Differentiate Commercial vs Residential Real Estate Transactions

For any property investor, experienced and new, understanding the intricacies of commercial and residential real estate is crucial for making informed decisions when buying property. Both residential and commercial real estate in Singapore offer distinct opportunities and challenges. Therefore, knowing the nuances of their transactions can significantly impact the success of your investment.

1. Purpose & Usage: Commercial vs Residential Real Estate

Knowing the use and types of commercial and residential real estate properties allows you to identify the purchasing process and requirements.

Commercial Properties

Properties for commercial real estate are for business and investments. In Singapore, commercial real estate properties are categorised into retail, industrial and commercial (B1 for offices and warehouses; B2 for factories), and hotel. They are zoned according to their uses in Singapore’s Urban Redevelopment Authority (URA) Master Plan, which is a statutory land use plan that guides Singapore’s developments in the medium term over the next 10 to 15 years. Should the purpose and usage of a commercial property be changed, it must adhere to the guidelines and regulations provided by the URA and seek their approval.

Residential Properties

Generally, residential real estate properties serve as living spaces for individuals and families. Similar to commercial real estate properties, residential properties are also divided into two types: public, hybrid, and private housing. Private housing encompasses non-landed housing, such as apartments and condominiums, and landed housing, like bungalows and terrace houses. Singapore’s Housing and Development Board (HDB) manages public housing, which is why these properties are called HDBs. On the other hand, hybrid housing or Executive Condominiums (EC) are for homeowners that surpass the income limit of getting an HDB. These are private-public properties for individuals with a monthly income ceiling of more than S$16,000.

2. Costs for Residential vs Commercial Real Estate

When you plan to purchase any property, potential property owners must be prepared for the necessary payments on top of the property’s price.

Commercial Properties

The property’s price will depend on the type of property being purchased; for example, small offices are relatively cheaper, while bigger factories may require a heftier price. Property investors must also pay property tax, buyers’ stamp duty (BSD), goods and services tax (GST), furniture, and renovation. Additionally, industrial properties like factories will require Seller’s Stamp Duty payment.

Residential Properties

Many factors affect the cost of a residential property in Singapore. Aside from the property type, other factors that affect its cost include its proximity to the city centre, maturity of the estate, market history, condition, neighbourhood, residential real estate market trends, and age of the property. Moreover, there are additional expenses to cover, such as legal fees, maintenance fees, stamp duties, home insurance, and the newly established Additional Buyer’s Stamp Duty (ABSD) for those planning to buy a second property.

3. Loan Options

Banks and financing institutions provide different loan opportunities for residential and commercial real estate investors when financial support is required.

Commercial Properties

Property investors can apply for commercial real estate loans as individuals or companies. Whichever entity the property investor may apply will be subjected to the Total Debt Servicing Ratio (TDSR). Suppose the property is bought as an individual. In that case, the individual must have a total debt obligation of less than 55% of their monthly income, even if they own a residential property. If the loan is under a company or organisation, the banks will evaluate the TDSR based on the company’s annual net operating income and annual debt.

Residential Properties

For those planning to purchase a private or hybrid property, the loan must come from a bank. On the other hand, those planning to get public housing or HDBs can choose between an HDB loan and a bank loan. Bank loans usually offer different loan packages for uncompleted and completed properties. They also provide borrowers with fixed rates and floating-rate loans. HDB loans have a higher interest rate compared to bank loans but offer a great deal of stability. They are also more forgiving than bank loans as they provide a higher Loan-to-Value (LTV) limit and require a lesser downpayment.