With The Recent Residential ABSD Increase Announcement: Will It Drive Investors To Industrial And Commercial Properties

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Apr 28, 2023

Recent Residential ABSD Increase Annoucement

Introduction

Singapore has experienced a significant increase in property prices in recent years, prompting the government to introduce measures to cool the market. One such measure is the Additional Buyer's Stamp Duty (ABSD), which was first introduced in 2011. The ABSD is a tax imposed on individuals and entities buying residential property in addition to the standard Buyer's Stamp Duty (BSD). The rates for ABSD have been increased several times over the years, with the latest increase occurring in April 2023.

Timeline of ABSD Increase

Date	Singapore Citizens	Singapore Permanent Residents	Foreigners
8 Dec 2011	0%	5%	10%
12 Jan 2013	0% on 1st property Additional 7% on 2nd property Additional 10% on 3rd and subsequent properties	5% on 1st property Additional 10% on 2nd and subsequent properties	15% on all properties
6 Jul 2018	0% on 1st property Additional 12% on 2nd property Additional 15% on 3rd and subsequent properties	5% on 1st property Additional 15% on 2nd and subsequent properties	20% on all properties
16 Dec 2021	0% on 1st property Additional 17% on 2nd property Additional 25% on 3rd and subsequent properties	5% on 1st property Additional 25% on 2nd property Additional 30% on 3rd and subsequent properties	30% on all properties
After 26 Apr 2023	0% on 1st property Additional 20% on 2nd property Additional 30% on 3rd and subsequent properties	5% on 1st property Additional 30% on 2nd property Additional 35% on 3rd and subsequent properties	60% on all properties

While the ABSD was primarily targeted at the residential property market, it has also had an impact on the commercial and industrial property markets. In this article, we will explore how the ABSD increase may drive investors toward industrial and commercial properties. We will provide an overview of the commercial and industrial property markets, analyze the impact of the ABSD increase on commercial property sales in 2018, and evaluate the potential implications of the ABSD increase on industrial and commercial property investments.

Historical Look At The Impact on Commercial/Industrial Property When There's a Residential ABSD Hike

As Singapore's property market continues to evolve, it is essential for investors and business owners to understand the current landscape and make informed decisions. Let's dive into the details of what happen to the commercial/industrial market when ABSD hikes.

Analysis of Commercial Property Sales in Singapore in 2013 & 2018 When Residential ABSD Hike

Overview of commercial property sales in 2013

According to data from the Urban Redevelopment Authority (URA), the total transaction value of commercial properties in Singapore reached SGD 23.8 billion in 2013, up 16.4% from the previous year.

The number of commercial property transactions also increased in 2013, with a total of 3,704 deals completed, up 19.4% from 2012.

The office sector saw the largest increase in transaction value, with sales up 39.2% to SGD 10.7 billion, followed by the retail sector with sales up 12.5% to SGD 8.7 billion.

The industrial sector saw a slight decrease in transaction value, with sales down 3.5% to SGD 4.4 billion.

Overview of commercial property sales in 2018

According to data from the Urban Redevelopment Authority (URA), the total transaction value of commercial properties in Singapore reached SGD 40.2 billion in 2018, up 17.6% from the previous year.

The number of commercial property transactions also increased in 2018, with a total of 3,080 deals completed, up 2.2% from 2017.

The retail sector saw the largest increase in transaction value, with sales up 24.4% to SGD 11.1 billion, followed by the office sector with sales up 18.5% to SGD 20.9 billion.

The industrial sector saw a slight dip in transaction value, with sales down 2.7% to SGD 8.1 billion.

The Potential Shift of Investors to Industrial and Commercial Properties

Industrial properties and commercial properties are two types of real estate properties that are commonly used for business purposes. While both types of properties are intended for business use, there are some differences between them.

Industrial properties are primarily used for manufacturing, warehousing, and production activities. These properties are usually located in industrial zones or parks and are designed to meet the specific needs of industrial tenants. They may include features such as loading docks, large floor spaces, high ceilings, and specialized electrical and plumbing systems. Industrial properties can be further classified into light industrial, heavy industrial, and flex industrial properties.

On the other hand, commercial properties are used for a variety of business purposes, such as office spaces, retail stores, hotels, and restaurants. Commercial properties are usually located in areas with high traffic and visibility, such as central business districts and shopping centers. These properties are designed to meet the needs of businesses that require a visible and accessible location.

One key difference between industrial and commercial properties is the type of tenants they attract. Industrial properties are generally occupied by manufacturers, wholesalers, and logistics companies, while commercial properties are typically occupied by retailers, service providers, and office-based businesses.

How ABSD increase may impact investors' decision-making

The ABSD increase may prompt investors to shift their focus from residential properties to industrial and commercial properties. With the ABSD increase making residential properties less affordable, investors may seek higher returns and stability in industrial and commercial properties. Additionally, the ABSD increase may also make industrial and commercial properties more attractive for developers who may be looking for new opportunities.

Effects of ABSD on Commercial Properties: One of the key impacts of the ABSD Residential hike on the Singapore property market was the increase in demand for commercial properties. This was due to various factors such as the attractive rental yields and the lower stamp duty rates as compared to residential properties. As a result, the number of commercial property transactions increased significantly after the ABSD hike in 2013 & 2018.

One probable explanation for this surge in demand for commercial properties is that investors have changed their attention from residential homes to commercial properties since capital appreciation gains would be limited and the fact that commercial properties are viewed as a more stable investment, with long-term rental income streams that are less affected by market fluctuations.

Effects of ABSD on Industrial Properties: While commercial properties saw a surge in demand after the ABSD hike, industrial properties experienced a decline in transactions. One possible reason for the decline in industrial property transactions is that many small and medium-sized enterprises (SMEs) purchase industrial properties for their business operations. With the increase in ABSD, these SMEs might have less access to liquidity and may not be able to afford the higher costs of industrial properties. This, in turn, has led to a decrease in demand for industrial properties. Other potential reasons are:

Limited investment potential: Unlike commercial properties, industrial properties have limited investment potential, as they are primarily intended for owner-occupation. This means that investors are less likely to be interested in purchasing industrial properties for the purpose of generating rental income or capital appreciation.

Specific usage requirements: Industrial properties have specific usage requirements, such as ceiling heights, loading bays, and access to transportation. This means that they may not be suitable for a wide range of businesses, reducing the potential pool of buyers.

Economic uncertainty: The ABSD hike is usually implemented during inflation and a period of economic uncertainty, with many SMEs facing financial difficulties. This may have led to a decrease in demand for industrial properties as SMEs were less willing to take on additional financial burdens.

The Pros and Cons of Investing in Industrial and Commercial Properties

Investing in industrial and commercial properties can be a great way to diversify a real estate portfolio, but it's important to consider the potential advantages and disadvantages before making any investment decisions.

Advantages of Investing In Industrial and Commercial Properties

Stable income stream: Industrial and commercial properties often have long-term leases with stable, creditworthy tenants, which can provide a steady income stream for investors.
Potential for long-term capital appreciation: The value of industrial and commercial properties can appreciate over time, providing investors with the potential for long-term capital appreciation.
Diversification of portfolio: Investing in industrial and commercial properties can help diversify a real estate portfolio, reducing overall risk.
Higher Loan to Value Compared to Residential Properties: Did you know that you may acquire a loan for up to 90% of the property's value, as opposed to the existing residential 75% LTV? This makes it more appealing to investors since it requires less cash.
Lower Entry Barrier: When compared to a multi-million dollar home purchase, commercial and industrial properties offer a wider pricing range that may be tailored to your budget.

Disadvantages of Investing In Industrial and Commercial Properties

Shorter leasehold: Unlike residential buildings, which have a 99-year leasehold status, industrial and commercial assets normally have a shorter leasehold, with most industrial properties having a leasehold of 30 to 60 years.
Longer vacancy periods: Industrial and commercial properties may require more time to lease than residential homes. This is due to a limited pool of possible tenants, and businesses sometimes demand a longer time to analyze a location before committing to a contract.
Higher turnover rates: Industrial and commercial renters may have a greater turnover rate than residential tenants. This is due to the increased frequency with which enterprises migrate or grow, as well as their vulnerability to economic situations.
Dependence on economic conditions: Industrial and commercial properties are more sensitive to changes in the economy compared to residential properties. For example, if there is a downturn in the market, businesses may struggle to pay rent, leading to a decrease in income for property owners.
Interest Rates: Typically commercial/industrial properties loan interest rates are higher than residential property interest rates. Find out more on commercial properties rates here.

Need help to assess your industrial/commercial property loan eligibility? Contact Smart Towkay now for expert advice and guidance.

Factors to Consider Before Investing in Industrial and Commercial Properties

Before investing in industrial and commercial properties, it's important to consider a variety of factors to ensure that the investment aligns with your goals and risk tolerance.

Location

Location is a critical factor to consider when investing in industrial and commercial properties. Properties located in desirable areas with strong transportation links, infrastructure, and access to labor are likely to have higher demand and potentially higher rental rates.

Property Type

Investors should consider the type of property they want to invest in, such as office buildings, warehouses, or retail spaces. Different property types have unique characteristics that can impact their rental rates and demand.

Tenant and Lease Terms

Investors should evaluate potential tenants' creditworthiness and their lease terms to ensure that the property has a stable income stream. Long-term leases with creditworthy tenants can provide a reliable income stream and reduce the risk of vacancy.

Market Conditions and Trends

Investors should stay informed about current market conditions and trends to evaluate the potential demand for industrial and commercial properties. It's important to consider economic indicators, population growth, and industry trends that may impact the market's demand for industrial and commercial properties.

Commercial/ Industrial property loans are typically pegged to SORA (Singapore Overnight Rate Average) or fixed rates. SORA is a benchmark interest rate that reflects the average rate at which banks in Singapore lend funds to one another in the interbank market. SORA is used as a reference rate for many financial instruments, including loans, derivatives, and bonds.

Find out the latest SORA rates here.

Conclusion

Based on the article we have discussed, it is clear that the increase in ABSD rates has led to a shift in investor interest toward industrial and commercial properties in Singapore. This shift has also been driven by other factors such as stable income streams, potential for long-term capital appreciation, and diversification of investment portfolios.

While we did not specifically mention Chinese investors driving conservation shophouse prices above $7,000 per square feet it is possible that such investors may have contributed to the rising prices in this particular property segment. The increasing demand for these types of properties may be due to their cultural and historical significance, which can make them attractive to certain investors.

In conclusion, the ABSD increase in Singapore has led to a shift in investor interest from residential properties to industrial and commercial properties. While investing in industrial and commercial properties can provide stable income streams, potential long-term capital appreciation, and portfolio diversification, it's important to consider the potential disadvantages.

Frequently Asked Questions

What are the current trends in the industrial/commercial property market?

The current trends in the industrial/commercial property market are positive, with the industrial sector continuing to thrive. However, the overall commercial real estate outlook for 2023 is uncertain, with the challenges ahead for the retail and office space sectors, and ongoing supply chain issues and inflation. It is difficult to predict how these factors will affect demand for industrial/commercial property in the near future. Additionally, the Singapore government has recently announced measures to cool the private residential and HDB resale markets, which may impact property demand in certain segments.

Which asset classes are performing well in the industrial/commercial property market?

The industrial and commercial property market in Singapore is showing strong performance, particularly for logistics and data center properties. These assets are in high demand due to the growth of e-commerce and the increasing need for cloud storage and data processing. On the other hand, office spaces might also have been hit by the pandemic and remote working arrangements, resulting in a decline in demand for rental.

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