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Prime heritage play
A NICHE market often bypassed by real estate investors due to its specific guidelines on use, the prime conservation shophouse market in Singapore's city core has been buzzing with activity of late. Shophouses in the CBD and Chinatown (the old postal districts 1 and 2) have seen increased transaction activity, along with price appreciation since the second half of last year. These properties, costing anywhere from S$7 million to S$25 million each and housing tenants ranging from hipster bars to au courant restaurants to boutique offices, are sometimes compared to Good Class Bungalows (GCBs) for their scarcity value.
But there is a key difference between the two property segments which also explains their appeal: whereas foreigners are not allowed to buy landed homes in GCB Areas, they may acquire shophouses on sites that are fully zoned commercial. This gives them ownership of the land title, and therein lies the attraction of such shophouses to foreigners.
One investor also tells BT he prefers to park his money in commercial shophouses instead of residential properties, as "yields are higher; moreover there is no additional buyer's stamp duty, it is easier to get financing and no stamp duty payable on exiting the investment".
The heightened activity this year is partly led by supply.
A substantial portfolio of shophouses in the Boat Quay/Circular Road and New Bridge Road areas was put on the market by the family of the late Teochew businessman and philanthropist Lee Wee Nam.
The nine shophouses and one commercial building were snapped up in March for S$82.5 million by homegrown property investment group 8M Real Estate.
Positive sentiment from the overall improvement in the property market and more sanguine economic outlook has also spilled over to the shophouse segment; investors are being drawn by prospects of further price appreciation.
"Five years ago, freehold/999-year leasehold shophouses in Districts 1 & 2 (D1 and D2) were typically trading between S$2,000 per square foot (psf) and S$2,500 psf on built-up area. This has since increased to about S$2,750-S$3,250 psf in late 2017 till now," says Clemence Lee, associate director of capital markets at JLL.
D1 includes areas such as Boat Quay, Club Street, Amoy Street, Telok Ayer Street, Temple Street and Pagoda Street. D2 includes Bukit Pasoh Road, Jiak Chuan Road, New Bridge Road, Keong Saik Road and Teck Lim Road.
Along Tanjong Pagar Road, in District 2, the steady price rise in the past couple of years is apparent in three transactions along the same stretch: from S$2,166 psf for Nos 15-23 in 2016, to S$2,400 psf for Nos 29 and 31 in 2017, to S$2,466 psf for Nos 25 and 27 earlier this year. This translates to a total price gain of nearly 14 per cent over two years. All the shophouses in these three deals are on land with the same tenure: 99 years starting December 1994.
The big owners of conservation shophouses in Districts 1 and 2 include homegrown outfits 8M and Clifton Partners, SilkRoad Property Partners, Hongkonger Tony Chen of Arcc Holdings, Spanish tycoon Ricardo Peralta and Stanley Quek of Region Development.
8M, whose shareholders comprise Ashish Manchharam and institutional investors, owns more than 40 shophouses in Districts 1 and 2 worth about S$500 million - bolstered by its recent S$82.5 million acquisition. Set up in 2014, 8M has so far not sold any of its properties.
Mr Chen, who owns 60 conservation shophouses in Chinatown, Kampong Glam and Little India, is a long-term investor. "We are passionate about heritage shophouses. Owning a conservation shophouse is like owning a piece of unique artwork sitting on land. It has to be preserved," says the Singapore PR who has been living here for 30 years.
Clifton Partners and its affiliates currently own 14 shophouses in D1 and D2 - with a combined value of about S$250 million.
"We look for conservation units with potential for value adding and restoring to their original condition, boosting rentability in the process," says Zain Fancy, who owns Clifton. He was formerly Morgan Stanley's Asia real estate investment head.
In the past five years, the group and its affiliates have sold 15 conservation shophouses for close to S$160 million.
"We more than doubled our investment. The lowest pretax internal rate of return for a monetised shophouse was in the low-double digits per annum," says Mr Fancy.
Sammi Lim, director, capital markets, CBRE, says: "The investment outlook for conservation shophouses remains healthy. URA's conservation framework and guidelines will ensure that the capital values of these assets hold steady.
"Their scarcity and sound real estate fundamentals have bolstered investors' confidence that these heritage assets are prized and worthy of long-term investment."
Yet, agents say yields for commercial shophouses in the CBD have fallen over the past year as rental increases have not kept pace with price gains. For freehold/999-year leasehold shophouses, gross yields have eased from 3 per cent a year ago to 2.5-2.7 per cent. For 99-year leasehold shophouses, yields have slipped from 3.5 per cent to 3 per cent, said Mr Lee of JLL.
Rents for food and beverage (F&B) outlets on the ground floor of shophouses in D1 and D2 have remained flat in the past year, while rents for office space (typically on the upper levels of shophouses) have inched up a few per cent.
Prime street frontage
Perhaps for this very reason, shophouses continue to attract tenants.
According to JLL's data, it costs about 20-30 per cent less to rent ground-floor F&B space in shophouses in D1 and D2 compared with leasing the same amount of space in a nearby mall or mixed-development. "This is partly because there is no gross turnover (GTO) rent component in shophouse leases; tenants pay only a fixed rental," says the property consulting group's national director of retail Gary Nonis.
An F&B tenant can expect to pay S$10,000 to S$48,000 in monthly rental for ground-floor shophouse space of 800 to 4,000 sq ft (or about S$12 psf on average) in D1 and D2 - against S$14,000 to S$65,000 (including the GTO rent component) in a mixed development in the financial district.
The prime street frontage and flexibility of operating hours also draw tenants, says Knight Frank executive director Mary Sai. "There is also more flexibility on the way you do your layout and how you dress up the shop - unlike in a shopping mall. For a shophouse, although you have to follow URA guidelines, your facade can be quite different; you don't need to be consistent with your neighbour."
Mr Nonis points to other reasons why it makes good sense for restaurants to be in shophouses: "While F&B operators in a mixed development often rely on a captive crowd (office workers in the building) and patrons from nearby properties, the downside of operating within a mixed development, specifically within the CBD, is that it is usually a weekday trade.
"On the other hand, shophouse clusters attract not only those who work in nearby developments but also tourists."
Mr Lee says that malls draw the usual F&B tenants and tend to be more homogenised; conservation shophouses make for more experiential, destination lifestyle offerings in a heritage setting. "The younger generation likes the idea of finding a hidden restaurant or bar."
Tenants looking for non-conventional office space - at rentals much lower than prime office buildings - have also flocked to shophouses. Office tenants leasing space on the upper floors of shophouses in the financial district can expect to pay about S$5-8 psf a month for say 1,000 to 5,000 sq ft, depending on the quality of the shophouse and its location - lower than the S$10-12 psf for similar-sized space in prime Grade A office buildings, says JLL's regional director of markets Tahlil Khan.
"Shophouses tend to draw occupiers that do not require the conventional corporate image of being in an office tower - including media and PR/advertising firms, smaller law firms, tech companies and business incubators," he added.
Co-working space operator The Working Capitol is one that has taken to shophouses in a big way. It signed master leases of longer than the standard three years at 1 and 3 Keong Saik Road and for the second-level space at the neighbouring 120 and 122 Neil Road, giving it a total gross floor (GFA) area of 40,000 sq ft - enough to pack in 400 seats (from hotdesking to dedicated offices) catering to solo-preneurs to MNCs, an events venue that can seat 200 people, a cafe and four restaurants.
"Over here, our operation is so synonymous with the neighbourhood; the shophouse architecture and street landscape are such an integral part of our identity. It evokes a more emotional response compared with a glass office tower in the CBD," says The Working Capitol chief executive and co-founder, Benjamin Gattie.
The group has also leased all of 89 Neil Road which will give it an additional 25,000 sq ft GFA (for a further 300 seats) plus a 7,000 sq ft roof terrace; and has begun to operate in this space in phases since last month.
Apart from interesting restaurants and trendy offices, a row of adjoining shophouses also makes for a unique boutique hotel experience. Garcha Hotels acquired 28 conservation shophouses in three locations in 2012-2013 for a total S$148 million and spent a significant sum restoring them into three luxury hotels. Two are already operating: The Vagabond Club - a Tribute Portfolio Hotel in Syed Alwi Road and Six Senses Duxton. The third, Six Senses Maxwell, is slated to open later this year.
"For all three properties, on average, it has taken us about a year longer than we originally anticipated to restore the properties; they were full-gut renovations," says Satinder Garcha, chairman and CEO of the group.
"The biggest challenge is working within the conservation guidelines. The costs are generally higher; it is a lot more expensive to restore per square foot within a shophouse than to just build a new building - because there is a lot more complexity, and other than that, in the case of two of our three properties, putting it to a use that it was not originally built for. It is like working with a jigsaw puzzle. But then it is very rewarding to see it turn out actually." Mr Garcha notes that conservation shophouse prices in Singapore have gone up significantly in the past five to seven years because of the scarcity value. "And because of the heritage value, the appeal of these properties continually grows upon people. And I don't see that changing. I still see conservation shophouses as good investments for the long term."
There are about 6,760 shophouses in Singapore gazetted for conservation. They make up the bulk of the nearly 7,200 buildings gazetted for conservation.
"This is no mean feat for a small island and land-scarce city-state with competing land use needs. It is a testament to the importance we place on our built heritage and a holistic urban planning approach," says Teh Lai Yip, senior director, conservation, at the Urban Redevelopment Authority (URA). She was part of the team led by by Koh-Lim Wen Gin in the 1980s that championed the conservation cause. Mrs Koh-Lim retired as chief planner and deputy chief executive of URA in December 2008.
"Many other cities envy us," says Mrs Koh-Lim. "We are so small, with limited land and yet we can do conservation in a comprehensive way and there's enough critical mass and presence."
Nearly half or 3,320 of the 6,760 conservation shophouses are in the Historic Districts of Boat Quay, Chinatown, Kampong Glam and Little India. "Together as a district or as a street, I think these shophouses enhance the physical environment, the streetscape. Their presence enhances the built environment." For instance, the low-rise shophouses along Boat Quay provide 'urban windows' for the high-rise office buildings behind.
"So for the city as a whole, there is all this porosity, so the built environment as a whole is enhanced. Imagine if all the areas where you see conservation shophouses today were high-rise; there would be no breathing space," says Mrs Koh-Lim.
Architectural historian and anthropologist Julian Davison says: "The shophouse is very much a cultural signifier for Singapore. "A large part of Singapore's identity is wrapped up in its history as a port city in the late 19th and early 20th centuries and the ubiquitous shophouse defined the urban fabric of the city in that period and continued to do so until the early days of independence."
Post-independence, despite the pressures for redeveloping the city, the authorities managed to safeguard some precincts of shophouses in the Historic Districts.
Says Knight Frank's Ms Sai: "Shophouses remind us of our historic background, the immigrants who came here and wanted to have their accommodation and business in the same premises." Ms Sai herself grew up in a shophouse.
Her family used to run a coffeeshop downstairs and lived upstairs. That property was part of a row of shophouses right at the end of Tanjong Pagar and Anson Road - which was later torn down to make way for the container port.
"It was fun growing up in a shophouse. Amenities were just a few doors away. You had a barber shop, a prawn noodle shop, provision shop; there was even a wet market selling pork and vegetables within a shophouse. If you lived next to a pet shop selling birds, you would hear parrots repeating orders being shouted at the nearby coffeeshop in Hainanese."
Simon Monteiro, associate director of heritage buildings at Savills Singapore, who has been selling shophouses for nearly 25 years, says: "A conserved shophouse is like a time capsule. Each shophouse that has been gazetted for conservation brings you back to that era, what the architecture was at that time, the story of how our forefathers lived..."
Some feel however, that certain areas have lost some of that hallowed charm.
Mr Monteiro suggests it would be timely for the authorities to take a closer look at the tenant mix in certain conservation areas. "Today, there are too many Korean restaurants in Tanjong Pagar; it's like Little Korea."
"Perhaps, URA should adopt some sort of quotas on tenant mix in the Historic Districts to ensure they reflect the heritage of the place. I don't think we want tourists to label our heritage area as Korean Town.
"URA should research to create a balanced tenant mix, and educate owners that the objective of conservation is to show to the world our roots through these shophouses."
In a similar vein, Mrs Koh-Lim says: "For each of these Historic Districts, URA needs to play a more pro-active role in the place management; it needs to review the land-use control instead of just stating a broad category like 'commercial'.
"Perhaps it is timely to review and ask ourselves whether we should narrow down the kinds of trades to allow in these premises. After so many decades now, we should review and retake a new position, if you ask me. If you have the will, this can be done.
"You can have a five-year plan; it may not be feasible to implement things immediately, but gradually, you could encourage the owners and guide them back to retain some of the charm and character of the place.
"But it cannot be back to the 'good old days' for sure because some trades have vanished. Only the viable traditional trades that are still in demand - like medical halls, shops selling herbs, dried goods, traditional confectionery shops, etc - can afford the rentals."