Shophouses: Investing in Singapore's heritage

MY CHILDHOOD days were spent in a pre-war shophouse owned by my great-grandparents, who operated a traditional Chinese medical hall on the ground floor, and resided on the upper levels. I spent many a carefree afternoon playing with other children in the rear court, roaming along the five-foot way and hiding, up in the attic.

Even though this row of traditional shophouses along Upper Bukit Timah Road has made way for new developments, those memories remain vivid in my mind, fuelling my interest in this asset class.

Shophouses are an iconic part of Singapore's built environment, reflecting our multicultural influences in their architecture - from Malay roof eaves to decorative Peranakan tiles to the Art Deco facade popular in 1950s' architecture.

Although many were lost during Singapore's urban development, those that remain today have to adhere to strict conservation rules and guidelines for restoration and adaptive reuse in a bid to preserve them.

Investing in shophouses

The market for shophouses, though small due to their scarcity, is a lucrative one. They traditionally hold their value even during market downturns, and many investors are interested in owning a piece of heritage.

Based on URA Realis data, total transaction value of shophouses hit a historical high in Q1 2018, topping the previous market peak in Q1 2013. This was supported by one or two large transactions. For the rest of 2018, we expect demand for shophouses to remain stable.

In general, shophouses with a winning investment profile offer a prime location, prominent frontage, strong tenant profile and with approval for F&B, hospitality or retail use. Buyers are drawn to invest in shophouses for a number of reasons, including their heritage value, location or unique charm of a specific property or distinctive architecture. Upgraded shophouses, or those with potential for further enhancement also stand out to investors.

The typical gross entry yield of shophouses is in the range of 2 per cent to 3 per cent, depending on the tenure of the site.

Some buyers are willing to accept lower entry yields if they feel there is potential to rejuvenate the tenant mix or high possibility to value-add to the property. This could increase the current rents significantly leading to higher mid- to long-term yields.

Otherwise, buyers usually favour stronger-yielding assets that provide them with greater stability to hedge against rising interest rates. There are also investors who are attracted to the heritage value or nostalgia factor of such properties and are willing to enter at lower yields to own a piece of history.

Adjoining units of shophouses are prized assets as they offer higher space efficiency. Investors are attracted to the prospect of buying a row of shophouses as it is akin to buying a boutique building.

It also gives them the flexibility of exploring change of use of the property by leveraging the larger floor plates. That said, single shophouses remain attractive as their quantums are more palatable.

Investor profile

Ultra-high net worth individuals, who take mid- to long-term views on preserving their capital, are attracted to shophouses for their future capital appreciation. We also see steady interest from family offices or small and medium-sized businesses who buy shophouses for their own occupation to hedge against volatility in office rental cycles.

With the positive rental outlook and tapering office supply pipeline, these businesses invest in shophouses as a strategy to lock in their long-term operational costs.

Those who are drawn to the shophouse market tend to be seasoned investors who like the potential for capital appreciation and the yield play offered by this asset class.

While those who traditionally invest in residential properties may consider alternative asset classes, we do not expect a strong surge in demand for shophouses simply because of the higher additional buyer's stamp duty (ABSD) rates on residential properties which took effect on July 6, 2018.

Savvy investors will base their decisions on a host of factors such as the office rental market, interest-rate environment and macroeconomic conditions.

CBRE foresees that demand for shophouses as well as strata offices will remain consistent in the next two to three years against the backdrop of tight office supply and rising rents.

Recent trends

In general, prices of shophouses have remained stable, with a few stand-out assets traded at higher price points. In recent years, there are more shophouses put up for sale by families who have owned these properties for generations and are looking to divest and redistribute the funds.

Most of these families had used the premises either as residences or offices. After moving or selling the business, they would be looking to make better use of their funds by cashing out as they no longer need the premises.

There also appears to be a major shift in tenant profiles in shophouses, with strong demand from established F&B tenants and businesses keen to explore non-conventional office layouts and who like the feel of being in a low-rise heritage building. Owner occupiers also like the flexibility of being able to operate their businesses 24/7 out of a shophouse as well as the convenience of surrounding amenities.

Shophouses in the CBD continue to remain popular with buyers due to their prime locations. That said, there is growing interest for shophouses in city-fringe locations such as Jalan Besar, Kampong Glam, Little India and in the east, specifically along East Coast Road and Joo Chiat Road.

Some of these locations are seen to be under the radar and could present significant growth potential. Many of them have under-utilised plot ratios with potential to build a rear extension.

This provides leverage to increase the gross floor area and flexibility to configure the floor space to suit the buyer's needs.

Such units are highly sought-after as buyers believe they can "perform their magic" and exercise creativity in the restoration process, incorporating both old and new elements into the property.

As scarce and highly prized cultural icons in Singapore, the biggest draw of shophouses as an asset class is that they will continue to be popular. Investors are also attracted by the intrinsic value in buying into a piece of heritage; where remnants of a bygone era or a chequered past are etched in stone.

Sammi Lim is director of capital markets at CBRE.

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