Fewer transactions, but firmer prices as CBD shophouses hold sway among investors

Apr 4, 2024

SALES volumes are down but prices are firm in what is the creme de la creme of the commercial shophouse market – Central Business District (CBD) shophouses.

The average transacted unit price on land area of CBD shophouses climbed by nearly 18 per cent to S$11,098 per square foot (psf) in 2023 from S$9,434 psf in 2022, said PropNex Realty’s head of research and content, Wong Siew Ying.

Shophouses in the CBD refer to those that are located in Districts 1 and 2, which include the Downtown Core areas of Raffles Place, Boat Quay, Tanjong Pagar, Neil Road, Kreta Ayer and Chinatown.

According to ERA Singapore’s managing director of capital markets and investment sales Steven Tan, prices of CBD freehold/999-year shophouses have more than doubled between Q1 2020 and Q1 2024, which has led some investors towards leasehold shophouses, as they offer comparatively better yields.

The average yield for leasehold shophouses, depending on lease balance and the approved use, is about 2.5 to 3.5 per cent. For freehold shophouses, yields are around 1 to 2 per cent, said Yap Hui Yee, executive director of investment sales and capital markets at Savills Singapore.

The price difference between 99-year leasehold and freehold/999-year shophouses in the CBD can be quite substantial.

Clemence Lee, CBRE’s executive director of capital markets, noted that the 99-year leasehold shophouse at 38 and 40 South Bridge Road was transacted for S$13.58 million in January 2023, achieving S$5,175 psf per land area; while the nearby 999-year leasehold 43 South Bridge Road was sold at S$10.5 million or S$9,041 psf per land area the following month.

“Assuming rent is not too different given the proximity, the difference in yield could be 50 to 70 per cent,” he said.



While shophouses can be sold individually, those who are sold collectively do command a price premium of some 10 per cent, according to PropNex’s Wong, as buyers are able to amalgamate them to provide a bigger and more regular floor plate that is easier to use.

Knight Frank’s executive director for capital markets Mary Sai, and Leonard Tay, the firm’s head of research, told The Business Times that investors are keen on both leasehold and freehold shophouse properties.

“From Q1 2023 to Q1 2024, over a 15-month period, there were 11 freehold and 10 leasehold shophouse transactions, showing that the spread among the different tenures has been fairly even.”

“The main overarching factor in any shophouse purchase remains location, and for a prime location in a gentrified district, wealthy investors are willing to impute a substantial premium irrespective of tenure,” said Knight Frank.

Concurring, Savills’ Yap said that “investors generally do not look at the yield, they look at wealth preservation and capital appreciation”.

Lease decay for 99-year shophouses is not a major concern among buyers, according to market watchers.

ERA’s Tan said: “Shophouses are unlike residential properties which use the Central Provident Fund (CPF) for mortgage payments. (Thus,) the restrictions on the use of CPF for properties with shortening leases do not apply to commercial shophouses.”

Furthermore, there are also no restrictions on foreign ownership for commercial shophouses and these are not subjected to Additional Buyer’s Stamp Duty or Seller’s Stamp Duty, Tan added.

Analysts also shared that leases may also get a fresh top-up, on a case-by-case basis, by paying a land premium to the authorities.

Furthermore, it is likely that the property value will get a boost once its lease has been renewed – offering price upside potential to the buyer.

There are currently about 6,500 shophouses islandwide.

With their limited supply, and given the conservation status and heritage value of some shophouses, it is unlikely for the government to allow the lease to expire without renewal and take the land back for redevelopment, PropNex’s Wong explained.

Wong further added that based on URA’s Realis data, there are no sustained downward price trends in terms of transacted average unit price on land area that would suggest the negative impact of declining lease for 99-year shophouses.

In the market today, a shophouse takes an average of about six to eight weeks to secure a tenant.

Rentals have risen by 30 to 33 per cent since bouncing back from the pandemic, said CBRE’s Lee.

Challenges such as manpower shortage, rising operational costs, including utilities, materials, labour, and more competition have resulted in more attrition among tenants, Lee said.

“It is more difficult to find tenants and rents appear to have stabilised,” he observed.

Savills’ executive director for research and consultancy Alan Cheong noted that the average rents for CBD shophouses could range from S$8 psf per month to the mid-high teens for ground floor units. For the upper floors, the rents could range from S$6 to S$7 psf for a variety of uses.

Cheong noted that CBD shophouses are attractive to those in advertising, fund management, family offices, private equity, fitness, aesthetic clinics, bars and bistros and fine dining. Boutique hotels and co-living operators may also find conservation shophouses a lure for guests and clients.

Looking ahead, CBRE’s Lee said most shophouse owners have a long-term investment horizon. He believes that the value of shophouses will continue to rise due to its scarcity.

However, Lee observed that with the buyers from China gone after the anti-money laundering saga, it would be difficult for shophouse transactions to continue trading at record prices unless rents were to increase substantially to improve the returns.

There are also many freehold shophouses being put up for sale by liquidators, according to CBRE.

Lee said: “We believe that prices, based on gross floor area for CBD freehold shophouses, will stabilise between S$3,500 and S$4,500 psf while 99-year leasehold shophouses will trade between S$2,500 and S$3,300 psf depending on the locations and specifications of the shophouses after the supply released by the liquidators has been absorbed by the market.”

Similarly, transaction volume will start picking up again in 2024 once these shophouses have been traded and prices have stabilised, Lee added.

The shophouse market has seen transaction activity slowing since 2021. In that year, there were 69 deals, and this dropped to 28 transactions in 2022, and 18 sales last year.

For the first two months of 2024, there were only two deals inked so far, Urban Redevelopment Authority’s Realis data as at Mar 19 showed.

https://www.businesstimes.com.sg/pro...mong-investors