www.shaproperty.com

WHEN Mr Y.H. Chua, a businessman in his 50s, was mulling over his options for investing his Central Provident Fund (CPF) savings recently, he decided to take a road less trodden and put his bets on a commercial property instead of a residential unit.

'I was actually on the verge of buying a condominium unit in the west (of Singapore) that also cost about $300,000,' he said.

 

'But I changed my mind after calculating that rental yields for that condominium had been stagnant at a maximum of 3.5 per cent for the past few years - if you are lucky to get a tenant.'

 

Instead, he bought a 'fairly large-sized' strata-titled office unit in International Plaza recently for about $300,000, and 'struck lucky' by finding a tenant who paid a monthly rental of '$2,000-odd', garnering gross rental yields of about 8 per cent a year.

 

Commercial property can generate gross yields of up to 6 to 8 per cent, compared with about 3 to 4 per cent for residential properties, said Mr Lee Tang Keat, Jones Lang LaSalle's associate director and head of auctions and sales.

 

Indeed, commercial properties have been a 'better investment' in the past six to 12 months thanks to rising prices and rentals, and this trend is likely to continue, said Mr Jeremy Lake, CB Richard Ellis' executive director of investment properties.

In contrast, yields for residential property - with the exception of high-end units - have remained relatively flat.

 

General office rent levels are still about 13 per cent below the last 10 years' average prime rent and 40 per cent below the 1997 level, so there is 'ample room for further rental growth', said Mr Moray Armstrong, the executive director of office services at CB Richard Ellis.

 

Consultants also note that prices for some commercial properties are still 40 per cent off the peak reached during the property boom in the late 1990s, so there are still some capital appreciation gains to be made from certain properties.

More Singaporeans have been buying commercial properties over the past nine months.

 

According to Knight Frank, the total number of sales transactions for commercial properties - office, shophouse and shop units - hit 516 in the second half of last year. In contrast, there were just 404 transactions in the first half of last year, and 490 in the second half of 2004.

 

Some investors have also indicated that they are snapping up commercial properties before the window of opportunity to use their CPF funds to buy non-residential property closes on July 1 this year, noted Mr Lee.

 

The Government announced last June that Singaporeans would no longer be able to invest their CPF savings in office space, shops and other non-residential properties as they can do so by sinking money into property funds.

 

In general, the market interest rates for commercial property loans for small investors are several percentage points higher than for residential loans. This higher cost meant that being able to use CPF funds to whittle down the loan sum or to pay off mortgage instalments was an 'important consideration' for Mr Chua.

 

He used a 'large chunk' of his CPF funds to pay for his International Plaza unit.

Recognising this greater interest among retail investors for commercial property, HSBC rolled out a variable rate loan package that offers 4.25 per cent interest on the first year.

 

Other banks already offer such packages, covering up to 80 per cent of the market value of the property. Among them is OCBC Bank, which has noted an increase in demand for loans for the purchase of commercial properties in the second half of last year.

 

There are also additional costs attached to commercial properties that may whittle down the returns on the investment.

 

For instance, buyers of non-residential properties have to fork out a 5 per cent goods and services tax if the seller is GST-registered.

 

They also have to pay regular maintenance costs and property taxes of about 10 per cent of the estimated annual net rental of the property.