With the latest restrictions on residential and industrial properties, we have seen an increase in number of enquiries and applications for commercial property loans. What are some of the basic things to look out in a commercial property loan?
Investing in commercial property is deemed to have higher risks compared to investing in residential property. One of the reasons is due to the fact that commercial property is restricted to commercial use only. To banks, it may not be as easy to dispose off a commercial property in times of loan default and repossession compared to a residential property. To the investors, in times of poor economic condition, a commercial property may take a longer time to be tenanted out compared to a residential property, which could otherwise be turned into owner occupied property or tenanted at a lower rate.
A commercial property can be purchased under a company name or a personal name. If the borrower is a company, the directors/owners of the company are required to act as personal guarantors for the loan. Third party guarantor may be considered by some banks.
For corporate borrowers with operating businesses, banks are mainly looking at the track record of business owners/operators and their experience in the trade, the financial standing of the company in terms of its profitability, cash flow and gearing positions, as well as the future prospects of the business. The financial status of the directors/owners must also be satisfactory with no issues to over gearing and defaults in payments in personal liabilities.
For investment holding company as borrower, it will be purely based on the past track record of the property owners in investing in properties and their financial standing, and whether the existing property portfolio is generating profits and positive cash flow from rental after deducting related costs.
For new start-ups, as there are no track records, it will be solely assessed based on the financial standing and credit profile of the business owners. The same credit assessment will apply to individual borrowers if the property is purchased under personal name.
The financing quantum for commercial property loan is up to 80% of valuation if the property is for own business use. If the property is for rental purpose, the financing quantum is generally up to 70% of valuation. A higher quantum may be considered by some banks if the financial profile of the owners are strong and subject to approval by banks.
Generally, the loan period ranges from 20 years to 25 years. Some banks may be able to grant longer loan period of 30 years to 35 years, subject to property type and approvals by banks. Most banks also require remaining lease of 30 years after expiry of loan tenor. Some banks may consider shorter remaining lease of 10 years after loan expiry.
In view of the current low interest rate environment, it is not difficult to secure competitive rates of less than 2% for a commercial property loan. For floating rate package pegged against bank's board rate, the first year rate can be 1.45% followed by 1.75% for the second year. For rates pegged to SIBOR, the loan rate is 3mth SIBOR + 1.28% ie. about 1.66% based on 3mth SIBOR of 0.38% currently. For those who prefer fixed rate loan, the lowest rate available is 1.98% fixed for the first 3 years. And on a case-to-case basis, lower rates may be negotiated, subject to banks' approval.