Commercial real estate deals in Singapore remain stable even as borrowing costs climb, with investors leveraging lower loan rates and robust industrial demand. This resilience is supported by the fact that acquiring business premises does not trigger extra stamp duties or limit the loan-to-value (LTV) ratio, irrespective of the number of other properties owned.

A key difference between residential and commercial loans in Singapore is the lack of standardized rates or LTV caps for commercial properties. According to Jo’An Tan, Director at Redbrick Advisory, LTV rates for commercial properties can range from 70% to 90%, depending on the borrower’s relationship with the bank and the property’s unique characteristics.

Commercial Loan Assessments

Banks assess commercial loan applications based on the borrower’s repayment ability, taking into account factors such as cash flow, liquidity, and the property’s potential for rental income. For business owner-occupiers, banks may offer financing of up to 90% if they can demonstrate high liquidity and cash flow, as well as provide evidence of the property’s intended use.

In contrast, investors may secure financing of up to 70% or 80% if the rental income from the property can sustain the loan. Ethan Ng, Director at Cashew Mortgage brokerage, notes that banks underwrite loans for investors more cautiously, as there is no operating business behind the property to generate income.

Rising Interest Rates Impact

Despite rising interest rates, commercial lending rates in Singapore remain competitive, with rates ranging from 1.55% to 1.65% over the past three weeks. However, Ng expects rates to rise to 2% by the end of the year, with the possibility of further increases in 2027.

The US Federal Reserve’s recent rate hike has had a direct impact on the Singapore Overnight Rate Average (SORA), the wholesale rate that commercial loans are pegged to. Local banks in Singapore have priced in expected interest rate hikes from the US Federal Reserve ahead of time, according to Ng.

Some borrowers are adjusting their financing strategies in response to the interest rate environment. For example, one of Ng’s clients was able to reprice an existing loan from 2.25% to 1.8% due to a good business relationship with the bank.

Others are opting for properties with smaller loan quantum, between $700,000 and $800,000, which can be eligible for up to 70% to 80% financing from banks. These properties often have higher rental-to-mortgage installment ratios, making them more attractive to investors.

Strong Tenancy Key Factor

Tan notes that strong tenancy is more important than flexibility when it comes to commercial properties. Investors are generally favorable towards the industrial property market, particularly the food factory segment, due to its high demand and low turnover rates.

Areas like Admiralty and Senoko have historically performed well in terms of tenant demand, with recent sales of strata-industrial freehold projects in MacPherson selling out at launch. Tan illustrates the importance of strong tenancy with the example of an F&B kiosk near an escalator, where a landlord can assume a tenant will not move due to a small annual rent increase.

A physical location can also matter to how a business operates and grows. A financial services SME buying a property for its own use, for example, may pay a premium to be near other businesses or clients in its industry.

Business owners and property investors in the commercial and industrial space are taking the increase in commercial lending rates in their stride, with Singapore still offering competitive lending rates and a robust regulatory environment. The brokers say that businesses who find the right product for their needs are not shying away from looking for a loan to finance a new purchase, despite higher borrowing costs.

Buying vs Renting in Singapore

One key factor driving this trend is the fact that rents in Singapore hardly ever go down without recovering later on, making it more attractive for businesses to buy rather than rent. As Tan notes, “If there’s one thing we know for sure in Singapore, it’s that the long-term trajectory suggests that rents hardly ever go down without recovering later on.”

With the current interest rate environment, businesses are weighing the costs of borrowing against the potential benefits of owning a property. For some, the increase in interest rates may be a minor concern, especially if mortgage installments can be managed within their monthly cash flow operations.

A 0.5% rate increase, for example, might only add $200 to $300 to a business’s monthly payment, a relatively small increase compared to the potential long-term benefits of owning a property. As Ng points out, this can be a better deal than taking a shorter tenure or lower LTV to save on total interest, only to end up with a much bigger monthly payment that strains the business later on.

In this environment, businesses are looking for ways to manage their borrowing costs, whether through loan repricing, opting for smaller loan quantum, or buying properties with higher rental-to-mortgage installment ratios. As the interest rate environment continues to evolve, businesses will adapt and respond to the new conditions.

Industrial Property Market Trends

The industrial property market, in particular, is seeing strong demand, with areas like Admiralty and Senoko performing well in terms of tenant demand. The food factory segment is also attracting investors, due to its high demand and low turnover rates.

Tan points to areas like the food factories in Admiralty and Senoko, which have historically performed well in terms of tenant demand. Recently, two strata-industrial freehold projects in MacPherson, an established industrial estate with a similar tenant profile, sold out at launch.

Tan illustrates the stickiness of tenants in certain locations, using the example of an F&B kiosk near an escalator. A landlord can assume a tenant will not move due to a small annual rent increase, as they have already built a customer base in that location.

Ng cites a recent example where one of his clients was able to get his existing interest payments repriced from 2.25% down to 1.8%. This was due to a good business relationship with the bank, as well as the client’s prompt action in requesting a repricing.