cent - compared with about 3 per cent for residential properties, although they come with considerably higher risks.

Experts expect less upside in the residential sector this year after the Urban Redevelopment Authority's data showed home prices rising a sharp 17.6 per cent last year.

DTZ's South-east Asia research head, Ms Chua Chor Hoon, said that with residential prices considered to have peaked, the outlook for commercial and industrial property has become more positive as their rentals recover in line with the economic rebound.

As properties in the commercial and industrial realm are often more specialised, however, more thought, ground research and a reliable agent should be enlisted in your real estate search.

Unlike residential investments that can see huge capital gains within a short period, industrial and commercial properties are often rental yield plays instead and are less easy to flip. They require a longer term perspective.

Risks such as market volatility, higher borrowing costs and thin trading volumes for such properties that could hinder divestment attempts should also be factored into purchase decisions.

What are the differences compared to the residential sector?

Excluded from cooling measures

A key advantage of a non-residential investment is the fact that it will not be hampered by any of the four rounds of government property cooling measures.

While residential properties, for example, will now be slapped with a sellers' stamp duty if they are sold within four years of purchase, commercial and industrial spaces are not subject to the same rules. Those with an existing home loan will also not be subject to the Government's tighter financing rules.

Cushman & Wakefield senior manager of Asia-Pacific research, Mr Ong Kah Seng, said that while rents and prices of non-residential properties have been on the uptrend, this has been 'quite gradual and is unlikely to require any government intervention'.

Higher Yields

Experts say that the yields for non-residential properties are generally ahead of the 2.5 to 3 per cent yield commanded in prime residential areas.

Jones Lang LaSalle's (JLL) head of research for South-east Asia, Dr Chua Yang Liang, said that conventional industrial spaces have yields of up to 5 per cent.

Retail yields in the Orchard area are about 5.5 per cent while office space in the central business district (CBD) can fetch up to 4.5 per cent.

Cushman's Mr Ong said that while residential properties typically have yields of about 3 per cent, industrial properties can command yields in excess of 7 per cent.

Retail shops might also achieve about 5 per cent yields while office units pull in a slightly lower 4 per cent.

The outlook and sentiment for the retail, office and industrial sectors are also positive with the recovering economy and improved consumer optimism propping up retail rents.

Business expansion is also sustaining the recovery of office rents, allowing industrial space to benefit from spin-offs from both sectors.

A less liquid investment

One key difference, however, is that while there is a large pool of private residential properties - about 257,000 units - the non-residential sector is often less liquid in nature and these properties may be more difficult to trade.

Investors must be prepared for longer holding periods since the demand for such investments is considerably weaker.

Ms Tay Huey Ying, Colliers International director of research and advisory, said that the high transaction cost and relatively low trading volume could mean it may take months for investors to sell their properties and get the proceeds.

This is an inconvenience should investors need cash urgently.

Financing restrictions

Retail investors will be unable to use cash from their Central Provident Fund to purchase commercial and industrial properties.

Bank mortgage rates also tend to be higher than those offered for residential properties with the loan-to-value ratio typically lower at 70 or 80 per cent. Potential buyers must have cash upfront to cover the rest of the sale price.

Unlike residential properties, which are exempted from the goods and services tax (GST), GST is applicable for purchases of commercial and industrial property from a GST-registered company.

Experts say that investors can consider setting up a company to buy units, paying GST at purchase and subsequently claiming it back from the tax authorities.

Differing market dynamics

Market dynamics affecting the commercial and industrial markets also differ somewhat from the residential property.

JLL's Dr Chua said that, compared to residential, there is a higher risk involved as these assets are more exposed to the dynamics of regional economies.

Colliers' Ms Tay said that as commercial and industrial properties are business premises, they tend to be more sensitive to economic cycles and are hence more volatile, particularly in a down market.

In the event of a recession, for example, the industrial or commercial space might be vacated as business go under or pull out of Singapore, while the investor is left paying off the mortgage.

With the manufacturing sector a key employer and a significant contributor to economic output, the Government is also keen to keep the cost of industrial premises competitive.

Although sale prices and rentals have recovered, the industrial sector is closely watched by the Government, which can limit upside potential in rents and prices.

Leasing practices

Experts say that commercial and industrial lease terms are typically 3+3 years whereas residential leases are usually on shorter terms of 1+1 or 2+2 years.

International Property Advisor (IPA) chief executive Ku Swee Yong said commercial tenants are more secure as they stay longer on average, since changing a business address - which also involves the retrofitting of a new office - is costly.

And commercial landlords do not need to furnish their units as it is the tenants who take charge of interior furnishings. The space is reinstated to its original condition when the premises are vacated.

Rent-free periods ranging from two to four weeks are also common for commercial and industrial leases.


Whether retail, offices or factories, there are a gamut of options involving various investment sums to cater to the varying risk appetite of small-time investors.


Mall strata-titled shops

DTZ's Ms Chua said that there are few strata-retail units with most in older shopping centres. Retail unit sizes and prices vary widely and can go up to $9,000 per sq ft (psf) or more for a less than 300 sq ft unit in a good location such as in Far East Plaza.

However, attractive strata-titled retail space in the heart of town can be purchased in older buildings such as Lucky Plaza and Centrepoint.

A key feature of good retail space is an accessible and visible location with lots of people walking past. This can command higher rental yields.

A 248 sq ft fourth floor space in Orchard Plaza, for example, can be purchased for about $538,000 while a 678 sq ft shop unit in Fortune Centre in Bugis Street costs about $1.1 million.

Cushman & Wakefield data found that Viva Vista - a residential cum commercial development in Pasir Panjang, Sim Lim Square and Peninsular Plaza saw the most strata-titled shop units transacted last year.


Shophouses - with their limited supply and unique design - can be leasehold or freehold and are seeing yields of about 5 to 6 per cent.

A 3,627 sq ft two-storey shophouse in Sims Avenue, for example, was advertised with an asking price of $3.2 million last week.

HDB shops

Located across the island, HDB shops offer investors more choices and also an attractive rental yield of about 7 per cent, DTZ's Ms Chua estimates.

This is because they usually have a shorter tenure left on their lease and can be purchased at a lower cost. Rents do not take into account tenure, allowing investors to benefit from higher yields.

A 700 sq ft unit at Ang Mo Kio Ave 4 with 70 years left on its lease, for example, is on the market for $690,000 while another 720 sq ft unit at Chai Chee Street with a remaining lease of 72 years is being sold for $650,000.

Investors, however, will have to take into account the depreciating value of their asset, experts caution.


Strata-titled offices

Agents say that some strata-titled buildings such as Golden Mile Complex and Orchard Tower are popular with investors as they carry the possibility for redevelopment or collective sales gains.

Experts said that strata-titled buildings, however, are less common as many office buildings are held by developers, funds or Reits.

Examples of strata-titled offices include International Plaza, The Central, Suntec City and Sim Lim Tower - which is a freehold development - with unit prices for some strata-titled offices in the CBD going for more than $2,000 psf.

Advertisements taken out in The Classifieds section of The Straits Times feature agents asking for about $1,100 psf for a 4,250 sq ft unit at Sim Lim Tower - about $4.7 million.

With a 70 per cent bank loan, however, an investor will need to fork out $1.4 million for the unit with an advertised yield of more than 4 per cent

A 1,216 sq ft office unit in Orchard Tower was recently advertised with a price tag of $2.6 million.

Colliers' data has found that transactions that took place at International Plaza along Anson Road last year of units sizes ranging from 463 to 2,357 sq ft were sold for between $648,000 to $3.3 million.


Industrial units are the more affordable investment option as their unit prices are generally between $250 psf and $500 psf, with many small units of below $1 million available for sale.

Their shorter leases - at 30 or 60 years - must be taken into consideration when comparing prices.

Classified ads taken out over the last week also offered yields that were mostly above 5 per cent. For example, two flatted factory units totalling 3,347 sq ft in Woodlands Industrial Park can be purchased for $720,000 with an advertised yield of 6.8 per cent.

Upcoming launches open to retail investors include Oxley Holding's industrial project at Ubi Road 1, Soilbuild's new ramp-up factory development at Yishun Street 23 and Chiu Teng's retrofitted former Kallang Bahru Complex project.


As with any real estate investment, there are risks and expenses associated with placing your money in a physical industrial or commercial asset. Some of the risks more specific to industrial and commercial properties include:

Interest rates risk

IPA's Mr Ku said the chief risk - apart from other risks also associated with owning residential units - is rising interest rates. This is because mortgage rates and hence borrowing costs are higher when compared to residential loans.

'When economic conditions are strong, interest rates will rise first... meaning your cost may ratchet up quickly while rentals remain the same, especially since commercial tenancies might be signed for three to five years at a go,' he said.

Management risk

Property management requires investors to be well-versed in a wide range of skills including building maintenance, marketing strategies and tenant management. The poor management of the property may cause the value of the properties to fall, experts said.

Retail and office strata-titled buildings are also often relatively older. Such properties often have specialised or niche tenants of cost-sensitive businesses who might be unable to match significant increases in asking rents.

Market risk

The commercial and industrial sectors are more vulnerable to economic cycles.

Mr Nicholas Mak, head of research at property consultancy SLP International, cautioned that investors should, if possible, buy a unit in a trade they are familiar with or one that can be owner occupied.

Should the economy falter, they can use the units instead of leaving them empty.

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