This fortnightly column addresses readers’ investing issues. I’ve read about coffee shop transactions and their high prices. Shophouses also seem to be doing very well. Why are investors so keen on them?
SINGAPORE – Well, there are shophouses and there are shophouses. The ones grabbing the headlines with their eye-watering prices are situated in conservation areas – there are an estimated 6,500 to 6,800 such units in Singapore – and that is a factor in keeping their prices elevated.
They are a mix of residential shophouses, commercial ones and mixed commercial-residential, built between the early 1800s and mid-1900s. Some of the well-known areas are Emerald Hill, which features mainly residential shophouses, and Boat Quay, where they are mainly commercial. Joo Chiat in the east is also famous for its streets of shophouses.
These shophouses are also grouped according to their location: historic districts such as Chinatown; residential historic areas such as Emerald Hill; and secondary settlements that include Balestier, River Valley and Tiong Bahru.
Among these, the ones that are generating the most buzz in the market are the commercial shophouses.
Transaction volume and value were both higher in the second quarter than the first, according to PropNex. There were 64 transactions compared with 52 in the first quarter. Transaction value was $481 million, up from $467 million in the first three months of the year.
These transactions include all commercial shophouses as well as those for mixed use but exclude fully residential shophouses. Shophouses in non-conservation areas are also included.
There were 34 sales with a total value of $218.3 million in the District 8 area, which includes Jalan Besar and Little India, during the second quarter. These exceeded the previous quarterly high of 29 deals worth $130 million, in 2013.
Overall, the number of transactions in the second quarter is likely to be higher than the 64 recorded, as some buyers do not lodge a caveat which would result in the sale being recorded in the Urban Redevelopment Authority’s Realis.
When a buyer takes out a loan to buy a condo, for example, the bank will lodge a caveat to stake its claim to the property and protect its interests. But if a caveat is not lodged, then the identity of the buyer and the price are not officially available.
A high-profile transaction where a caveat was not lodged was the $53 million sale of Hotel Soloha in Teck Lim Road in the Bukit Pasoh area in the second quarter. The hotel consisted of three adjoining shophouses.
The top five transactions in the second quarter included two shophouses at the junction of Jalan Besar and Petain Road, marketed by Savills. It can be reconfigured for various commercial uses as it has rare F&B (food and beverage) approval on the ground, third and fourth floors. It also has 40m dual road frontage for high visibility and footfall.
With a guide price of $23 million, the deal finally closed at $28 million.
Another transaction also closed by Savills was for five shophouses in Club Street, which were sold for $25.9 million to Singapore-listed ABR Holdings. The sale price works out to about $3,582 psf on the blended floor area. 1, 3, and 5 Club Street are three-storey shophouses with an attic. 7 and 9 Club Street have two storeys.
Why are they selling like hot cakes?
Shophouse sales in Chinatown and the Tanjong Pagar area have hit the headlines in recent years.
One reason for the increased interest in the shophouse segment is the growth of family offices – investment firms that manage assets for wealthy individuals or families – in Singapore. A shophouse can serve as part of the assets.
Buyers, including foreigners, do not have to bear additional buyer’s stamp duty (ABSD) on shophouses that are zoned for commercial use. That is a key consideration, as foreigners generally cannot buy landed property. There is ABSD payable on the residential component of the shophouse, if it has mixed use.
Most buyers would already have residential property and are likely to avoid more residential property investments, given the associated hefty ABSD levies.
Mr Richard Tan, PropNex’s senior associate group district director, noted that Singapore’s effective handling of the Covid-19 pandemic was one factor in attracting foreigners to base themselves here.
Mr Simon Monteiro, senior associate vice-president of List Sotheby’s International Realty (List SIR), said that family offices “are seeking legacy investments, so shophouses are attractive to them as they are great trophy assets that increase in value over time due to limited stocks”.
Shophouses also have their appeal for businesses and companies, noted Mr Monteiro.
“As companies shift to flexible working and hybrid workplaces, a commercial shophouse becomes more attractive to companies that want to own their office space, especially since now, strata subdivision of commercial properties in the central area is not allowed for high-rise office buildings in Singapore’s Downtown Core.
“With a vibrant start-up scene, there is now a demand for office spaces that cater to a workforce that does not conform to the traditional pattern of 9-to-5 office hours.
“Even larger multinational companies are moving out of traditional office buildings where the central air-conditioning shuts down in the evenings or on weekends, with additional costs incurred if an office tenant needs to use it outside a prescribed schedule.”
Mr Monteiro observed that “many of them are now choosing to relocate to shophouses where they are part of a vibrant community neighbourhood where there is lots of social activity with amenities like gyms, hair salons and F&B venues”.
He said: “We see the trend of co-working spaces picking up with such operators helping to ensure their offices can be fitted to specific requirements. For start-ups that are growing rapidly, they start by renting out different floors in an entire building and expanding gradually in the same neighbourhood as they grow.”
Huttons Asia senior group division director Jeremy Lim said that for certain tenants such as IT, design or law firms, there is a hipster vibe from the shophouse area that a traditional office in a high-rise building cannot match.
Michelin-starred restaurants in these areas enjoy the exclusive ambience that a conservation shophouse offers them.
Making money
While a shophouse in the Tanjong Pagar area may not leave you much spare change from $25 million, rental yields are another matter.
PropNex’s Mr Tan pointed out that landlords of commercial shophouses with F&B tenants on the ground floor affected by the pandemic would likely not be earning top dollar for their rents. Some might have signed two-year or three-year leases, thus locking in the relatively lower rentals for the next couple of years and depressing yields.
This will be something investors will have to accept. List SIR’s Mr Monteiro said: “Investors planning to buy a conservation shophouse must be prepared that typical rental yield is in the range of 2 per cent to 2.5 per cent. The opportunity is more from capital gains as there is only a limited number of shophouses.”
He suggested that “placemaking” is important. This is how a neighbourhood, through intangible factors like its community spirit and history, can attract people, which supports the value of the property.
With prices already sky-high in the Downtown Core, some investors are turning to areas such as Jalan Besar and River Valley.
In terms of investment potential, Mr Monteiro is positive about these areas, as the guidelines allow for some redevelopment such as a new rear extension as long as the streetscape is maintained.
He added that “some pockets of Little India that have become more popular like Norris Road and Desker Road” have potential as communities are emerging there, where people work, live and play in the same area.
Savills Singapore’s executive director of research and consultancy, Mr Alan Cheong, said: “The up-and-coming areas will be in the Jalan Besar, Lavender Street and Little India micro-markets.”
The shophouse market is likely to continue to perform well even in an environment of rising interest rates and slow economic growth due to the limited supply and architectural heritage, he noted.
Mr Cheong added: “The more it becomes this sort of asset class, the more it becomes immune to interest rate movements. The absence of ABSD for commercially zoned conservation shophouses opens up the market to even more foreign investors, increasing the pool of buyers for this type of property in future.”
Buyer checklist
So if you ever do make your fortune and have the opportunity to buy one of these shophouses, what would be some of the things to look out for?
Mr Monteiro said: “Location is of utmost importance and impacts the price of the property. It is better to buy at least a pair of shophouses beside each other so that adaptive reuse is easier. Sometimes, a pair of shophouses become amalgamated into one address.”
Adaptive reuse would refer to these properties being restored and upgraded to meet modern lifestyles, where the shophouses are transformed into restaurants, boutique hotels or co-working spaces, for example.
PropNex’s Mr Tan also advises buyers to do their homework on location and footfall. For example, there is a significant difference in rent for the shophouses in Tanjong Pagar Road that are nearer to Orchid Hotel than those closer to the Maxwell Food Centre. The former have better footfall from the nearby offices in International Plaza and Guoco Tower and the differential in rent can be in the region of $5 psf.
Check for illegal alterations when inspecting a property, as these will have to be removed. Shophouses in the historic districts are likely to cost more in maintenance because the conservation guidelines are stricter.
One owner of a shophouse in Chinatown said ruefully that the cost of repairing his roof would wipe out his profits for the month.
Lease tenure is one consideration, with freehold shophouses in the Central Business District being the most prized.
One Global Group senior analyst Mohan Sandrasegeran said freehold shophouses saw the highest percentage change in prices in the second quarter, with average unit values increasing 20.8 per cent to $5,076 psf compared with $4,201 psf for the same period a year ago.
Shophouses on 999-year leaseholds registered a price increase of 1.2 per cent in the second quarter to around $6,098 psf while 99-year leasehold shophouses were up a robust 7 per cent to $4,756 psf.
But investors need to take these gains with a pinch of salt. They capture the land area and not the built-up land area. This makes comparing prices across properties more complicated.
Huttons’ Mr Lim noted that leasehold shophouses are also performing well. For example, those in Duxton Road and Craig Road where fancy restaurants are located are 99-year leasehold properties yet able to command premium prices when sold.
Mr Lim added that investing in a shophouse is not as straightforward as a residential property.
Buyers are advised to seek confirmation on the use. For example, properties command better rentals if they can be used for F&B purposes but the use has to be confirmed on application.
Buyers may also want to check on how far the setback is from the road in case there is road widening that will affect the value of the shophouse.
Mr Lim said: “Buying a shophouse is similar to buying a landed property. While there are many advantages and there is the exclusivity factor, there are also important considerations as these can affect the value of your investment.”
Bottom line
The outlook for these shophouses is still positive given the limited supply. With the resumption in travel and other activities after the pandemic, commercial activities are improving and will support the value of the shophouses.
“Source:[Long list of factors driving shophouse buying spree] © Singapore Press Holdings Limited. Permission required for reproduction”
