FAQ: Buying a Commercial Property in Singapore
Buying commercial or industrial properties for investment purposes requires lot of research and planning. Commercial and industrial properties are more varied than residential properties in Singapore.
Before making any commitments to purchase a commercial property, you need to review information about the property and re-evaluate your long-term plans for realistic and assured returns on investment. Commercial and industrial loan packages tends to be step-up packages. The first one and two years are low rates while the third is usually at least 1% point higher.
You may want to make sure that many banks will lend to that property, else you may not have much choice in the later years to refinance when the rates go up.
Here are some industrial property buying tips you may follow to make sure you’ve made the right decision.
• Tenure of the property
• Rental income
• GST registration (goods and services tax)
• Calculation of property tax
• Related cost such as innovations or other land improvements
• Interest rates of mortgage
• Types of commercial property
There are 2 ways to buy a Commercial property.
* As an individual or;
* As a corporation (via Private limited or LLP)
What is tenure?
Land itself have duration. Freehold means estate in perpetuity while leasehold means that it is being rented out to you. Freehold properties are much more expensive as there is no development charge upon redevelopment and tends to appreciate in value while leasehold properties run out of time and it’s value tends to fall.
Rental yield and investment return of invested capital ROIC
Can a tenant’s rental cover the loan or is the place accessible enough that it would be feasible for rental income? GST registration is important. You need to know who is paying for the GST. Is it the buyer or the seller? Property tax refers to the tax percentage and total amount of tax you are going to pay for the property.
What is the downpayment required and what is the loan to value of the property? This affects your return of invested capital.
You also need to look into other related costs such as renovations or land improvements that you need to do and make the place look great for better markup later or higher income rental. To get the best fit mortgage interest rates an independent mortgage broker may be able to help you. The usual amount that you may borrow is estimated 70% and up to 80% of the value of the property. The term of the loan is usually approved for 15 to 30 years.
You should be aware that using either corporation or company’s name requires much paperwork and longer time for processing. The usual documents are: -
• Company’s financial statements
a. profit and loss statement
b. balance sheet
c. audited report of financial accounts (for some banks and non audited for others),
• Bank account statements
• Certificate of Incorporation from ACRA
• Listing down of each director’s stake
• Copies if NRIC of all directors
• If Company income is insufficient, directors or stakeholders will be required to act as guarantor and submit their income documents and other forms of verification similar to a residential home loan application.
The financing and loans market is more fragmented than compared to the residential home loans market. In other words, there are more differences from case to case.
There is a huge differences between buying a commercial/industrial property under personal name or under company name.
Credit worthiness and approval for Commercial loan in Singapore
Buying under own name you will have your income assessed. All borrowings will likely be taken into consideration for most borrowers unless they clear a certain income ceiling (and are considered high income). If you are already highly geared, banks will likely not want to lend you.
If you buy under a Private limited or LLP company, Singapore banks and lenders would then want to see that the company has a cash flow track record for the past few years that is sufficient to pay for this investment. For instance, a company makes a profit of $15,000 every month and this translates to a $15,000 income deposited in a timely manner into the company’s accounts, then banks will lend up up to 60 to 90% (typically) of this $15,000. In other words, banks may grant you a loan up to 60 to 90% of debt servicing ratio.
If you buy under a private limited or LLP company that does not have much cash flow or profit (or if the companies are special purpose vehicles), then banks will require directors of the company to guarantee any loans taken by the company under their individual capacity.
In many cases, these directors will also need to prove that they have most of their incomes derived from the company from which they are directors. If they earn an income elsewhere (i.e. other than that from the Private limited companies from which they are directors) in another profession then some banks will not grant a loan to the private limited company even if individual directors agree to be guarantors.
There is also a difference between buying under a company name (as a special purpose vehicle) or buying under a company that does not have enough income. Some banks will accept director’s income from sources other than the company applying for the loan, some will only accept director’s income if it is in the form of a director fee or salary from the company applying for the commercial property loan.
Loan to value or loan quantum will also be subjected to whether the property is for own use or for investment. At this current moment, investment purposes have stricter criteria.
Credit officers within the banks will from time to time impose new rules and additional documentation checks. Often, credit officers may ask for additional documents if they wanted additional cross checks.
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