Shophouse yield play

/ The Edge Property |

February 23, 2016 9:00 AM SGT

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The East Coast-Joo Chiat area has become a lively foodies’ haunt, with memorable joints such as Alibabar, a hawker bar; Full of Crab, a seafood restaurant; Rabbit Carrot Gun, a restaurant-cum-boutique residence; and Sinpopo Brand café. F&B operators and diners are not the only ones who have flocked to the East Coast neighbourhood. Last year, it became a magnet for property investors as well.

In May 2015, five adjoining shophouses at 201 Joo Chiat Road were sold for $16.8 million in a deal brokered by Sammi Lim, associate director of investment properties at CBRE. In December, three adjoining shophouses at 42 to 46 Joo Chiat Road were sold for $23 million, also brokered by Lim. In January, CBRE launched for sale another four adjoining shophouses at 292 to 298 Joo Chiat Road, tagged at $8.8 million. The tender will close on March 8.

Three adjoining shophouses at 42 to 46 Joo Chiat Road were sold for $23 million in December, in a deal brokered by CBRE.

Looking for shophouses near Joo Chiat Road? Start browsing here.

Source: CBRE

Closer to Geylang Serai, a row of five adjoining shophouses at 142 to 150 Joo Chiat Road was put up for sale by tender last September, with a price tag of at least $14 million. At the close of the tender a month later, there were several offers on the table. The shophouses are still available for sale, says Chestertons managing director Donald Han, who is handling the sale.

“The East Coast-Joo Chiat area has emerged as the new bright spot, as investors perceive that values have yet to be maximised,” says CBRE’s Lim. The price for the shophouses at 201 Joo Chiat Road translated to $1,357 psf based on net lettable area, while the $3.5 million sale price of a shophouse at 452 Joo Chiat Road in October worked out to $1,489 psf on gross floor area. As for the three shophouses at 42 to 46 Joo Chiat Road, the price was $1,552 psf on GFA.

What’s the attraction? Prices of conservation shophouses along the main East Coast Road can hit $2,000 to $2,300 psf, while those located along the side streets in the Joo Chiat area are priced in the $1,000 to $1,500 psf range, notes Lim. The gap can also be seen in terms of the rents, which can be as wide as 20% to 25%, owing to the difference in visibility and foot traffic, she adds.

Investors entering the market today are the likes of SilkRoad Property Partners, which purchased the shophouses at 201 Joo Chiat Road; family offices; and high-net-worth individuals. Such investors prefer adjoining shophouses as they provide “excellent potential for growth” in both capital values and rents, says Lim.

Another attraction of these shophouses in the city fringe is the development potential with plot ratio to build a new four- to five-storey rear extension. Some investors relish the idea of adding value by retrofitting the shops, reconfiguring the internal space and putting in new tenants to achieve higher rental yields, she says. “The trend is for conversion of the upper levels into co-working space while retaining the ground floor as F&B, which commands the highest rents.”

In the Joo Chiat-East Coast area, restrictions have been placed on the conversion of shophouses for F&B use. This is because a lot of the streets flanked by shophouses are narrow, two-lane roads. More F&B outlets lead to traffic congestion and parking problems, says Shaun Poh, executive director of capital markets at Cushman & Wakefield (C&W). Therefore, shophouses with permanent approval for F&B use on the first level are the most sought-after.

Yield compression The deal that riveted shophouse owners last year and led to a flurry of upward price adjustments was the sale of 75 Pagoda Street in Chinatown for $20 million last February. The price worked out to $3,500 psf on GFA. It was “a super high price”, says CBRE’s Lim. Another eye-popping transaction was the sale of two adjoining shophouses on Telok Ayer Street reportedly to a Spanish business magnate for $18.2 million last October. Lim reckons there could be more such deals this year.

Shophouses in the Chinatown-CBD core saw prices soar much faster than rental rates last year. “Yields for shophouses in the core CBD have been compressed to a paltry 3% today,” notes C&W’s Poh.

However, weakening stock markets, mounting interest rates and growing global economic uncertainty have led buyers to become more wary, demanding higher yields as compensation for the increased market risks, adds Poh. Investors are now seeking net yields of 3% to 3.5% for shophouses in the CBD and Chinatown, and 4% for those located in the city fringe, he estimates.

Adding to the risk is the supply overhang in the commercial sector, warns Chesterton’s Han. The upper floors of shophouses in the CBD are frequently used as office space and command rents of $5 to $6 psf today. In the city fringe, rents of office space on the upper floors of shophouses are generally in the $3 to $4 psf range. “Rents are softening in tandem with the office market and projected to dip 10% this year,” notes Han. “Therefore, in order to achieve higher yields, prices will have to come off.”

Ripple effect The East Coast-Joo Chiat area may have been the first to benefit from the ripple effect. However, shophouses in other city fringe locations, such as Jalan Besar, Rangoon Road and Little India, have also seen greater investor interest over the past year. The completion of the Downtown Line, fewer restrictions on F&B use and freehold tenure are some of the factors drawing investors to these locations, says CBRE’s Lim.

Knight Frank launched for sale a four-storey mixed-use building and an adjacent two-storey shophouse on Rangoon Road on Jan 19. The site is zoned for residential use on the upper floors and commercial use on the first level. The freehold site of 6,879 sq ft has redevelopment potential with a gross plot ratio of 3.0, attracting interest from investors and boutique developers. The tender will close on March 1.

C&W brokered the sale of a building on Jalan Ismail off Jalan Eunos in the East. It is a three-storey stand-alone building with four strata apartments on the upper levels and a retail unit on the first level that is used as a mattress showroom. The building, which has four separate titles (8, 8A, 10 and 10A Jalan Ismail), was sold to a single buyer for $10 million, according to caveats lodged in January.

Earlier this month, the tender for three adjoining shophouses at 63, 64 and 64-1 Spottiswoode Park Road closed with several offers. The shophouses are located within the Blair Plain Conservation Area, where most shophouses are zoned for residential use. However, two of the three adjoining shophouses (namely 63 and 64 Spottiswoode Park Road) that were up for sale were the rare few zoned for commercial use on the first level and residential use on the upper floor. “That has attracted the interest of owner-occupiers and investors,” says C&W’s Poh, who is handling the sale.

Prices of conservation shophouses have been holding relatively steady owing to their scarcity. According to URA, there are about 6,500 conservation shophouses in Singapore. “It’s similar to Good Class Bungalows, where there are about 2,400 units in gazetted areas,” says CBRE’s Lim. “However, unlike GCBs sitting on large land sites, which can be subdivided, conservation shophouses cannot be subdivided and the supply is fixed.”

Like other real estate sectors, shophouses have not been spared from the impact of the total debt servicing ratio loan framework, which significantly reduced borrowing limits, especially for investors with multiple properties. The segment has seen a dramatic drop in transaction volume since June 2013, when the TDSR was introduced, with the number of shophouses sold plunging 60% from 147 deals in 1H2013 to 59 in 2H2013, according to CBRE Research. However, transaction volume has since stabilised, adds Lim, with 112 shophouses sold in 2014 and 106 in 2015, based on caveats lodged (see chart).

Chart

Source: CBRE Research

Distressed sales in the offing? Some distressed sales could surface in the shophouse segment this year, says Grace Ng, deputy managing director of Colliers International. A tougher economic environment, challenging property market with cooling measures still in place and rising interest rates could lead some shophouse investors and business owners to run into “financial difficulties”.

Distressed sales could emerge in the form of mortgagee, liquidator’s or receiver’s sales, adds Ng. However, she expects the number of distressed sales to remain low.

Owners could also opt to put their shophouses for sale via auction as it offers greater publicity in the current subdued market, reckons Ng. Last year, Colliers sold two shophouse properties at its auctions. One was a row of five adjoining shophouses at 9 to 17 Teck Chye Terrace, located off Upper Serangoon Road, which fetched $14.63 million at an auction in January. Another shophouse at 362 Tanjong Katong Road was sold under the hammer for $6.35 million in July. Both were owners’ sales.

At Colliers’ upcoming auction on Feb 24, a shophouse on Perak Road in Little India will be put up for sale by its owner. The 2½-storey shophouse sits on a land area of 1,389 sq ft, with a 99-year lease from 1994. The refurbished shophouse has an indicative price of $4 million to $4.2 million. The property is within a short walk of two MRT stations — the Rochor MRT station and the upcoming Jalan Besar MRT station on the Downtown Line Stage 3.

“Owing to limited supply, most owners are reluctant to sell unless they achieve their asking price,” says Ng. “They will try to hold on to their shophouses, preferring to lease them out even if it means accepting lower rents.” She does not foresee prices dropping significantly.

“There are still plenty of investors with money around,” says Jeremy Lake, executive director of investment properties at CBRE. “In a situation like the one we’re in now, buyers are more responsive in adjusting their prices, while sellers take a little longer. For this reason, there are fewer deals.”

This article appeared in the City & Country of Issue 716 (Feb 22, 2016) of The Edge Singapore.

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