A home to call my own
Behold the strata business space market
Those who have been waiting at the sidelines hoping that the Singapore Budget 2015 will see the removal of some of the cooling measures that have impacted the residential property market may be disappointed. But here’s the bright spot: it now means that you can actively look into alternative investments, and the best thing is that they can still take the form of real estate – specifically commercial and industrial property. In the rest of this article, we give a general overview on the various property types available and the trends seen over the past few years. This will be followed by more detailed analysis on each property sector in the next few articles.
The strata market
When it comes to investing in commercial and industrial property, most non-institutional investors will likely be buying units at what are known as strata developments. This is because buying a single unit requires much less capital outlay as compared with purchasing an entire commercial or industrial development – the cost of which would typically be out of reach for the common individual investor.
Strata-titled properties are basically developments that have separate individual titles issued to each unit comprising the entire property. These units usually share common facilities, which can take the form of car parks, toilets, and security – which are governed by a common deed of mutual covenants.
In this sense, buying a strata commercial or industrial unit is similar in theory to purchasing an apartment or condominium unit.
Since the government moved to prevent an overheated residential market, many investors have already turned their attention to the strata industrial market, in particular around 2010 - 2012. These properties were popular largely because of the relatively small capital outlay required, and also because of developers’ moves to offer small-ish industrial space of about 1,000 – 1,500 square feet (sq ft) to cater to demand from the mum and pop investor. In fact, back in 2011, one could purchase a 60-year leasehold unit in a suburban location for about $280 - $380 per square feet (psf); while a similar unit in a mature industrial estate such as Paya Lebar or Ubi could cost between $650 - $820 psf.
But since mid-2012, the government has been capping the maximum tenure of industrial sites to 30 years instead of the usual 60 years, likely a bid to quell soaring industrial property prices as shorter-tenure spaces tend to have lower selling prices.
Subsequently in 2013, the government introduced the Sellers’ Stamp Duty (SSD) on industrial property to discourage short-term speculative activity which could distort the underlying prices of industrial properties, and raise costs for businesses.
Sellers’ Stamp Duty Rates for Industrial Properties
Source: Inland Revenue Authority of Singapore
SSD payable is to be rounded down to the nearest dollar.
Savvy investors, however, can still put their money into industrial units – it simply means that you need to hold these properties for a longer period, specifically, beyond three years. That isn’t a poor prospect: yields in industrial property traditionally fall within the 5-10 per cent range because of the low price point, meaning that investors can earn good returns as they wait out that three-year period. And while the measures to cap rising prices in the industrial market may have impacted yields they would still, generally, likely be higher than purchasing residential property.
One might note that the industrial market has since seen a sharp drop in transactions from the highs of 2011/2012, and slower growth in capital value. However, such stabilisation is not necessarily such a bad thing – especially for longer term investors or owner-occupiers.
Strata medical suites
Medical suites can be considered a relatively new investment property type in Singapore, with interest in this alternative segment growing since 2013.
What are medical suites, exactly? They are commercial properties meant for medical usage and traditionally sold to doctors, which have been largely untouched by the government’s cooling measures. In the last two years, traditional developers have also begun incorporating more medical suites in mixed-used and commercial developments, creating more opportunities for savvy investors to enter the market. While buyers need not be doctors, the end usage of medical suites must be for medical purposes, meaning that doctors – generally regarded as secure tenants – are highly likely to be the inhabitants of such space.
And because use of such space is strictly for medical purposes, investors are indirectly banking on the outlook of Singapore’s medical industry when they acquire medical suites. While prices of medical suites typically follow general market trends and demand has, like all property segments, been impacted by the implementation of the total debt servicing ratio (TDSR), there is plenty of good news to be found in Singapore’s medical sector. This means that any downward price movements are likely to be less drastic, compared with other property types.
For one, research has long shown that Singapore’s developed medical infrastructure, and quality-driven and reputable integrated healthcare system, have made Singapore a forefront destination for foreigners seeking medical treatment.
And this is likely set to continue. According to the Medical Tourism Index (MTI) 2014, Singapore was ranked as the fourth most attractive market for medical tourism, just below Canada, the UK and Israel.
MTI is an index by the International Healthcare Research Center (IHRC), a US-headquartered non-profit research centre that promotes and provides transparency and improves global healthcare quality, population health management, expanded access to care, and the consumer healthcare experience.
Even with the TDSR in place, the strata office market has continued to perform decently. Transactions with caveats lodged came up to about 517 in 2014, compared with 743 in 2013. Properties in locations that saw high interest continue to see higher resale prices, with hotspots such as the Marina/City Hall/Bugis markets seeing sellers who cashed out in 2013 enjoy capital appreciation of over 20 per cent - and as high as over 40 per cent – for holding periods that were less than one year. With no sign of cooling measures to be implemented on the office market, the continued popularity of strata office space among businesses given Singapore’s rising business cost environment, and the relative affordability of such space, expectations are for the strata office market to continue seeing growth.
This gives a short, general overview of the historical trends and performances that we’ve seen in the strata office, retail and industrial sectors over the last few years. The next article will look at the strata industrial market in greater detail – specifically, the types of properties available, and how to go about investing in this segment, and what to look out for.