HDB Adds 2,000 More Units to BTO Flat Supply

Strata Commercial and Industrial Properties - Not for the Novice Investor

Introduction

Traditionally the strata commercial and industrial sectors see more interest from companies because owning a property asset allows them to concentrate on the business without worrying over rising rental costs. It also minimises relocation costs should they be forced to move because of high rents.

But with the Government introducing regulations on the private residential market at a regular pace since 2010, some individuals shifted their focus to the commercial and industrial sectors in search of better returns.

What are the Returns from such Investments?

Individual investors prefer to buy uncompleted commercial or industrial units because the upfront cash is lower because the units are paid progressively as the construction takes place. This gives them an opportunity to flip the unit should there be an offer.

An analysis of new strata commercial and industrial projects launched since 2010 was carried out. Caveats were downloaded from URA Realis and then matched to compute the net returns an investor achieved from buying and selling a strata commercial and industrial unit. As the lodgement of caveats is not compulsory, the information from URA Realis is not complete but it gives an idea of the kind of returns some investors achieved.

Net Returns = Selling Price – Purchase Price – GST – Stamp Duty – Legal Fees – Early Loan Redemption Penalty- Agent’s Commission

The GST payable is based on progress payments but it is not possible to determine the exact amount paid before the buyer sells off his unit. Hence it is assumed that the buyer has paid the full GST amount in the calculation of net returns.

Legal fees, assumed to be 1%, include subsidies and claw back if the buyer sells within the lock-in period. It is assumed that the legal subsidies and claw back are the same amount.

Early loan redemption penalty is typically 1.5% of outstanding balance. It is assumed the buyer took a 70% loan.

Agent’s commission for selling the unit is assumed to be 2%.

Transactions in the resale market were not analysed because we are unable to ascertain whether the seller of a strata commercial or industrial unit in the resale market is a GST registered entity and the outstanding loan amount.

From Table 1, there are 14 profitable and 12 unprofitable strata commercial unit transactions. The net returns range between $9,777 and $251,227 for the profitable transactions. The losses are equally large, between -$21,517 and -$194,763.

For industrial strata transactions (see table 2), there are 198 profitable and 13 unprofitable deals. On the surface, it appears that the industrial strata market yields the best net returns. But the net returns for profitable transactions and unprofitable transactions are almost the same, $2,652 to $689,241 and -$8,512 to -$322,215, respectively. It seems that the investors of industrial units in projects launched in 2010 achieved the best net returns. This is probably because they enjoy the first mover advantage and profited from spillover demand because of regulations in the residential market in 2011 and 2012.

However the strata commercial and industrial markets appear to be getting speculative. Strata commercial units in projects launched in 2010 are held for an average of 440 days before being sold. In 2011, this dropped to 324 days and in 2012, the strata commercial units are held for an average of only 60 days. For the strata industrial market, units bought in 2010 are held for an average of 461 days before being sold but this dropped to 364 days in 2011. In 2012, it dropped even further to 78 days. The shortest time a strata unit was held before sale was only four days. The buyer probably assigned his option to another investor.

  

Table 1: Sample of New Strata Commercial Projects Transactions

Project Name	Size of Unit (sq m)	Net Returns	Net Returns (%)	Profitable Deals	Unprofitable Deals
Launched in 2010
Icon@Changi	17	$93,370	19.8%	1	na
Loft @ Nathan	52	-$49,452	-2.8%	na	1
Soho Life	38 to 51	-$21,517 to $70,540	-3.8% to 8.5%	1	1
Suites @ Katong	63	$128,411	10.2%	1	na
Viva Vista	16 to 32	-$154,779 to $47,767	-17.3% to 9.9%	1	1
Launched in 2011
Cavan Suites	47	$38,317	4.3%	1	na
Le Regal	10	-$25,871	-6.0%	na	1
Launched in 2012
Centropod @ Changi	10 to 17	-$22,594 to $20,654	-5.8% to 5.8%	1	3
East Village	10	$9,777	1.8%	1	na
Millage	11 to 17	-$42,816 to $98,412	-4.5% to 19.8%	2	1
Oxley Tower	11 to 18	-$194,763 to $251,227	-29.1% to 27.7%	5	4
			Total	14	12

Based on caveats lodged with URA

Table 2: Sample of New Strata Industrial Projects Transactions

Project Name	Size of Unit (sq m)	Net Returns	Net Returns (%)	Profitable Deals	Unprofitable Deals
Launched in 2010
First East Centre	214 to 291	$15,594 to $483,973	3.2% to 73.9%	12	na
Harvest @ Woodlands	99 to 303	-$42,669 to $375,981	-15.2% to 85.8%	44	6
Meissa	90 to 110	$2,652 to $196,684	0.4% to 33.3%	8	na
North Point Bizhub	238 to 248	-$322,215 to $156,359	-51.1% to 38.9%	5	1
Pioneer Centre	138 to 176	-$8,512 to $153,665	-1.8% to 46.6%	3	1
The Crescent @ Kallang	88 to 130	-$14,155 to $154,697	-2.7% to 47.8%	116	1
West Point Bizhub	447 to 646	$86,468 to $689,241	6.4% to 105.5%	4	na
Zervex	105 to 427	-$36,500 to $129,434	-2.3% to 28.6%	2	1
Launched in 2011
A’Posh Bizhub	154	$64,732	12.3%	1	na
North Spring Bizhub	1,024	$117,665	4.4%	1	na
Launched in 2012
AZ @ Paya Lebar	111	$69,753	6.8%	1	na
Primz Bizhub	88 to 107	-$22,507 to $15,952	-5.2% to 4.5%	1	3
			Total	198	13

Based on caveats lodged with URA

Should One Invest in Strata Commercial/Industrial Units?

Most of the time, the decision of individuals to invest is made based on the quantum of investment and the possibility of making money on the investment.

To keep the investment quantum affordable for buyers of strata commercial units, some developers have shrunk the units. This is particularly striking in the strata shop units where the smallest unit is only 5 sq m or 54 sq ft. One could not help but think what trade is suitable to operate in a 5 sq m retail unit and yet generate enough profits to service the loan.

Table 3: Range of Sizes of Strata Commercial Units

	2010	2011	2012
Unit Sizes (sq m)	11 to 121	5 to 137	9 to 201

Many individual investors probably had no idea what they are buying, whether the strata unit is able to be rented out and to what trade. This is because individual investors, especially those new to the commercial and industrial sectors might not know what is included in the saleable area and the exact needs of a business whereas companies know their operational needs and are discerning enough to invest in a property asset that suits their needs.

  

To ensure that the strata industrial units are designed to suit the needs of industrialists, the Government on 1 January 2012 put in place guidelines on the minimum size, minimum number and size of cargo lifts, minimum ceiling height, minimum electrical loading and minimum floor loading for industrial developments. These, according to the Government are what a bona fide industrialist needs. There are no regulations on the strata commercial market thus giving developers free rein to design the units.

Other than the above, the investor also has to be mindful of the upcoming supply which will affect the selling price and rent of the unit he/she is buying. There is a supply of around 7.1 million sq ft of office space, 5.1 million sq ft of shop space and more than 10 million sq ft of industrial space completing in the next few years. This supply excludes any potential new launches in the future. This will put a cap on any upside on prices and rents. Furthermore the Urban Redevelopment Authority (URA) is clamping down on unauthorised users of industrial space. These unauthorised users will have to move if they receive a notice from URA. This will increase the supply of industrial space for sale or lease and put downward pressure on prices and rents.

  

Conclusion

The strata commercial and industrial markets offer investors an alternative to residential investment. The returns are attractive judging from the caveats lodged with URA but the losses are equally enormous.

Investors have to understand the risks and challenges they will face are very different from the residential market. Without a clear understanding of the risks involved, investors who buy such strata commercial and industrial units are not any different from someone gambling in a casino. Another option for investors wanting to venture into the commercial and industrial market would be to put their money in a commercial or industrial real estate investment trust and leave the management of the risks to the experts

Summary of Government Regulations on the Private Residential Market since 2007

Date	Regulation
7 December 2011	Foreigners and non-individuals (corporate entities) buying any residential property will pay an ABSD of 10%. Permanent Residents (PRs) owning one and buying the second and subsequent residential property will pay an ABSD of 3%. Singapore Citizens (Singaporeans) owning two and buying the third and subsequent residential property will pay an ABSD of 3%.
13 January 2011	Increase the holding period for imposition of Seller’s Stamp Duty (SSD) from the current three years to four years. Raise the SSD rates to 16%, 12%, 8% and 4% of consideration for residential properties which are bought on or after 14 January 2011, and are sold in the first, second, third and fourth year of purchase respectively. Lower the Loan-To-Value (LTV) limit to 50% on housing loans granted by financial institutions regulated by MAS for property purchasers who are not individuals. Lower the LTV limit on housing loans granted by financial institutions regulated by MAS from 70% to 60% for property purchasers who are individuals with one or more outstanding housing loans2 at the time of the new housing purchase.
30 August 2010	Increase the holding period for imposition of Seller’s Stamp Duty (SSD) from the current one year to three years. For property buyers who already have one or more outstanding housing loans at the time of the new housing purchase: ·         Increase the minimum cash payment from 5% to 10% of the valuation limit; and ·         Decrease the Loan-to-Value (LTV) limit for housing loans granted by financial institutions regulated by MAS to these buyers from the current 80% to 70%.
19 February 2010	Introducing a Seller’s Stamp Duty (SSD) on all residential properties and residential lands that are bought after today and sold within 1 year from the date of purchase Lowering the Loan-to-Value (LTV) limit to 80% for all housing loans provided by financial institutions regulated by the Monetary Authority of Singapore (MAS).
14 September 2009	Reinstatement of the Confirmed List for the 1st Half 2010 Government Land Sales (GLS) Programme. Removal of the Interest Absorption Scheme (IAS) and Interest-Only Housing Loans (IOL). Non-extension of the Jan 2009 Budget assistance measures for the property market when the measures expire.
31 October 2008	Existing ban on conversion of office space in the Central Area to other uses will be lifted.
26 October 2007	Withdrawal of Deferred Payment Scheme (DPS)