What Are the Differences Between Commercial and Residential Properties?

Since 2008, residential properties have been the property investment of choice, until the latest MAS cooling measures. Loan restrictions, rising prices, and an additional buyer’s stamp duty (ABSD) made it even more difficult to raise capital to buy a second property.

With residential property becoming increasingly regulated and expensive, commercial properties have become an attractive alternative. That’s because commercial properties untouched by the cooling measure, due to less speculative activity.

Now, commercial properties (retail, industrial, and office) are proving more attractive to investors. But before you decide to buy, you should understand the following differences between commercial and residential properties:


Know Your Intentions

Just like you have two intentions for buying a residential property (to live in, or for investment), you have two options for commercial properties as well. You can either operate the property as a business owner, or use it as an investment.

If you’re a business owner, many business experts strongly encourage you to own your own commercial space if you can afford it for two important reasons:

  • Your monthly payments will be lower.
  • Your property’s value will appreciate.

So before you buy any property, be sure about your ownership intentions.


Know the Regulatory Differences

Financing for residential properties is a straightforward process – you can borrow 80% or 90% for your first home (Bank or HDB loan), and 50% or 30% on your second, depending on your loan tenure and age.

Commercial properties are more complex, comprising the following property types:

  • Industrial
  • Retail
  • Office
  • Shophouse
  • Mixed Development

The regulations surrounding each property type are lengthy enough to fill a book, so it rests upon you to educate yourself on both the rules of your chosen property type and commercial property market.


Know the Pricing Issues

When it comes to comparing the price of commercial and residential properties, there are several key differences you must understand:

  • Commercial properties typically have a lower cost per square foot. This can be due to the shorter leases, which only last 30 – 60 years. There are freehold commercial properties, but they are rarely located in prime business areas.
  • Commercial property prices tend to be more volatile because its value is tied to industry outlook. If the property is occupied by semiconductor manufacturers, you’ll need to keep an eye on industry exports. If the industry slows, tenants may have to close up their business or relocate to cheaper locations.
  • Commercial properties have higher returns over a 5 – 10 year period compared to residential properties. But you can also benefit from keeping a commercial property as a long-term investment by focusing on rental yields instead of capital gains.


Know the Rental Yields

The rental yields for residential properties ranges from 2% – 3%, but commercial properties can yield almost double that with an average of 5%. But unlike residential properties, commercial properties need constant asset enhancement.

It’s much easier to rent out an unfurnished 3-room condominium than a bare office. You’ll raise your chances of increasing your capital outlay if you can tailor your property to suit the needs of prospective tenants. That’s unless you don’t mind taking a lower rental yield if you’re not choosy about who rents from you.


Know the Financing Issues

The biggest downfall in purchasing a commercial property compared to a residential property is that you cannot use your CPF. In addition, the banks have different lending policies for each commercial property type.

But those aren’t the only differences between the two. Here are several other key differences to note before purchasing a commercial property:

  • The Loan-to-Value (LTV) for a commercial property ranges from 60% – 70%, while residential properties have an LTV of 70% – 80% for a bank loan.
  • The loan tenure for commercial property is 20 – 30 years (dependent on the age of the property), while residential properties have loan tenure of up to 35 years.
  • The interest rates for commercial property are typically 0.5% – 1% higher than that of residential property.
  • The banks will let you borrow up to 10% more if you purchase a commercial property for use as an owner-occupier instead of as an investment.
  • You don’t need to pay an ABSD on commercial property, but there is a Seller’s Stamp Duty (SSD) for industrial properties, which is 15% if you sell it within 1 year, 10% for the second, and 5% for the third year.
  • The property tax rate for residential properties ranges from 0% – 15% if owner-occupied and 10% – 20% if not, while commercial property tax rate is a flat 10%.
  • You may need to pay GST for a commercial property if you’re purchasing property from a GST-registered company, so you’ll need to pay an additional 7% on the property.  But if you own a GST-registered company, you can claim back the amount.