Shophouse rentals extend gains in Q3 as landlords price up on strong demand

DEMAND for shophouse space is hot and on the rise, with tenants already being priced out as rents continue to climb in the third quarter of 2022.

Fusion restaurant Beng Who Cooks will be rolling down its Neil Road shutters for good, owner Jason Chua announced last month, after the landlord raised rent for his renewal by nearly 60 per cent to S$13,000 from S$8,200 a month, The Business Times (BT) understands.

The space has already been let to a new tenant, said to be a cocktail bar, at the higher rental.

A check on property listings site Commercial Guru found ground floor units on Neil Road listed for rent at up to S$15,000, or S$11.86 per square foot (sq ft) per month.

Other ground floor tenants along Neil Road that BT spoke to reported a mixed bag of rental rates, ranging from S$5,000 at a Japanese eatery to S$13,000 at a Korean restaurant.

According to a report issued by Propnex on Wednesday (Oct 26), the median rental for shophouses stood at S$5.65 psf per month in Q3, up from S$5.50 psf per month in Q2. The Q3 median rental is also 15.3 per cent higher year on year, an ERA report noted.

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While shophouse space continues to be in demand going by the stable volume of rental transactions, total rent values appear to be falling.

Propnex data showed that in Q3, 904 rental contracts were signed, taking the nine-month tally to 2,679 contracts, up about 1 per cent from the 2,653 contracts signed in the same period last year.

Total rent values signed during the third quarter came to S$8.88 million, 6.8 per cent higher quarter on quarter and the highest in over three years. Yet, the Q3 tally took total rental value for January to September 2022 to S$21.9 million, some 14 per cent lower than the S$25.4 million signed in the year-ago period.

Singapore’s border reopening and tourism rebound has benefitted many food and beverage (F&B) and retail businesses operating in shophouses in tourist hotspots, industry watchers believe.

Tricia Song, head of research, South-east Asia, CBRE, said that shophouse spaces within the central areas are also increasingly appealing to F&B and retailers for its “quaint and charming” characteristics, resulting in higher demand for ground floor shophouse spaces in the CBD.

Besides commercial and F&B operators, demand for shophouse spaces has also been driven up by hotel and co-living operators, Propnex researchers added.

“A number of them have been consistently acquiring shophouses in the city and fringe areas to capitalise on the burgeoning hospitality sector and brisk residential rental market.”

Propnex pointed to Singapore Tourism Board data showing the average hotel room rate hitting a 10-year high of S$256 per night as of July, while residential home rentals continue to climb. It sees demand for shophouse rental properties including co-living spaces continuing to grow further in the medium term.

Given the buoyant demand for shophouse space, the rental space has now turned into a landlord’s market, where landlords find themselves with more negotiating power to raise rents.

CBRE’s Song believes that selected shophouse rentals would continue to go up in the near term, especially as rising interest rates are driving up cost of capital for landlords.

“As the cost of capital increases, shophouse owners will have to increase rents to cover the higher mortgage payments. This will also cause rents to increase moving forward,” said Song.

Further, given the rising rentals, analysts observed that there were more shophouse owners who are choosing to raise their rents, instead of selling their assets. This contributed to a drop in the number of shophouses available for sale in Q3, with just 35 transactions recorded in the quarter according to a report from ERA published on Thursday. Compared with sale volumes last year, this represents a fall in volume by nearly half.

Given the limited stock of shophouses in Singapore, investors looking to hedge against inflation and to preserve wealth are unlikely to be deterred by rising mortgage rates, said ERA’s researchers.

Rents for ground floor shophouse space close to the CBD have been trending up to S$13-S$15 psf, and some resistance could set in as operating costs have escalated, said Sulian Tan-Wijaya, Savills executive director, retail & lifestyle.

“However, this does not mean that shophouses will lose their lustre as an asset class. Conservation shophouses are likened to an art piece where yields are not so much of a consideration among investors,” said Tan-Wijaya.