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Overshadowed shophouse sector set to ride on office and retail revival

With the office and retail markets set for recovery this year, shophouses are poised to reap the benefit from rental growth.

Apr 15, 2018

Christine Li


The private residential market enjoyed the limelight last year with sales increasing and prices bottoming out. The revival of the en bloc market also fuelled optimism as developers shored up land banks in anticipation of price rises amid a declining number of unsold inventory.

Although the residential market looks promising, we believe there are also exciting opportunities in the shophouse segment in the coming years.

Driven by demand from high-net-worth individuals, family offices and boutique family funds, shophouse transaction values and volumes rose last year. With recovery on the cards for both the office and retail markets this year, shophouses are well poised to reap the benefit from the rental growth in these sectors.

WHAT ARE SHOPHOUSES?

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.

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 shophouse market has largely been spared from heavy acquisition taxes.



SHOPHOUSE DEMAND ON THE RISE

Shophouse demand picked up last year with 148 deals concluded, up 38.4 per cent on 2016. Nonetheless, this remains substantially below volumes seen between 2010 and 2012, when on average, around 280 units were transacted annually.

A price gap between buyers and sellers has resulted in limited activity in the shophouse market. 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.

Shophouse median prices peaked at $3,824 psf on land in 2014 and have fallen 13.7 per cent to $3,301 psf last year. The price fall can be attributed to a pull-back in demand after the implementation of the Total Debt Servicing Ratio, which raised affordability concerns.

The expected recovery in the office and retail markets will further bolster the shophouse sector, given its flexibility of use. Grade A office rents are expected to increase by 10 per cent this year, after rising 6.6 per cent in 2017.

Though the fast expansion of co-working space in the CBD may siphon off some office demand from the shophouse market, small businesses which prefer the privacy and visible frontage may still be attracted to this segment as an alternative to office buildings.

Furthermore, with improving retail sales and higher tourist arrivals amid a more positive economic outlook, retail rent is poised to stabilise and recover this year. This will bode well for shophouses, of which prices could reach greater heights in the years to come.

•The writer is the head of research at property consultancy firm Cushman & Wakefield Singapore.