Shophouse deals continue to languish

20140414-bt-shophouse-deals-continue-to-languish [SINGAPORE] Shophouse transaction volumes continued to languish for the third consecutive quarter, as demand took a hit following the introduction of the Total Debt Servicing Ratio (TDSR) framework in late-June last year. However, prices have continued to hold - due to a limited supply of shophouses and most owners taking a longer-term horizon and having holding power.

CBRE's analysis of caveats data shows that 26 shophouses changed hands for a total $118.4 million in the first quarter of this year, down from $149.3 million in Q4 last year and $197.2 milion in the preceding Q3. In Q1 and Q2 last year the figures were $463.7 million and $458 million respectively, reflecting the buoyant market pre-TDSR. CBRE's analysis covered only shophouses on sites zoned for commercial use.

Shophouse transactions weakened to $346.5 million in the second half of last year from $921.7 million in the first half - resulting in a full-year figure of $1.27 billon, down from $1.38 billion in 2012.

Besides TDSR, which has tightened lending for property purchases across the board, another key reason for the sharp slowdown in shophouse transaction volumes is that prices have risen in the past few years to levels beyond the affordability of most potential buyers, said Knight Frank executive director Mary Sai.

"You can't do shoebox units in the case of shophouses - unlike what developers have been doing in the residential market, to keep lumpsum prices affordable to buyers," she quipped.

"A prime freehold two-and-a-half or three-storey shophouse zoned for commercial use in a central area - say Telok Ayer or Chinatown - used to cost $4-5 million three or four years ago. Today it would easily cost $8-10 million," said Ms Sai. Current transacted prices reflect $2,500-3,000 psf on gross floor area (GFA) - easily 10 per cent higher than a year ago.

Ashish Manchharam, regional director of investments at JLL, noted that places such as Club Street and Duxton Hill command higher than the average CBD price psf due to a concentration of food and beverage outlets resulting in high customer traffic, which commands higher rental rates.

Ground-floor space leased to F&B outlets has been the key driver for rent yields, says Simon Monteiro, director at Historical Land, a boutique property agency specialising in shophouses. "One year ago, ground-floor F&B space in the Duxton area could fetch $7-8 psf monthly rent; now it is $10-13 psf," he added.

On the whole, however, property yields for shophouses have fallen as their rents, especially for offices on upper floors, have not risen in tandem with prices, added Mr Monteiro. "Gross rent yields are now 2-3 per cent, down from 3.5 to 4 per cent a year ago," he added.

Sammi Lim, associate director of investment properties at CBRE, said: "There is a growing trend of buyers looking at a row of shophouses as they provide greater flexibility for usage - be it for F&B or offices."

Besides those in the F&B and hotel trades, said Savills Singapore deputy managing director Steven Ming, shophouse buyers include high net worth (local and foreign) individuals and families who are increasingly looking at real estate to fulfil their wealth preservation strategies.

"Shophouses allow the investor to participate in the office market rent growth story without having to fork out large sums acquiring office blocks. Morever, buying conservation shophouses, each a unique property with its own history, is often likened to buying a piece of art.

"And the characteristics of investing in a shophouse and Good Class Bungalow are quite similar: despite low yields, they continue to enjoy investment demand because of limited supply. However, investing in shophouses is even better - as additional buyer's stamp duty and seller's stamp duty do not apply for shophouses that are on sites zoned for commercial use," said Mr Ming.

While transacted shophouse prices have not eased, a seasoned investor acknowledged that owners have had to adjust downwards their price expectations by about 10 per cent from a year ago.

Agents predict that transactions will remain slow for the rest of the year, with prices likely to hold.

Mr Manchharam predicts a full-year 2014 figure of around $400-500 million - less than half of last year's. "Due to lower volume and liquidity in the market at present, there may be limited capital value growth in the short to medium term. However, we do not expect prices to decrease, as most shophouses are typically held by individuals and private investors with a long-term investment horizon and they have the ability to hold."

Agreeing, Knight Frank's Ms Sai added: "You do not have new stock piling up, unlike the residential market."

High prices, said Mr Monteiro, will also put a lid on transaction activity. While some ultra-rich buyers are prepared to pay very high asking prices for unique shophouses, these are more of an emotional buy, like antiques.

"In general, shophouses above $3,000 psf on GFA are not moving as the gross yields work out to below 2 per cent; most buyers can't justify paying such prices.

"We'll have to see buyers getting better rental yields before we can see a more active market. Properties with good visibility such as corner units in prime locations are more likely to attract F&B groups. Restaurants, good quality wine/entertainment bars and other premium lifestyle offerings will help push rental yields to make it viable for prospective buyers to bite."

Source: Business Times, 14 Apr 2014