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THE number and value of shophouse transactions so far this year is roughly half that of last year, as demand has been hit by tightened availability of loans, a compression of shophouse yields and investor interest being diverted to overseas properties.
Prices in choice locations in the Central Business District, however, are still holding given the limited supply and the profile of owners, mostly deep-pocketed investors that are happy to continue renting out their premises if they cannot reap significant capital appreciation.
CBRE's analysis of URA Realis data shows that 101 caveats have been lodged for shophouse transactions so far this year totalling S$548 million, down from 206 caveats adding up to S$1.27 billion in 2013.
In the first half of last year, S$922 million worth of shophouses changed hands; however the onset of the total debt servicing ratio (TDSR) framework in late-June 2013 has caused some buyers to hold back their purchase plans.
Shophouse sales slipped to S$347 milion in the second half of 2013 before easing further to S$277 million in H1 this year and S$271 million so far this half. However, these figures do not include deals involving sales of shares in special purpose vehicle companies that own shophouse assets, since caveats are typically not lodged for such deals. An example would be a S$50 million sale of a row of five shophouses in the CBD this year.
A shophouse in Boat Quay is understood to have been sold recently for S$9.5 million - which has not been caveated.
Owners who want to sell shophouses may have had to clip their pricing expectations, say property agents, but actual transacted prices have been resilient in districts 1 and 2, where the choicest conservation shophouse stock is located, such as Telok Ayer Street, Club Street, Amoy Street, Chinatown, Duxton Hill and Tanjong Pagar.
Sammi Lim, CBRE associate director, investment properties, said: "Despite the decrease in the number of transactions compared with pre-TDSR, shophouse prices have remained resilient and in fact we are still observing an overall increase in capital values in choice locations. Current transacted prices in districts 1 and 2 in the CBD are in the range of S$2,200 psf to S$2,500 psf of gross floor area (GFA) on average - depending on land tenure - compared with S$1,800-2,200 psf around May or June last year before TDSR."
Knight Frank executive director, investment, Mary Sai also said that transacted prices in Telok Ayer and Chinatown locations are around S$2,500 psf of GFA - surpassing the S$2,000-2,100 psf in Q1 last year. "Prices of conservation shophouses in the Central Area and Little India have held firm - defying our expectations of a price softening in the aftermath of TDSR and the Little India riot last December.
"However, shophouse prices outside the Central Area in places such as Geylang, East Coast and Upper Serangoon have softened about 5-10 per cent (post-TDSR)."
Simon Monteiro, director at Historical Land, a boutique property agency specialising in shophouses, observed that "those who are selling shophouses currently are the ones looking to divest a few small shophouses in various locations and replacing them with a bigger investment, for example, a row of shophouses; or some investors who just want to cash out now for retirement reasons".
Even after the TDSR rollout, a few investors have managed to realise attractive gains from shophouses. For example, a property in Peck Seah Street was acquired in March last year for S$12.2 million and resold four months later (before the completion of the sale) for S$16.8 million before being flipped again in October the same year for S$20.5 million.
Such cases are rare though. Most of those making sizeable gains have longer holding periods. For instance, a property on Tras Street that was sold two months ago for S$11.15 million had previously changed hands for S$7.1 million in May 2012 and prior to that for S$5 million in July 2010, according to caveats data.
Mr Monteiro notes that most shophouses are held by ultra high net worth (UHNW) owners with very good holding power. "For them to sell, the values must double or more."
Agreeing, Knight Frank executive director (investment) Mary Sai, said: "There are owners telling us: 'If I don't get my price, I'll just rent it out."
Yields on shophouses have declined as rental increases have not kept pace with the jumps in capital values.
"Net yields today are around 2-2.5 per cent on average on commercial shophouses in Districts 1 and 2," said Ms Sai. "In Q1 2013, they used to be 3-3.5 per cent."
Mr Monteiro said that current sub-3 per cent yields are "rather unattractive to investors". "If you are a serious seller, you may have to lower your price expectations to allow the yield to the buyer to be 3-3.5 per cent. Only then will you see interest."
Industry players note that buyers are also factoring in expected increases in borrowing costs.
Ms Sai said that a common strategy by landlords is to lease out the ground floor to a food and beverage (F&B) outlet or as a showroom, and find office tenants for the uppper floors.
The increase in Grade A office rents has helped to prop up office rents in shophouses.
"Landlords try to maximise their rental returns by having one tenant per floor to avoid having to give a bulk discount to a single tenant occupying the whole building," Ms Sai added.
Investors that acquired shophouses more than five years ago would be able to comfortably service their mortgage from rental collection as their purchase price would be much lower than current values, she said. "But those who bought 1-2 years ago, I think, to their horror, some of them find they cannot push up the rental much if the rent at the point when they bought their property was already quite peakish. If they trigger any further increases, their tenants may not find it sustainable to continue business at the location."
On the other hand, Zain Fancy, founder and director of Clifton Real Estate, which owns more than a dozen shophouses in Singapore, pointed out that it is still possible to spot good investment opportunities. "A lot of shophouses are under-rented; their owners have not spruced up the properties in years. So there is a value proposition here.
"By renovating properties, rents go up and hence prices increase. From the tenants' perspective, renting space in a shophouse can be attractive. For instance, we're leasing ground floor retail space at Pagoda Street, a location with very high foot traffic, at S$17-18 psf a month - a discount to the S$35-40 psf for ground floor space in an Orchard Road mall.
"We have leased an upper-level office floor (of about 1,200 sq ft) in one of our CBD shophouses at S$8 psf, so that's about S$10,000 monthly rent - and they get their own toilet and pantry. The occupier is new to Singapore and was previously operating out of a serviced office, paying about S$5,000 a month for a space of about 100 sq ft."
Ms Sai too noted that the average shophouse office rent in the CBD of about S$6-6.50 psf a month is lower than the double-digit rents in Grade A office buildings.
Street-level F&B space has been the key driver for growth of shophouse rents, noted Mr Monteiro. "There has been an influx of cafes and restaurants in conservation shophouses in the CBD for example in the Duxton, Keong Saik and Gemmill Lane locales, for instance, in the past four or five years."
Currently, approval from the Urban Redevelopment Authority (URA) for "eating houses", the planning term for F&B use, is granted on Temporary Permission of one to three years.
However, Mr Monteiro cautions that "that there may come a time when, to maintain a mix of trades in the conservation districts, URA may limit approvals for F&B use in shophouses even in the CBD". This could potentially cause a reversal of interest in commmercial shophouses, he added.
Another reason for thinning of shophouse transactions is that some property investors have been moving away from the Singapore scene in search of higher yields, say agents.
Still, Singapore shophouses have their attractions. "Funds and UHNW investors, mainly foreigners, are among the buyers," said Mr Monteiro. Investors switching from the residential segment, which has been hit by cooling measures, also find commercial shophouses an attractive alternative. There are no restrictions on foreign ownership of shophouses on sites fully zoned commercial.
Ms Sai points out that despite the already sharp price appreciation, a shophouse investor paying, say, S$2,500 to S$2,800 psf on GFA in the CBD will feel comforted knowing that it is still cheaper than the S$3,000-4,000 psf on average for new strata retail units in city-fringe locations and at least S$3,000 psf for new strata offices in the financial district.
Agents say that prices of shophouses in districts 1 and 2 will continue to be supported by the fact that they are mostly well located - in the business district and near an MRT station.
There is also an increase in demand from end-users looking to buy and occupy a shophouse for their own business instead of leasing it out, said CBRE's Ms Lim. "These properties are a limited-edition asset class as they are designed with a distinctive facade, possess a unique charm and are steeped in history. Shophouses will continue to be highly sought after. Transaction values and volumes are projected to increase about 10 per cent in 2015."
Ms Sai too expects the pricing outlook for districts 1 and 2 shophouses to remain resilient next year. "But other areas including Little India (District 8) and non-central locations may succumb to the impact of TDSR and the economic situation."