Paul HO (iCompareLoan.com)

This article has also been featured on TheEdgeProperty

Singapore’s owes its industrial transformation and modern day success to Dutch economist Dr. Winsemius who in 1960 led the United Nations team to examine Singapore’s potential in Industrialization. Dr. Winsemius presented a 10-year development plan to transform Singapore from an already successful entrepot into a centre of manufacturing and industrialization. With his help, Singapore also attracted Shell and Esso to establish refineries here and Philips to set up manufacturing. He continued to work as Chief Economic Advisor from 1961 to 1984 working hand-in-hand with Goh Keng Swee, Lee Kuan Yew and Goh Chok Tong to develop Singapore into the economic success it is. (Reference 1: Wikipedia)

Early stages of industrialization wasfocused on labour intensive industries and increasingly move upstream into higher value-added industries and eventually with the advent of electronics, moved into High technology. (Reference 2: EDB)

The early part of the industrialization was located in Jurong. Comparing the 2014 Master plan versus the 2003 master plan, Industrial B2 zonehas spread out into the North East region and also added new zoning in the West region, north of Jurong. This is in line with the aim of Urban planning to bring jobs closer to homes and to reduce commuting time.

 Map 1: Masterplan 2014, (Source: URA)

Map 2: Masterplan 2003, (Source: URA)

 Map 3: Legend of Master plan (Source: URA)

The largestIndustrial Business 2 (B2) zoneis concentrated in Jurong with some scattered in other areas, such as Woodlands and near the airport.Certain businesses (industries) thataredeemed a potential disturbance to residents are subjected to a 50m nuisance barrier and placed under B2 zones.

 Blurring of lines between Industry and Commercial

The restructuring of industries across the world shifts from heavy industries to a focus on light industries such as Information and Telecommunication, knowledge industry andcloud computing. The definition of “industry” is changing. Production no longer simply meant having people sit beside lathe machines milling precision parts. A modern day “Industry” could also mean having teams of people tapping profusely into the laptop doing programming and coding. There is a blurring of lines between these industries and that of other commercial activities, and development to be used for offices.

Commercial zones are defined by URA as “…Area used or intended to be used mainly for commercial development.”

Such as developments to be used for: –

• Offices
• Mixed Uses (e.g. Office/Shopping/Cinema/Hotel/Flat)
• Convention/Exhibition centre, commercial school
• Bank
• Market/Food centre/Restaurant
• Cinema
• Entertainment
• Foreign Trade mission/Chancery
• Recreation club.

IS COMMERCIALAT A PREMIUM COMPARED TO INDUSTRIAL ZONE?

Commercial zones are premium and concentrated in Central Business District (CBD), there are also commercial zones located outside of category 1 where rentals are cheaper.

Table 1: URA, Commercial Offices – category 1 median rentals are ~$107 psm or about ~ $10.09 psf. Q2 2014, Q1 2015. (Category 1 refers to city core), https://www.ura.gov.sg/realEstateIIWeb/comm/rentalOffice/submitSearch.action

Category 2 (refers to properties outside of category 1) median rentals (Appendix 1) are in the range of $47 to $70 psm or about $4.37 to $6.5 psf.

We randomly selected District 3 and 5 for comparison. The Industrial median rentals in the city fringe Queenstown, Tiong Bahru, Clementi New Town comes in at $19.87 to $32.82 (Level 2 or higher) psm or $1.85 to $3.05 psf.

Postal Districts:

03 – Queenstown, Tiong Bahru,
05 – Pasir Panjang, Hong Leong Garden, Clementi New Town,

Table 2: JTC, 2015Q1 Median rentals in city fringe District 3 and District 5 (

http://cwapps.jtc.gov.sg/applications/IndustrialStatistics/Rentalstatistics.aspx

There is no real apple-to-apple comparison. For the purpose of this study, we assume that Category 2 (fringe area) of commercial zoneswould be a rough approximation to Industrial B1 properties in D3, D5, one of whichis in the city fringe.

Commercial properties still command a premium rental of $4.37 to $6.5 psf compared to industrial B1 properties at $1.85 to $3.05.

Chart 1: Commercial offices category 1, 2, and Industrial Fringe (District 3, 5) rental price (per square feet)  (Source: URA, JTC, iCompareLoan.com)

Table 3: Rental table of commercial offices category 1, 2 and Industrial fringe District 3 and 5 prices factored with ancillary use (Source: URA, JTC, iCompareLoan.com)

As industrial properties can only have 40% of the space for ancillary use, hence we computed an implied rental based on only 40% of ancillary usage for Industrial properties.

Between Commercial Cat 2 – Upper versus Industrial Fringe – Upper range

• A comparable $6.5 versus $7.625 psf of rental

Between Commercial Cat 2 – Lower versus Industrial Fringe – Lower range

• A comparable $4.37 versus $4.625 psf of rental

If you compare only the usable ancillary space allocated for office use, the industrial properties are almost on par with commercial offices, in fact industrial property is slightly more expensive if we did not factor the other usable 60% space for industrial use.

However Industrial B1 properties confer the advantage of using the rest of the 60% space for designated industry use. This pretty much lowers the cost of the overall space.

COMMERCIAL ACTIVITIES REDEFINED AS INDUSTRIAL USE

Industrial B1 zones are scattered across Singapore interspersed amongst commercial and residential areas.

In the past, industrial buildings are dreadful looking with dirt, grime and noise.

Newer industrial buildings such as those by Ascendas are well built with many amenities.

Some E-business activities have been regarded as Industrial uses and can be considered as part of the 60%.

Table 4: E-Business Activities regarded as Industrial use (Source: URA, Non-resi-handbook, Reference 3)

As a result of this classification, many banks and insurance company’s call centres, IT centres, Data centres have been moved to Business Parks, Industrial B1 and B2 zones such as those in Kaki Bukit, Changi business parks. Many of these activities were previously considered supporting office functions of Banking and Finance are now considered “Industry”.

With these new definitions, it eases business cost pressures on such commercial activities, but shifted demand into Industrial properties.

DEMAND FROM COMMERCIAL ACTIVITIES DIVERTED TO INDUSTRIAL PROPERTIES

Many newer industrial properties sitting on Business 1 (B1) zones are increasingly sophisticated and looking like Commercial buildings. In fact you might not even tell them apart unless you refer to the URA Zoning Master Plan.

Since industrial B1 zones are better located nearer to housing estates or regional centres and no longer mainly in Jurong, there is substantial advantage to break the zoning rules.

In 2009, retailer Mustafa has been issued with a writ of summons for operating a supermarket in the warehouse in Kallang Pudding road. Due to the rental price differential between retail and warehouse zoning, there is a lot of temptation to break these zoning rules.

In 2012, CEA issued a circular (Reference 4) to property agencies and Key executive officers warning agents against misleading marketing of Industrial properties in which agents purportedly talked up the potential of using the industrial properties.

In fact, many such breaches would never be found, as inspection would be costly and time-consuming. On top of that, the lines are greyed between commercial activities and industrial activities, meaning that it can be debatable whether there is an actual real breach or not. There is huge benefit to arbitrage the difference in rental yields, hence a lot of incentive to breach the zoning rules, softly or blatantly.

And in the URA circular issued to KEOs on CEA Practice (Reference 4), where URA stated, “However, URA recognises that certain non-industrial activities, such as ancillary offices¹, staff canteens and showrooms are needed to support the predominant industrial uses.”

And in this circular, URA clarifies that it allows Showrooms to support predominant industrial uses. Hence giving Industrial B1 properties the legality to become commercial showrooms. The rental prices are even better for commercial showrooms. Allowing for showrooms in Industrial B1 zoned properties will significantly enhance the valuation for such industrial properties, especially those at level 1. Many showrooms tends to have on-the-spot retail functions, which are of course not allowed.

Conclusion

• E-businesses activities are being reclassified as Industry use and allowed in Industrial B1 zone. Many banks and financial institution’s back office, call centres, IT centres, data centres have moved to Industrial B1, B2 and business parks in search of lower rental. In essence this moves some of the commercial demand to industrial.
• There would be no benefit for a business to use only 40% of the space for ancillary use such as an office if they do not have a significant industry component to use up the 60% of the space. For example, there may be some industry where their Industry component may only use up 20 to 30% of the Industry space, while the office is 40%. Therefore there would not be substantial rental savings.
• Businesses such as IT, programming and info-communication would benefit the most as these industries would use up the full 60% for industry and 40% for offices. In fact you would walk into an such a factory/unit and you would not even feel its an “Industry”, rather there would be neat rows of office partitions and people working on their computers, just like another other commercial offices.
• As Industrial B1 zones are spread out across the island and no longer concentrated in Jurong (which is generally regarded as inconvenient location), there is a growing benefit to arbitrage the rental yield whether legally or illegally. The fact that URA sees a need to issue a Circular to all property Key executive offices (KEOs) as well as developers (Reference 3) attests to this growing segment of Commercial looking Industrial properties.
• Allowing for Showrooms within Industrial B1 properties will indirectly compete with Commercial retail zones. This creates a bigger arbitrage opportunity as Commercial retail has even higher rental compared to Commercial Offices.
• Now that Singapore has become the world’s costliest city, perhaps with these rules in place, Singapore could in time become the place where you see the most beautiful industrial buildings. Ascendas REITs, Mapletree logistics and various large scale industrial property owners are likely beneficiary of these policies with rents generally around $3 to $5 per square feet.

URA has an unenviable task of managing Master plan zones as it will not be easy. URA has done a great job in urban planning and zoning and I believe will continue to do so in the future. It just has to gradually tweak the rules to ensure that there is not too great an arbitrage opportunity between commercial zones and industrial zones. Enforcement may be an option, but unlikely to be economical.

References: –

1. Wikipedia, Albert Winsemius (1910-1996),https://en.wikipedia.org/wiki/Albert_Winsemius

2. EDB,

https://www.edb.gov.sg/content/edb/en/about-edb/company-information/our-history.html

3. URA, Non-Resi-handbook, Some aspects of e-businesses considered as industrial,

http://www.ura.gov.sg/circulars/text/non-resi-handbook.htm

4. URA,Circular No: CEA Practice Circular 3/12 URA/PB/2012/08-DCG, Misleading Marketing of Industrial properties

, 20 Jun 2012, http://www.ura.gov.sg/uol/circulars/2012/jun/dc12-08.aspx

Extract: “To ensure that limited industrial land is used mainly for industrial uses, the URA requires at least 60% of the total floor area of an industrial development to be used for core industrial activities. However, URA recognises that certain non-industrial activities, such as ancillary offices¹, staff canteens and showrooms are needed to support the predominant industrial uses. Hence, such supporting non-industrial uses, together with other ancillary areas (e.g. lift lobbies and circulation spaces) are allowed to occupy up to 40% of the total floor area of an industrial development.”

APPENDIX

1. URA, Fringe area, Category 2 Median Rental for Periods Q1, 2013 to Q1, 2015. https://www.ura.gov.sg/realEstateIIWeb/comm/rentalOffice/submitSearch.action

Definition:

Category 1 refers to office space in buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, command relatively high rentals and have large floor plate size and gross floor area. Category 2 refers to the remaining office space in Singapore which are not including in Category 1.

2. URA Zoning description

What does iCompareLoan.com do?

www.iCompareLoan.com is a Loan Portal and a Mortgage & Loan broker, helping property buyers and home owners to get the best fit home loan and business owners obtain Business loans for business expansion.

Home Loan Report ™ is Singapore’s first Cloud based Home Loan Report ™ platform to be used by Property agents, financial advisors as well as other Mortgage brokers to prepare reports for their customers.

Home Loan Report ™ – Enterprise allows a property agent’s website to immediately add a loan section. Improve your Google Ranking, let’s viewers increase Time-on-site. Property or Finance sites that deployed Home Loan Report ™ – Enterprise loan section sees viewers stay on their site longer by between 30% to 350% after 4 to 8 weeks of installing the Embedded Loan Plugins.

About PAUL HO:

Paul holds an a B.Eng(Hons) Aberdeen University (UK) and a Masters of Business Administration (MBA) from a Macquarie Graduate School of Business (MGSM) Australia. He also serves as current President of Macquarie University Alumni Association of Singapore and Hon. Secretary of British Alumni.

He is founder of www.iCompareLoan.com, his articles have been syndicated/featured on STproperty, iProperty, BTInvest, TheEdgeProperty, Propwise, Propquest, Yahoo and TheOnlineCitizen amongst many other sites.

He has also given speeches, guest speeches, trainings and/or seminars at NUH Lunch time talk, iProperty, David Poh and Associates, Getty Goh’s Ascendant Asset property, NTU (Guest Lecture on SEO), Panel discussions at GPS Alliance, C&H, Skillup just to name a few.

He is passionate about helping people enhance their wealth and in making money work harder for them.

Copyright © – www.iCompareLoan.com

Paul HO from www.iCompareLoan.com

Central provident fund (CPF) was originally introduced in 1955 by the British Colonial authority to help workers save for their retirement. Over the years, CPF has developed many different uses. One of the main reasons these days for dipping into the CPF is to use their savings  to buy an HDB flat or a private property.

CPF savings consistently makes up 30 to 40% of a person’s gross salary, this has provided much liquidity for property purchases and potentially one of the reasons for the inflated property prices.

Most people in Singapore would rely on CPF to fund all or part of their housing loan installment way into 65, 70, 75 years old.

The CPF savings is meant to enable contributors to have a secure retirement. However it could also be CPF that is hindering your retirement plans. 

Can You Really Retire At 60 or 65?

When you think of retirement, most would conjure images of sitting back and relaxing, “doing things you enjoy”.

In fact most Singaporeans do not enjoy this luxury when they hit age 65.

With the rising cost of staying alive, it is common for Singaporeans to work beyond the official retirement age, especially if you have yet to pay off your home loan and expensive medical care.

And do not count on hoping to unlock all your savings with The Central Provident Fund (CPF) as there are withdrawal limits and other restrictions. (Reference 2) 

Amount Credited into CPF Ordinary Account shrinks

Once you reach 60, the percentage of wages credited into your CPF ordinary account is reduced from 12% to 3.5%.

When you reach 65 years old, while you contribute 5% of your monthly wages to CPF, only 1% of your monthly wages gets credited into your ordinary account. (Table 1)

Table 1: Ministry of Finance, Singapore Budget 2015, New CPF Contribution and Allocation Rates from 1 January 2016 for Employees (Note: the Underlined figures are from 1^st Jan 2016 onwards)

This compares to 12% for those in the age bracket “Above 55-60” (Table 1). This means that the inflow into your Ordinary Account shrinks over time, all else being equal. This would be a problem for those still servicing home loans and with tight finances.

Those falling into the bottom 20% percentile may be eligible for the Silver Support Scheme, which assists them with payouts of $300 to $750 quarterly starting around first quarter of 2016.

Money stuck in Medisave Account – Never to be seen?

As you age, a growing percentage of your CPF contributions goes into your Medisave Account – starting from age 55 (reference 2), which is allocated to meet your healthcare needs. For those 65 and above, 10.5% of your wages goes into your Medisave Account.

Do note that there are limits as to how much you can withdraw from Medisave.

This means that the savings in your Medisave Account are basically stuck and cannot be used to pay off your housing loans or for other emergencies.

There is a maximum to the savings in your Medisave account, which is known as the Medisave Contribution Ceiling (MCC), of $48,500. Amounts above the MCC will be automatically transferred to your Retirement account not Ordinary Account.

The MCC will be renamed as Basic Healthcare Sum (BHS) and rise to $49,800 with effect from 1 January 2016. The BHS will be held constant when you reach the age of 65.

Also, with effect from Jan 2016, the Medisave Minimum Sum (MMS) will be removed. CPF members do not need to meet the MMS of $43,500. (Source: CPF) 

More Cash Payment needed for your Housing loan after 60 years old

Let us investigate whether there is any extra cash out-of-pocket for people as they grow older.

Scenario 1: Mr. Lim’s Property Purchase of 1.25m

Property Price           : 1.25m

80% loan                   : 1m

Age of borrower        : 35

Loan Tenure             : 30 years

Salary                         : $7500

Interest rate               : 2%, 3% and 4%

Assumption               : CPF OA is emptied into installment servicing each month.

Note: CPF Contribution ceiling is $5000 in 2015, $6000 from 1 Jan 2016.

Table 2: CPF Contribution and Take Home Pay of a Person earning $7500 a month. (Source: CPF, iCompareLoan.com)

From the table 2, we can see that the biggest impact is when Mr. Lim reaches 60 years old. The Ordinary account crediting goes from $720 to $210. This is a drop of $510. This means that there would be a bigger cash outlay for installment. This would then easily cause hardship for lower income earners. However in this case, the impact seems to be manageable provided that the person continues to be employed at $7500 a month. In fact, as if to mask the issues, the take home pay actually increases. Hence it is important to take a look at the net pay. (Table 3)

Table 3: Net Pay after paying for Installment. (Source: CPF, iCompareLoan.com)

The net pay @ 2% interest rate drops from $3744 to $3564 when Mr. Lim reaches the age group 60 to 65. This drop causes some hardship, but may not be sufficient to cause distress. It becomes critical when interest rate reaches 4% when Mr. Lim is at age group of 60 to 65. Chart 1 illustrates the Net Pay at various mortgage interest rates versus age.

Chart 1: Net Pay of a person earning $7500 after factoring installment assuming all CPF OA is used for installment.

Hence a take home pay of $3564 (2% mortgage interest rate) in 30 years time @ 2% inflation will be equivalent to $1,967 in net present value.

And a take home pay of $3044 (3% mortgage interest rate) in 30 years time @ 3% inflation will be equivalent to $1254 in net present value.

As a general rule of thumb (with some exceptions) (reference 5), higher interest rates correspond to higher inflation.

Payouts from Retirement Account mitigate CPF Ordinary Account woes

For those who took up housing loan before 2013 and with tenures up to ages of 70 to 75, payout from the Retirement account which starts at 65 will slightly cushion your housing loan woes.

At 65, you can withdraw up to 20% of Retirement Account savings (includes first $5,000 withdrawn at age 55. (Reference 3, 4)

Those on the CPF LIFE Plan, a national annuity plan, would also have the option to receive monthly payouts when they hit 65, ranging from $650 to $1,900 (Reference 4) or opt to defer their payout start age up to 70. Deferring the payout start age will allow you to earn a higher interest rate of up to 7% for every year that the payout from CPF LIFE is deferred.

Conclusion

When Mr. Lim hits age group 60 to 65, he starts to see higher Cash outlay to pay for his housing loan due to the drop in CPF crediting into ordinary account. Though the reduction in net take home income is marginal, it is masking the issue of a reduction in incomes and over-funding of Medisave and other accounts. (Appendix A2)

As long as Mr. Lim continues to be employed at $7500 per month until age 65, he should still draw a decent net take home pay of $3564 @ 2% mortgage Interest rate, $3044 @ 3% mortgage interest rate or $2486 @ 4% mortgage interest rate and should be able to withstand a crisis.

However owing to inflation, the present value of his take home pay is small. Mr. Lim cannot hope to retire until he at least pays off his housing loan at 65 as his net take home income will be hardly enough. And he cannot afford to lose his job or get a reduction in pay or he will be in trouble.

While there is probably no immediate crisis within sight, the increased CPF contribution being locked up into Medisave account is worrisome coupled with the escalating medical fees which then empties the Medisave account. The Singapore government should really look at Singapore more as a country than as Singapore Inc., and allocate more resources to our underfunded healthcare system, which by and large are funded by us.

Can Singaporeans really retire at 60 or 65?

References: –

1. Ministry of Finance, Singapore Budget 2015, New CPF Contribution and Allocation Rates from 1 January 2016 for Employees (increases are underlined) http://www.singaporebudget.gov.sg/data/budget_2015/download/annexb1.pdf

2. Buying a Property – use up CPF before it vanishes into retirement account at 55, http://www.icompareloan.com/resources/buying-a-property-use-up-cpf-before-it-vanishes-into-retirement-account-at-55/

3. Source: Central Provident Fund, www.cpf.gov.sg

4. Based on estimates from the CPF LIFE Standard Plan as of April 2015, Source: Central Provident Fund, http://mycpf.cpf.gov.sg/Members/Gen-Info/CPFChanges/COS2015_CPF.htm

5. Mortgage Interest Rates – Key factors that impacts it, http://www.icompareloan.com/resources/mortgage-interest-rates-key-factors-that-impacts-it/

Notes: –

Definition of “Net Take home income” = Gross income – Employee CPF Contribution – Cash Outlay required for housing loan (after factoring CPF-OA being used)

APPENDIX

A1. Installment matrix, (source:  http://www.icompareloan.com/calculator/interest-rate-sensitivity-calculator)

A2. Chart 2, Total CPF Contribution of a person earning $7500. (Source, HDB, iCompareLoan.com)

What does iCompareLoan.com do?

www.iCompareLoan.com is a Loan Portal and a Mortgage & Loan broker, helping property buyers and home owners to get the best fit home loan and business owners obtain Business loans for business expansion.

Home Loan Report ™ is Singapore’s first Cloud based Home Loan Report ™ platform to be used by Property agents, financial advisors as well as other Mortgage brokers to prepare reports for their customers.

Home Loan Report ™ – Enterprise allows a property agent’s website to immediately add a loan section. Improve your Google Ranking, let’s viewers increase Time-on-site. Property or Finance sites that deployed Home Loan Report ™ – Enterprise loan section sees viewers stay on their site longer by between 30% to 350% after 4 to 8 weeks of installing the Embedded Loan Plugins.

About PAUL HO:

Paul holds an a B.Eng(Hons) Aberdeen University (UK) and a Masters of Business Administration (MBA) from a Macquarie Graduate School of Business (MGSM) Australia and has distinctions in finance and economics. He also serves as current President of Macquarie University Alumni Association of Singapore.

He is founder of www.iCompareLoan.com, his articles have been syndicated/featured on STproperty, iProperty, BTInvest, TheEdgeProperty, Propwise, Propquest and Yahoo amongst many other sites. He is passionate about helping people enhance their wealth and in making money work harder for them.