The recent property cooling measures in Singapore has once again diverted the spotlight from the private residential market to the shophouse market.
Shophouse clusters can be classified into two main submarkets. Those in the central business district (CBD) are in areas such as Chinatown, Tanjong Pagar, Upper Circular Road and Boat Quay, while the rest are farther out in places like Kampong Glam, Little India, Balestier, Geylang, Joo Chiat and Tiong Bahru.
Most CBD shophouses are in historic districts and governed by strict conservation guidelines. These shophouses are usually deemed as core assets due to their central locations, historic value and stable cashflows. Unlike the private residential market, the commercial shophouse market has largely been spared from heavy acquisition taxes.
The commercial shophouse market has always been on the radar of private investors and family offices and they are once again in the spotlight in the light of the latest measures targeting the residential market.
Built between the 1840s and 1960s, shophouses are typically narrow, long terraced houses with varied facades, with floor sizes ranging from 1,000 to 1,500 square feet. Shophouses are often used by new start-ups, businesses in the creative industries and food & beverage outlets.
A combination of rarity, location and flexibility in use have increased the value of commercial shophouses over the years. Owning a commercial shophouse is akin to owning a small commercial building, where you own not only the building but the land title as well; what is also appealing is that the owner has full naming rights and the opportunity to leverage the shophouse frontage to design its façade; being located in a corporate development limits the possibility of profiling a business. The current stock of shophouses is tightly held by investors who are in no hurry to sell unless a sufficiently high premium is offered. Nonetheless, opportunistic deals such as adjoining units of shophouses occasionally come on the market as owners look to redistribute funds or cash out after a long investment cycle.
Improved market sentiment due to the strengthening economy has resulted in increased activity in the shophouse market. The island-wide shophouse volume for 2018 YTD stands at $975.9 million, close to the 2017 full-year volume of $1.03 billion. REALIS data shows the median price of shophouses across the island rose from $3,301 per square foot (psf) over land area in 2017 to $3,555 psf over land area in 2018 YTD. But the market is also aware of benchmark prices being set in popular locations like 77 Amoy Street sold for $25m (about $3,500 to $3,600 psf on GFA) and 75 Amoy Street sold for $18,000,999 (slightly over $3,900 psf on GFA). Rents-wise, the shophouse segment experienced a marginal increase from $4.88 psf/mo in 4Q2017 to $4.92 psf/mo in 2Q2018 but yields remain compressed.
Shophouse rents also experienced a marginal increase from $4.88 psf/mo in 4Q2017 to $4.92 psf/mo in 2Q2018. Shophouse yields remain compressed. Recently, it was reported that 52 Boat Quay, a shophouse with 999-year leasehold tenure, was transacted at a gross yield of close to 3%.
Traditionally owned by family businesses, shophouses in District 1 of Chinatown have seen a steady change of hands over the years. Prices in this district have now crossed $3,000 psf. Kampong Glam is on the cusp of transformational growth amidst the growing catchment of residential units with the completion of DUO, Citygate Residences and other surrounding developments completing in the next two to three years. Investors are shifting their attention to the shophouse belt in this historic district. Prices of these freehold shophouses are at a relatively more affordable range compared to the shophouses within district 1 and 2, with more room to grow as the district matures.
Interest in commercial shophouses is projected to grow further, as the office and retail markets improve further. Grade A office rents are expected to increase by 10 per cent this year, after rising 6.6 per cent in 2017.
A price gap between buyers and sellers has resulted in limited activity in the shophouse market.
In the residential districts of Emerald Hill and Cairnhill, owners have experimented with infusing art into the shophouses by adapting residences with private art galleries, a museum or as an entertainment venue to host friends and associates. The perception is that such properties are similar to collectible art pieces and will appreciate over time, owing to their scarcity. Those which are well restored are increasingly sought after by investors and homebuyers. Additionally, those with a larger floor area have the flexibility to explore a co-living concept with study, meeting rooms where occupiers can work and live within the same compound.
By Terry Wong, Senior Manager, Capital Markets, Cushman & Wakefield