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Looking beyond the residential market

Monday 24 January 2011

Investors may make 4 to 8 per cent yields by renting out shops, offices and factories

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.

Source: The Straits Times