June 22, 2008

Buyers bidding up prices of shophouses

While sales have slumped this year after a strong run, units costing over $5m are attracting strong demand

By Joyce Teo, Property Correspondent

SHOPHOUSES have been a popular choice for investors, as well as occupiers who sought to avoid the hefty office- rent increases that were so rampant last year.

But after a spectacular year, shophouse sales have sunk this year due to the cautious mood in the property market.

Nevertheless, new figures released by CBRE Research show that more buyers are snapping up shophouses that cost more than $5 million each.

So far this year, $98.58 million worth of properties have changed hands, compared with just above $1 billion worth for the whole of last year.

And since January, deals for shophouses worth more than $5 million each have reached 86 per cent of total sales, or $83.75 million, compared with 64 per cent of total sales or $694 million last year.

'Investors and business owners still see shophouse units as an alternative to alleviate the current supply crunch in the office market,' said CBRE Research's executive director, Mr Li Hiaw Ho.

In the past two years, demand for shophouses has shot up, raising the value of such properties, he said.

For instance, in January this year, a European fund paid $6.88 million for four shophouses in Club Street.

The seller had bought them for $3.6 million in May last year.

But not all sellers can make such gains. A lot still depends on location.

Popular with smaller set-ups

Shophouses located near or within the Central Business District (CBD) are highly sought-after as they are usually located near MRT stations, said CBRE Research.

Last month, a fairly small 1,171 sq ft shophouse in Boat Quay was sold for a hefty $5.25 million. Earlier this month, a 1,455 sq ft shophouse in Bukit Pasoh Road went for $6.2 million.

There are cheaper options.

In Tanjong Katong Road, a few shophouses spread over 8,697 sq ft were sold for $8.2 million in March, according to CBRE data.

These same units were previously transacted in July last year for $7.72 million.

'Shophouses tend to attract smaller set-ups, mainly because the shophouses are usually small,' said Mr Li.

'Some hedge funds and investment-related companies also find the units unique, similar to the townhouses which you can find in London,' he added.

Tenants for shophouses in prime locations, such as Amoy Street and Telok Ayer Street, are mostly hedge funds, law firms, architectural firms, interior designing firms and art design schools such as Sotheby's Art School, said CBRE Research.

Attractive rental yields

Rental yields for shophouses typically range from 4 to 6 per cent, above the usual residential ones of 3 to 4 per cent, said Colliers International's deputy managing director for agency & business services, Ms Grace Ng.

For owner-occupiers, shophouses may make good investments as they could be paying less in mortgage payments every month compared to monthly rent in a prime office building, property consultants said.

Still, asking rents for shophouses in prime locations have jumped by at least 40 per cent or more in the past year, said Mr Li.

Current rates in the CBD such as Telok Ayer Street are as high as $8 per sq ft (psf) to $8.50 psf a month, up from $5 psf to $6 psf a month a year ago.

This compares with current average rents of around $16 psf for prime office building space.

'Even with rising values and rents, shophouses are still attractive to tenants because of the current office supply crunch,' said Mr Li.

For investors, shophouses may prove to be a better investment than a strata office unit, which gives a typical yield of 4 to 4.5 per cent, he said.

Colliers International is marketing a two-storey corner shophouse in Peck Seah Street, off Tanjong Pagar Road, at an indicative price of $6.1 million. At this price, the buyer of the tenanted property will get a rental yield of 5 per cent.

CBRE is selling a four-storey shophouse in Tanjong Pagar Road. The two existing tenants are paying rents of between $3 psf and $4 psf a month, which give a rental yield of 3.5 per cent.

But the leases will end next year, it said. Whoever buys the property - the asking price is $9 million - can ask for rents of at least $5 or $6 psf, which would give a yield of around 5 per cent.

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# For owner-occupiers, shophouses may make good investments, as they could be paying less in mortgage payments every month compared to monthly rent in a prime office building,

# Rental yields, ranging typically from 4 to 6 per cent, are often higher than for residential and office units, say property consultants.