EVEN though yields of shophouses are falling as their rental growth lags the rapid increase in their capital values, investment firms continue to like them, especially when they are available in a contiguous row and allow for master lease arrangements.
A Colliers White Paper released on Tuesday noted that the median rent of shophouses had increased 36 per cent from below S$4 per sq ft (psf) per month before 2012 to a record high of S$5.42 psf in Q4 2014.
In terms of capital values, their median prices rose 37 per cent year on year to a record high of S$3,772 psf in Q4 2014.
This was due to "the reluctance of owners, including deep-pocketed investors, to let go of their prized assets unless their price expectations are met", Colliers said.
It puts the typical net yields for freehold shophouses at 2.5 to 3 per cent on average, while shophouses with leasehold tenures yield about 3.5 per cent on average.
Investment companies and joint-venture firms are increasingly looking to lease contiguous rows of shophouses to capture "spill-over" tenants from the CBD.
"These investors are interested in a master lease arrangement, whereby as the master lessee, they are able to sublease the shophouses to other parties for a period not exceeding the term of the master lease," Colliers said.
A plus for shophouse owners is that they don't have to pay for improvement work and maintenance, which are borne by master lessees.
This form of lease generally entails a longer-term lease, usually a minimum of 5+5 years in order for the master lessee to recover the capital expenditure involved in enhancing the properties for sublease, Colliers said.
The upgraded shophouses (usually 40,000 sq ft or more, spanning at least three units) are then subdivided and rented out to new tenants paying higher rent, thereby allowing the master lessee to structure an acceptable return on their investment.
Besides investment firms, many companies also buy shophouses to better control their own occupancy costs, as well as for the flexibility of expansion and potential capital gains.
Rising office and retail space rents are expected to draw more commercial tenants to shophouses going forward.
As at end-2014, centrally-located offices were being leased at an average of S$6 psf at older buildings, and up to S$7.80 psf at newer premises. Gross rents of prime ground-floor retail space in the major malls around Bugis ranged from S$22 to S$41 psf per month as of Q4 2014.
In comparison, shophouses in the Tanjong Pagar cluster (Duxton, Keong Siak and Club Street) fetched a monthly median gross rent of S$6.18 psf per month in Q4 2014.
Shophouses tend to house creative outfits, such as those in advertising, public relations, architecture, media and startups - businesses that don't need or can't afford Grade A building specifications, but want to be located near the city central to be close to their customers.
Some shophouses have also been turned into cafes, nightspots, lifestyle shops and even boutique hotels - although the government is clamping down on some of these uses in certain areas.
Chia Siew Chuin, director of research and advisory at Colliers, said one difficulty of investing in shophouses is that retail investors will need to know what the property can be used for, and what extent of alteration works is permitted while still adhering to conservation guidelines.
The Urban Redevelopment Authority (URA) has classified around 6,500 as conservation shophouses. Because some of these buildings have been around since early colonial days, they may not be in very good condition, so investors need to work out their renovation costs and see how they compare to returns, she added.
But their conservation status also makes them a "rarity" due to their historical or architectural significance, said Chua Yang Liang, JLL South-east Asia and Singapore research head.
"At the end of the day, it's about demand and supply. Shophouses may become more attractive as more urbanisation progresses and their supply gets smaller."
That said, other shophouses in emerging localities might not be as fortunate.
"If you're early, that is, in an emerging neighbourhood, and you're the forerunner there, how long can you wait before your neighbourhood picks up, before you're noticed? That is a risk you have to face," he said.
Source: Business Times, 18 Mar 2015