Gudang Garam family member pays top notch price for Pagoda St shophouses

20150310-bt-gudang-garam-family-pays-top-notch-for-pagoda-st-shophouses-pic S$20m for the two adjoining 999-year shophouses translates to S$3,500 psf on built-up area and reflects just 1.8% gross yield based on current rental income

A MEMBER of the family behind Indonesian cigarette maker Gudang Garam is understood to have bought a pair of adjoining shophouses along Pagoda Street, at the busy entrance/exit of Chinatown MRT Station.

The price of S$20 million works out around S$3,500 per square foot based on the estimated built-up area of 5,700 sq ft.

Each shophouse has three storeys and an attic; and the two units are on a single land lot of 2,010 sq ft with a 999-year leasehold tenure from 1875.

Homegrown boutique property outfit TG Development is selling the properties, which are currently generating a combined rental income of S$30,000 a month - reflecting 1.8 per cent gross yield based on the transacted price.

The price is considered steep by industry watchers.

"Typically investors would require close to 3 per cent gross yield on freehold/999-year leasehold shophouses, and in the range of 3.5-4 per cent yield for shophouses with remaining tenures of around 70-80 years," said Sammi Lim, associate director of investment properties at CBRE.

Moreover, a freehold/999-year leasehold property involving a deal size of around S$20 million, even in a prime Chinatown location, would typically translate to S$2,900-3,000 psf of built-up area, she noted.

So the S$3,500 psf pricing achieved for the recently transacted pair of shophouses along Pagoda Street could be a new high for a Chinatown shophouse, suggested Ms Lim. However, this would be difficult to ascertain as official data on shophouses does not capture their built-up area.

"This is one of the busiest walkways along Pagoda Street and the buyer would be eyeing capital and rental appreciation," said Ms Lim.

Currently, the ground floor of one shophouse is leased to a cafe and the other, to a souvenir shop. The upper levels of both units are leased to a wedding planner group while the third and attic levels, to an office tenant.

Richard Tan, associate group division director of PropNex, who co-brokered the deal, representing the seller, said some of the leases in the two shophouses that are due for expiry soon will be renewed for another year, so that they will end at the same time as the longest lease in the buildings, which ends in 2016.

Thereafter, the new owner, whom he did not identify, plans to do a major spruce-up of the asset. "The two ground-floor units alone should be able to fetch a total minimum S$30,000 in monthly rent," he added.

There are no restrictions on foreign ownership of shophouses on sites fully zoned commercial such as the one transacted along Pagoda Street. All buyers, whether Singaporeans, foreigners or companies, pay only the standard 3 per cent buyer's stamp duty. This is a key attraction of this property type to corporate and foreign buyers, who have to pay a hefty 15 per cent additional buyer's stamp duty on any residential property purchase in Singapore, on top of the 3 per cent stamp duty.

Commenting on the price achieved for the pair of shophouses along Pagoda Street, Knight Frank executive director Mary Sai said: "Such a high-priced transaction could be one-off. Many owners of freehold shophouses in prime locations such as Chinatown, Boat Quay and Telok Ayer vicinities, are now expecting at least S$3,000 psf on built-up area. However if the passing rental income from the property reflects below 2 per cent gross yield, it is not appealing to local buyers. On the other hand, foreign buyers or those who want a piece of the action in a prime heritage location may be willing to pay premium price."

The typical business model of new investors would be to renovate the property and thereafter push up rents. "Some tenants may not be able to absorb the pace of rental escalation. No doubt, the high footfall in prime locations can be very enticing; the question is whether the business volume can sustain a high-cost environment - both rents and labour."

Source: Business Times, 10 Mar 2015