Active management can make big bets on coffee shops pay off

Jul 19, 2022

There have been various reports of record prices achieved on transactions of HDB resale flats, as more such flats get sold for over a million dollars each.

Recently, the sale of two HDB coffee shops generated much buzz. A caveat was lodged to buy 21 Street Eating House at Block 201 Tampines Street 21 for S$41.68 million.

Another HDB coffee shop, the 24-hour KPT Kopitiam, located at Block 848 Yishun Street 81, changed hands for S$40 million.

The 604 square metre (sq m) Tampines coffee shop, has 18 stalls and around 76 years left on its lease. The 397 sq m Yishun coffee shop has around 78 years left on its lease.

The price of the Tampines coffee shop works out to about S$6,411 per square foot (psf), while that of the Yishun coffee shop is a whopping S$9,361 psf. Such pricing easily matches or exceeds that of some prime ground level strata retail space in the Orchard Road area.

What the coffee shop deals show is that as long as investors can foresee earning good recurring income or capital gains, the price psf of some properties in the suburbs can top prices in prime areas.

Given Singapore’s stability and safe haven status, investor interest in physical property is keen. Some money gets channelled into strata commercial space, shophouses, hotels, warehouses and even coffee shops instead of homes, where buyers may need to pay additional buyer’s stamp duty.

Many coffee shops are transacted for much less than the prices fetched by the above Tampines and Yishun coffee shops. Still, going forward, sales and prices of HDB coffee shops may be well-supported, as Singapore has transitioned to living with Covid and removed group size and capacity limits at eating outlets.

Coffee shops may enjoy a scarcity premium. There are currently more than 770 HDB coffee shops, of which 400 were sold by the HDB in the 1990s. HDB stopped selling coffee shops in 1998.

Driving returns

One may get a net entry yield in the low single digits when buying an HDB coffee shop in a good location. Can this make sense given borrowing costs are rising and the Singapore Savings Bond, with issue date of Aug 1, offers an average annual return over 10 years of 3 per cent?

Unsurprisingly, when coffee shops change hands, stallholders worry that the new owner will raise rental substantially. Patrons in turn worry that food prices will rise, should stallholders pay more rent.

However, a new coffee shop owner, who pushes too aggressively on asking rent, may be left with empty stalls as existing stallholders give up their stalls and poor patronage as cost conscious consumers move their business elsewhere.

For some coffee shop owners, operating one or more of the stalls directly can potentially enhance the yield that is achieved.

Still, an active and creative owner may be able to grow the income purely from property ownership.

Compared with buying a strata office or shop unit, or an industrial asset, owning a coffee shop offers more scope to grow the income via good asset management.

Asset management initiatives

Just as a good mall owner needs to work with tenants to make a mall succeed, the way to prosper for a coffee shop landlord is to partner the stallholders. I offer five suggestions.

Firstly, actively manage the stallholder mix. Good mall landlords curate their tenant mix assiduously. A coffee shop owner may wish to understand the neighbourhood that the outlet serves and come up with an exciting mix of stalls. Change the offerings occasionally, so there is constantly something new for regular patrons.

Secondly, work the asset round the clock. Lunch and dinner times may see a coffee shop heaving with customers. What about breakfast time, tea time or supper time? Perhaps have stalls with strong offerings that target different times of the day, so the coffee shop constantly buzzes.

Consider having two or even three operators share a stall, which can morph from one that draws a strong day crowd to one that caters to the night crowd.

Thirdly, embrace the takeaway business. People jostling for tables at a coffee shop will please its owner. But, what really matters for an owner, who is long-term greedy, is the turnover that the stalls in the coffee shop generate.

Having a strong takeaway business, whether from patrons buying items to take home or ordering food delivery, helps. Have stalls that offer items which are easy to take away. Also, the coffee shop can consider providing its own food delivery service for its stallholders.

Fourthly, do intensive marketing. Coffee shops need to lure the younger generation. Have offerings that are popular with the young. Embrace digital marketing to give a particular coffee shop an identity.

With compelling marketing stories and spots or dishes that capture the attention of social media users, a coffee shop can draw customers from beyond the immediate neighbourhood.

Fifthly, offer an attractive place for people to interact. Today, many HDB estates boast high quality malls, libraries, and recreation facilities as well as hawker centres. A successful coffee shop needs to be the go-to place for residents of its nearby blocks.

A coffee shop owner can work on offering loyalty programmes and ensuring high standards of service and cleanliness. Hold ad-hoc special events to create buzz and build relationships with patrons.

Investing in a coffee shop requires more work than buying a home. Also, a coffee shop owner may not reap a potential bonanza from an en bloc sale, unlike an owner of a strata shop or office unit in an ageing commercial building.

Still, a diligent and creative owner can potentially drive up returns on a sustainable basis through good asset and property management, thereby justifying the paying of a hefty price tag for a coffee shop.

Instead of upping rents immediately, a new owner can opt to share in the turnover of stallholders. The owner can help drive more turnover for stallholders and be rewarded in the process.

Owners should also take heed that the HDB monitors the HDB coffee shop resale market, as well as the prices of food sold at coffee shops. While good coffee shop owners work to improve the customer experience to drive returns, let us hope they remember to have some stalls that provide nutritious food at reasonable prices.

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