Market for shophouses wakes up in the third quarter

Tue, Oct 20, 2020

Kalpana Rashiwala

AFTER a slow first half, the Singapore shophouse market started to stir in the third quarter on the back of pent-up demand following the 21/2-month period when property viewings were not allowed.

The value of shophouse transactions had slumped in the second quarter, with the ban on property viewings from April 7 to June 18 during Singapore's partial lockdown to stem the transmission of Covid-19.

A veteran shophouse agent said: "Buying a shophouse is quite different from shopping for a condo. You need to see the actual site, the orientation of the property, its layout, how the tenant's business is faring. On the same street of shophouses, you can have Grade A and Grade B. It wasn't easy to broker deals during the circuit breaker."

With the second phase of reopening on June 19, activity is picking up. The value of shophouse deals in the third quarter of this year rose to S$173.2 million - from S$117 million in Q2 2020 and S$152 million in Q1, based on Savills Singapore's analysis of caveats data in URA Realis.

While the Q1 and Q2 tallies were down 31 per cent and 46 per cent from their respective year-ago periods, the value of shophouses transacted in Q3 this year was almost the same as Q3 last year.

The shophouse transaction value for the first nine months stands at S$442.2 million, down 28 per cent from S$611.6 million in the year-ago period.

Savills Singapore director of investment sales Yap Hui Yee said buying interest in shophouses has been quite stable pre- and post-circuit breaker. "In a strong liquidity and low interest rate environment, there has also been more attention on shophouses due to their rarity and strong preservation of capital value."

Analysts say some investors prefer commercial shophouses to residential properties as yields are higher. Moreover, there is no additional buyer's stamp duty; neither is any stamp duty payable on exiting the investment.

The investors' pool includes foreign buyers, who face restrictions in buying landed homes; they are allowed to buy shophouses on sites that are fully zoned commercial, giving them ownership of the land title.

The seasoned agent said both local and foreign parties are in the market for shophouses. Among foreigners who have been viewing these heritage properties lately are individuals from China in their late 20s or early 30s. Some of them may be citizens of tax havens like Vanuatu and Dominica, he added.

Ms Yap noted that shophouses in Singapore are generally owned by private equity funds, high-net worth individuals and families with strong holding power.

CBRE senior director of capital markets, Clemence Lee, said shophouse sellers these days fall into two groups: The first comprises owners who were looking to sell their properties even before the Covid-19 outbreak; some have started to pull their properties off the market because they do not think they will get a high price during this period.

"Those who are selling are still holding on to pre-Covid prices." He cited the example of three adjoining 999-year leasehold shophouses at 44, 45 and 46 Amoy Street that have been sold for S$21.28 million by SilkRoad Property Partners. "This has been the price that the owner has been looking at since last year," said Mr Lee, who was not involved with the deal.

BT understands the three units were bought by an entity ultimately owned by Ng Cheow Leng, who is involved in several businesses, including New Century Real Estate.

The second category of sellers are those who might have to cash out as their businesses have been hit by the pandemic. "This group will typically be willing to provide discounts of 5 to 10 per cent," said Mr Lee.

An industry observer said that sometimes, those who wish to exit may not necessarily be in financial stress, but have other plans; they are nonetheless willing to let their properties go at below their initial asking price.

An active shophouse investor said: "Asking prices are a bit more realistic than before, but at the same time, supported by lower interest cost."

Krystal Khor, director of boutique property agency Mondania, said freehold or 999-year leasehold conservation shophouses in District 1 (for example, Amoy, Telok Ayer and Hongkong streets) and District 2 (including places like Tanjong Pagar, Duxton Road and Craig Road) are more highly sought after than units with, say, 70 or 80-plus years left on their leases.

Ms Khor, whose agency specialises in both the sale and leasing of conservation shophouses, said: "It's been a hard time; both tenants and landlords have been affected by cash flow problems during the pandemic. Everyone's doing their best."

Ashish Manchharam, chief executive of 8M Real Estate, which owns more than 50 shophouses, said: "We try to work closely with our tenants in this very difficult time to ensure we support them as much as we can in their business.

"For me, it is more important to have tenants in place than to let them leave. I'd rather try to work out a win-win solution that works for both of us."

Ms Khor said that since the Phase 2 reopening, when restaurants have been allowed to have dine-in patrons, cafes, hotpot and Korean BBQ outlets as well as restaurants run by artisanal chefs with a regular, local following, have enjoyed a revival in their business.

Industry observers say that restaurants in places that do not rely heavily on tourists, such as those along Telok Ayer, Stanley and Amoy streets, have been enjoying a stronger recovery in business.

Ms Khor said boutique hotels in shophouses may also enjoy a fillip in business from staycationers during the year-end school holidays.

The active shophouse investor said that signing rents for shophouses are now 5 to 10 per cent lower than 12 months ago - though rates are very location specific.

"If current rental rates hold, then we are going to see a lot more shophouse sales activity because, one, we are seeing more people who are keen to park money in this segment, and two, there are a lot of assets that were previously unavailable coming into the market as their owners want to cash out for various reasons.

"As long as they are realistic to the current market, they will be able to sell their assets because there is sufficient capital looking for shophouses. Low interest rates - below commercial shophouse rental yields - will continue to result in positive carry and drive deals."

Mr Lee of CBRE, who brokered more than a handful shophouse deals in the third quarter, expects demand for shophouses to remain strong in the fourth quarter, with increasing interest in city-fringe areas as well.

Transactions done this month include the S$14 million sale of three adjoining freehold shophouses at 101,103 and 105 East Coast Road. Ms Yap of Savills was involved with the transaction.

The gross yield is 2.1 per cent; the two-storey shophouses are fully leased, with F&B outlets on the ground floor.