Inflation, in simple terms, is the decrease in the purchasing power of a currency. This means people have less purchasing power with the same amount of currency because the cost of products and services went up.
During inflation, commercial property renters have a hard time finding reasonably priced rental offices due to increases in prices, and this is because inflation impacts rental properties in several ways:
An expert said that we can anticipate Singapore’s business central region office rents climbing by up to 4% this year. While this trend is expected, considering rental prices of Singapore offices continued to rise for the 7th straight quarter in 2022 Q2, business owners looking for commercial property rentals are starting to feel the pinch.
It is a no-brainer that the main downside of inflation for renters is that it can lead to higher rent costs. If you’re renting commercial space, the commercial property owner may raise the rent to keep up with rising costs.
Looking at it from the commercial property owner’s point of view, inflation impacts operational costs like maintenance utilities and insurance to fluctuate. When the cost to maintain a property goes up, the overall cash flow can decline for them. By increasing rent prices, it can help protect the true value of cash flows for them and subsequent returns.
However, this can impact the renter business significantly, especially if the business is already operating on a tight budget. This may force some businesses to relocate to a less expensive location or cut back on their operations to stay afloat.
Inflation is a complicated trend that affects all aspects of the economy, from businesses to individual consumers. One impact of inflation is that it can lead to lower consumer demand, which usually has a serious effect on businesses.
As prices rise, people often want to spend less on non-essential items like entertainment and clothing, resulting in lower sales and profits for businesses. Additionally, higher prices can force consumers to exit the market altogether, reducing the number of potential customers for a business and further lowering profit.
In short, inflation has extensive effects on both individual consumers and businesses, making it a serious concern for anyone interested in keeping the economy healthy.
Interest rates tend to rise when inflation rates are high. Naturally, borrowing money becomes more expensive when interest rates are higher. Therefore, it can be hard for your business to get a property loan if inflation is too high. This is because lenders will be worried about giving out loans to businesses who may not be able to repay the loan (on time or worse, at all) due to the unstable profit making and rising cost of living.
But, fret not. This is not the first inflation that has ever happened to planet earth and it is not the end of the world. Like an economist once said, by studying past economic periods, we can make a more informed decision based on how inflation is likely to affect the commercial real estate industry now. There are methods and wise decisions for you as business owners to make during this economical state.
It is no news that centrally located offices will continue to outperform in the longer term as they become scarcer and more sought after by tenants. Especially when there are no upcoming developments in the central business district, the demand will continue to rise while the supply would probably remain the same. Given the strong demand and limited supply, centrally located offices and shophouses will continue to be the hot office location, and rent prices are most likely going to rise more than the outskirts.
Myths that say “shorter lease agreement will always be better” are debunked in inflation’s case. When a rent period starts during inflation, it means that renters are paying for a higher priced rent. During inflation, a shorter lease would allow renters to negotiate lease agreements after the price has dropped. This will help renters save compared to agreeing on a longer leasing period during inflation.
If your residential property still has remaining value left after deducting its loan outstanding, a property-backed loan or a property cash-out might be a good option. While the usual business loan is heavily tied to your past business performance; restricting you in terms of your eligible amount for loan and interest rate, backing your loan with a residential property might offer you more freedom and savings. Especially during inflation where your business performance may be more unstable. These apply to private properties only which includes commercial, industrial and residential properties (non-HDB). Also, loans against your residential property could get you up to 85% loan-to-valuation while not having the usual TDSR applied.
To find out more about the benefits of applying for a property-backed loan, read our full guide on property backed loans.
Jennifer loves helping SMEs in their business growth journey. She is also an epicurean and has perpetual wanderlust. During the weekend, she weaves poems out of thin air and buries herself in books.