Shophouse sales surge in Q1, but outlook is mixed

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SHOPHOUSE transactions spiked in the first quarter of this year, riding on a diversion of interest from investors put off by the property cooling measures targeting the residential and industrial property segments.

However, property consultants gave mixed views on the outlook for shophouses, with some warning of early signs of a stalemate in the face of a price gap between buyers and sellers. This follows a sharp price escalation in the past few years which has compressed rental yields.

In the first quarter of this year, $460.1 million of shophouse deals were transacted, up 34 per cent from the $344.5 million in the preceding quarter and 60 per cent higher than the $287.2 million in Q1 2012. These figures were compiled by CBRE based on URA Realis caveats data.

For April, the figure was $75.6 million. The latest transaction was on April 22 based on URA Realis caveats information uploaded on May 7.

Last year ended with $1.37 billion of shophouse transactions, higher than the previous year's figure of $1.15 billion and 2010's $1.17 billion.

Knight Frank executive director Mary Sai said that besides a shift in investor interest to the commercial property segment - most shophouses in central locations such as Chinatown, Tanjong Pagar, Boat Quay and Little India are zoned for commercial use - another factor that is likely to have boosted the value of shophouse deals in Q1 was new launches of strata retail units at high prices. This made shophouses relatively more appealing.

"Shophouses in central locations are priced around $1,800-2,300 psf of gross floor area, compared with $6,000 psf or more for some new strata retail launches, some of which are outside the city," noted Ms Sai.

In absolute price quantum, some buyers may find it more worthwhile to buy a shophouse for, say, $5 million or more - against spending a similar sum on a strata retail unit, she said. A shophouse provides its owner with signage rights in addition to control of the profile of occupiers. As well, it has the flexibility of occupying some space while leasing out the rest.

CBRE said shophouse market fundamentals remained sound, with a positive demand outlook and limited supply. "Buyers include both local and overseas investors who are looking for quality assets for owner-occupation with potential rental and capital appreciation," it added. Analysts note that as shophouses in the central area are mostly zoned commercial, there are no restrictions on purchases by foreigners.

However, observers said an area of concern is that the run-up in shophouse prices in the past few years has led to net rental yields diving to below three per cent. Said Knight Frank's Ms Sai: "One-and-a-half years ago, shophouses in Chinatown were changing hands at around $1,200-1,500 psf on GFA, translating to net yields of about 3.5-4 per cent. Today, most owners are calling for prices of $2,000-2,300 psf, reflecting lower yields of 2.5-2.8 per cent."

Explaining why demand has outstripped supply, Ms Sai said: "There is a dearth of fresh supply of shophouses. For existing shophouses, their owners may see them as cash-cows generating a steady rental income and be unwilling to divest them - due to a lack of good alternative property investments. As most shophouses in the central area are classified as commercial properties, they have thus far been spared property cooling measures."

Some owners are also holding on to their properties as "conservation shophouses are like a collector's item, especially those with nice facades and which are steeped in history".

"There are still enquiries from potential buyers but mostly they can't match owners' expectations. Still some will buy despite current low yields - if they're looking at longer holding periods," said Ms Sai.

Ashish Manchharam, regional director of investments at Jones Lang LaSalle, said: "The market still has legs, but things have got to a point where buyers are shying away from some of these high prices - unless they can turn around these assets to drive yields. A lot of seasoned investors are still looking at 5 per cent net yield, post-refurbishment."

He added that more shophouse investors are starting to look outside the CBD in places like Tanjong Katong/East Coast, Upper Serangoon and West Coast. "While prices in these areas have also risen, investors are seeking shophouses that are zoned commercial/residential and located within residential areas."

Among the bigger shophouse deals last month were two adjacent 999-year leasehold properties at Amoy Street on land area of around 5,400 sq ft, which sold for $32 million or around $2,000 psf of gross floor area.

The pair were sold by an entity managed by Javelin Wealth Management, which paid $10.3 million for them in 2006.

In all, companies involved with Javelin have sold four shophouses in Amoy Street in the past year at prices from $1,645 psf to most recently $2,000 psf of GFA. The buyers are foreign investors, revealed Javelin CEO Stephen Davies, who also held a stake in the shophouses. They were sold with ongoing leases - predominantly to office tenants.

"These properties were all purchased in 2006 and 2007, so we were sitting on substantial profits, and therefore felt it appropriate to take those profits and redeploy them elsewhere. While I feel confident the market for shophouses will remain fairly solid, prospects for further price increases will be more difficult because rent increases will be limited with more supply of office space in general".

Market watchers reckon the risk of government intervention for commercial property could motivate some shophouse investors to take a profit.

Source: Business Times, 11 May 2013

general-logo-fauvicon-50x47[message_box title="Jasmine's Perspective" color="grey"]"Shophouses are the commercial equivalent of residential landed properties. Shophouses' limited supply suggest that prices are likely to trend upwards. Investors looking to invest in shophouses can expect good capital appreciation especially in the long term, but bearing in mind that rental yield will likely be lower than that of office space investments. "[/message_box]