One of the unintended consequences of the Singapore government increasing the Additional Buyers' Stamp Duty[i] rates from 15% to 25% in July 2018, may have prompted foreign investors to look into non-residential properties in Singapore.
There has been a general increase in transactions for the sale and purchase of shophouses and in particular, non-Singaporean controlled entities, buying up shophouses from Singaporean owners in the past two to three years.
Shophouses in Singapore is a special class of building in Southeast Asia which historically was purposed for a commercial shop on the ground floor and residence on the 2nd floor. Shophouses are generally two-three storeys high with a sheltered five foot pedestrian way at the front. They are very limited in supply which is one of the reasons why they can hold value and is a highly sought after property asset in Singapore
Purchasing a shophouse is unlike purchasing a typical residential or commercial property. Investors should take note of some of the unique legal issues in the purchase of a shophouse which we set out in briefly in this article.
Tenure of the Shophouses
Shophouses in Singapore have various tenures. It is possible for find shophouses with a leasehold title of 99 years, 999 years or even freehold.
According to the Urban Redevelopment Authority ("URA"), private shophouses were constructed between the 1840s and the 1960s. Some of the shophouses may seem like a good bargain – this may be because the remaining lease is less than 50 years. The short remaining lease may affect the possible financing options as some banks may reduce the loan amount offered. It is therefore prudent to conduct sufficient due diligence on the tenure of the shophouse and discuss the financing options with bankers before committing to the purchase.
Investors should take note not all shophouses are considered commercial properties and therefore presume that Additional Buyer's Stamp Duty which applies only to the purchase of residential properties is not be applicable.
For shophouses that form part of an entire building and is approved for mixed-use (e.g. HDB shop with living quarters on the 2nd storey), Buyer's Stamp Duty rate of up to 4% is payable and depending on the stamp duty profile of the purchaser, Additional Buyer's Stamp Duty may be payable on the component of the property which is attributable for residential use. For the non-residential component, the buyer will only need to pay up to 3% Buyer's Stamp Duty.
For shophouses that is not part of an entire building, reviewing the URA Master Plan zoning will be crucial to determine the Buyer's Stamp Duty and whether Additional Buyer's Stamp Duty is payable on the purchase. For example, for a shophouse that is zoned Commercial & Residential under the URA Master Plan, the Inland Revenue Authority of Singapore will deem that 60% of the Gross Floor Area is residential whilst the remaining 40% of the Gross Floor Area is non-residential.
The owner of a shophouse must comply with the approved use as determined by the authorities. Non-compliance is an offense and the owner may face criminal prosecution by URA.
If the shophouse is a private shophouse unit (i.e. not a HDB shophouse), it is possible to obtain information on the approved use of the unit from URA's online resources.
Investors should also take note that for shophouses that comprise of 2 or 3 storeys, the approved use for each level may also differ. It is possible for an application for the change of use to be submitted to URA for consideration but resources provided by URA will give a good indication of whether the change of use application is likely to be approved or rejected.
It is common for encroachments to be present in shophouses which may not be apparent upon visual inspection of the property. Examples of encroachment of air space include air-condition compressors which have been installed beyond the boundaries of the property onto the adjoining or adjacent land or property.
Encroachments should be regularised by the existing owner whenever possible or if the encroachment is onto state land, a temporary occupation licence may be issued by Singapore Land Authority in respect of the encroachment if rectification of the encroachment is not possible due to various reasons (e.g. the facade of a conserved shophouse cannot be altered).
The burden of regularising any encroachments which can be regularised but not completed by the existing owner will fall onto the new incoming owner. As such, investors should take this into consideration in their due diligence checklist.
Outlook for Investing in Shophouses
It is expected that investor demand for shophouses will remain strong due to their rich heritage history and limited supply. Foreign investors are also keen to grab a slice of the pie as shophouses serve as an alternative to owning prime land in Singapore since foreigners are generally prohibited from buying residential landed properties in Singapore (with some exceptions).
However, navigating the potential legal pitfalls in the purchase of a shophouse can be daunting for investors who are not familiar in the investment in this particular asset class. For investors, it is equally important that the ownership structure which is set up at the onset to acquire the shophouse is carefully planned to achieve the desired investment objective.
The setting up of the ownership structure is basically the analysis of the various types of investment vehicle that the investor should consider, for example should the investor incorporate a Singapore private limited company, a Variable Capital Company in Singapore or a foreign holding company to acquire the Property that is the most efficient and best suited to the investor's investment objective depending on his source of funds.
As Benjamin Franklin once said, "If you fail to plan, you are planning to fail!"
[i] ABSD is a tax that's levied on top of Buyer's Stamp Duty, as a cooling measure to keep property prices affordable for Singapore citizens by managing the demand for residential properties
This article was first published by Knight Frank here on 21 Dec 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.