Published May 15, 2007


Check before investing in commercial properties


WITH more MNCs choosing Singapore as a base for their regional headquarters, and increasing Reit activity, commercial property is becoming a popular investment choice. Today, many SME business owners are jumping on the bandwagon, choosing to purchase commercial property - some with the hope of selling it at a profit in the future, and others for more practical reasons, such as owner-occupancy in the face of rapidly rising rentals.

According to Standard Chartered estimates, the total demand for commercial property has increased by some 5 per cent over the past five years. In spite of this, supply remains limited with many new commercial projects being held by developers or Reits. Given the limited amount of land in Singapore, it is highly unlikely that there will be an over-supply of commercial property in the future, meaning that potential returns from such investments look promising.

However, while investing in commercial property looks promising, investors should be aware of the dependency of commercial property to the business cycle. Commercial property is also subject to government intervention should rents rise excessively to prevent office space from becoming unattractive to foreign businesses setting up shop in Singapore.

Another point to note is that commercial property investments may be more suitable for those looking for a stable yield rather than high returns from capital gains. Commercial properties are generally segmented into four categories - shops, offices, hotels and industrial usage - with the first two being most popular.

Investing in commercial property usually means investing in a large piece of property, and can entail quite a bit of risk. SMEs looking to invest in commercial property should consider the following:

# Tailor the investment to your budget. Many SMEs overestimate their financial ability to invest in commercial property, and underestimate the cost of fixing up these properties. It might be best for first-time investors to consider investments on a smaller scale and in areas with future growth potential. They can then rely on the property increasing in value.

# Diversify through commercial real estate. Investing in commercial real estate can help SMEs to diversify their business, as real estate developments can translate into condominiums, shopping centres and offices, just to name a few. In the short term, SMEs can continue to ensure income flow to retain the property by obtaining a lease agreement.

# Compare rental yields with Reit yields. A quick way to establish rental yield would be to look at Reit yields. For example, an SME investing in shops might want to find out the rental rate that retail Reits are charging to get a better idea of the yield one might be able to obtain. Location, surrounding amenities, population catchment, trade mix and anchor tenant also play a role in rental yield.

# Do your homework. Commercial properties are relatively sizable investments, and it pays to scrutinise all aspects of the transaction. Investors should check the sale and purchase agreement, and fully understand the terms and conditions. Ensure that finance arrangements and builders' inspection are attached and adhered to, and that the owner is not a bankrupt. Search the property title and confirm its ownership.

Check the master and zoning plan to ensure that the premises can be used for commercial purposes, and confirm with the relevant authorities that the property is not affected by any government notice or projects. It will help you to obtain the necessary clearance and permits for commercial leasing as well. Ensure that there are no illegal alterations and additions to the premises as the ultimate responsibility lies with the owner, and not the renovation contractor.

Commercial property buyers fall under two main categories - business owners and investors. Both types of buyers tend to have more sophisticated needs than an average residential property buyer. Hence, traditional rate-based mortgage packages may not best serve their needs.

The writer is General Manager, SME Banking, Standard Chartered Singapore