With the meteoric rise in property prices in Singapore, compounded with the cooling measures in the residential property market, more and more investors are now looking at commercial properties.
Do you know what you need to know when it comes to transactions involving commercial property?
Zoning:
When we refer to commercial property, we are really talking about a particular type of non-residential use. Other types of non-residential property include but is not limited to industrial (zoned as business use), sports and recreation, education institutions, and places of worship. Within this general classification of commercial property, there are further approved purposes or zoning. A property may be zoned for commercial use, residential with commercial at 1st storey, or mixed use, among other possibilities. Hence, office spaces, retail shops in shopping malls, shophouses and shopflats are all considered commercial property.
Leases and restrictions: There are a variety of leases for commercial properties, spanning from as short as 30 years, to as long as freehold. The lease period correlates to the transaction price, allowing for parties with different constraints to select the property that best suits their needs and abilities. Commercial property may have terms and conditions in the lease and / or restrictions. For example, a unit at Novena Medical Centre is likely to have restrictions as to what businesses are allowed to operate, and also any further conditions on such businesses, so that it is in-line with the purpose of the building. Some other commercial properties may state in their lease that consent from certain third party(s) is/are required before a transaction can take place. It is therefore important to check for any such terms and conditions prior to committing to a transaction.
Who can buy commercial properties?
There are generally no restrictions on eligible purchasers of commercial property. This is in contrast with residential property, where a myriad of restrictions apply depending on the type of residential property involved. However, restrictions may apply if we are discussing about properties zoned for mixed use, or properties zoned residential with commercial at 1st storey. This is because of the residential component of the property. For example, shophouses and shopflats have certain restrictions on them due to the residential component of the property.
In particular, transactions involving shopflats, otherwise known as HDB shophouses, are subject to HDB’s approval and prevailing rules at the material time. Loan and financing At the time of writing, the loan to valuation limit of commercial property is 80%, compared to 75% for residential properties. If an individual intends to take up a loan to buy commercial property, he or she will be limited by the Total Debt Servicing Ratio of 55% while organisations are assessed based on their credit information.
Stamp duties:
For commercial property without any residential component, buyers will have to only pay the Buyer’s Stamp Duty. This is on a tiered system, much like that for residential properties. The first $180,000.00 is stamped at 1%, the next $180,000.00 is stamped at 2%, and the remainder at 3%, rounded down to the nearest dollar. This means that for any commercial property valued or transacted (whichever is higher) above $360,000, the Buyer’s Stamp Duty can be calculated at 3% less $5,400.00.
There is no Additional Buyer’s Stamp Duty payable if one buys more than 1 commercial property. However, for a property zoned for mixed use or residential with commercial at 1st storey, there may be ABSD levied on the residential component. The ABSD is calculated based on the valuation of the residential component of the property. There is no Seller’s Stamp Duty for properties that are zoned commercial. However, should there be a residential component, then Seller’s Stamp Duty may apply.
Property tax:
Property tax for commercial properties is fixed at 10% of the Annual Value (the average annual rental as determined by IRAS). Property tax for commercial property with a residential component will have their taxes computed separately as the applicable tax rates are different. The commercial component will be taxed at 10% of Annual Value while the residential component will have the corresponding residential tax rate applied to it.
Do you know what you need to know when it comes to transactions involving commercial property?
Zoning:
When we refer to commercial property, we are really talking about a particular type of non-residential use. Other types of non-residential property include but is not limited to industrial (zoned as business use), sports and recreation, education institutions, and places of worship. Within this general classification of commercial property, there are further approved purposes or zoning. A property may be zoned for commercial use, residential with commercial at 1st storey, or mixed use, among other possibilities. Hence, office spaces, retail shops in shopping malls, shophouses and shopflats are all considered commercial property.
Leases and restrictions: There are a variety of leases for commercial properties, spanning from as short as 30 years, to as long as freehold. The lease period correlates to the transaction price, allowing for parties with different constraints to select the property that best suits their needs and abilities. Commercial property may have terms and conditions in the lease and / or restrictions. For example, a unit at Novena Medical Centre is likely to have restrictions as to what businesses are allowed to operate, and also any further conditions on such businesses, so that it is in-line with the purpose of the building. Some other commercial properties may state in their lease that consent from certain third party(s) is/are required before a transaction can take place. It is therefore important to check for any such terms and conditions prior to committing to a transaction.
Who can buy commercial properties?
There are generally no restrictions on eligible purchasers of commercial property. This is in contrast with residential property, where a myriad of restrictions apply depending on the type of residential property involved. However, restrictions may apply if we are discussing about properties zoned for mixed use, or properties zoned residential with commercial at 1st storey. This is because of the residential component of the property. For example, shophouses and shopflats have certain restrictions on them due to the residential component of the property.
In particular, transactions involving shopflats, otherwise known as HDB shophouses, are subject to HDB’s approval and prevailing rules at the material time. Loan and financing At the time of writing, the loan to valuation limit of commercial property is 80%, compared to 75% for residential properties. If an individual intends to take up a loan to buy commercial property, he or she will be limited by the Total Debt Servicing Ratio of 55% while organisations are assessed based on their credit information.
Stamp duties:
For commercial property without any residential component, buyers will have to only pay the Buyer’s Stamp Duty. This is on a tiered system, much like that for residential properties. The first $180,000.00 is stamped at 1%, the next $180,000.00 is stamped at 2%, and the remainder at 3%, rounded down to the nearest dollar. This means that for any commercial property valued or transacted (whichever is higher) above $360,000, the Buyer’s Stamp Duty can be calculated at 3% less $5,400.00.
There is no Additional Buyer’s Stamp Duty payable if one buys more than 1 commercial property. However, for a property zoned for mixed use or residential with commercial at 1st storey, there may be ABSD levied on the residential component. The ABSD is calculated based on the valuation of the residential component of the property. There is no Seller’s Stamp Duty for properties that are zoned commercial. However, should there be a residential component, then Seller’s Stamp Duty may apply.
Property tax:
Property tax for commercial properties is fixed at 10% of the Annual Value (the average annual rental as determined by IRAS). Property tax for commercial property with a residential component will have their taxes computed separately as the applicable tax rates are different. The commercial component will be taxed at 10% of Annual Value while the residential component will have the corresponding residential tax rate applied to it.
Income tax:
As property tax is wealth tax, should you rent out the Commercial Property, there is still income tax levied on the rental.
GST:
As with all other property purchases, should the seller be GST registered, GST is payable. The material time is the time of completion. This means that even if the seller was not GST-registered at the time of issuing the Option to Purchase and/or Sale and Purchase Agreement, should the seller become GST-registered at any time before, or on the date of completion, GST on the transaction will be payable.
While we prefer to be as comprehensive as possible, we are unable to cover every possibility regarding Commercial Properties.
Should you have any question on property matters, please reach out to us. Our experienced real estate team have a wealth of experience and knowledge on property related matters to provide you with sound and practical advice on your queries.
As property tax is wealth tax, should you rent out the Commercial Property, there is still income tax levied on the rental.
GST:
As with all other property purchases, should the seller be GST registered, GST is payable. The material time is the time of completion. This means that even if the seller was not GST-registered at the time of issuing the Option to Purchase and/or Sale and Purchase Agreement, should the seller become GST-registered at any time before, or on the date of completion, GST on the transaction will be payable.
While we prefer to be as comprehensive as possible, we are unable to cover every possibility regarding Commercial Properties.
Should you have any question on property matters, please reach out to us. Our experienced real estate team have a wealth of experience and knowledge on property related matters to provide you with sound and practical advice on your queries.
