The property cooling measures in July have influenced the super-rich to switch from luxury homes to an alternative asset class: conservation shophouses, which are in limited supply, especially those zoned for commercial use in the prime districts.
“After the cooling measures were imposed, we started getting more enquiries from people wanting to buy shophouses,” says Clemence Lee, JLL senior director of capital markets who specialises in shophouses. “Investors started to shift their focus towards commercial properties due to the higher stamp duties levied on residential property.”
Sales for shophouses in the 11 months from January to November 2018 have already hit $1.371 billion, based on URA data as at Nov 16. This is close to the peak in 2012, when $1.385 billion worth of shophouse deals were concluded. Lee is expecting fullyear sales in 2018 to exceed the record in 2012.
The total transaction value in 2012 was $1.38 billion but the number of transactions then was 291, according to JLL. In comparison, 156 shophouses have changed hands to date this year. This shows that the average value of shophouses transacted has almost doubled over the past six years (see table).
The shophouse at 64 Club Street was sold for $21.8 million ($3,880
Record prices
Before the property cooling measures took effect on July 6, the number of transactions for shophouses stood at 101. Post-cooling measures, 55 sales were logged, with new benchmark prices achieved in the latter part of the year.
The latest was set by the sale of 31 Keong Saik Road in November, according to a caveat lodged with URA Realis. The freehold three-storey shophouse is leased to Butcher Boy, an Asian fusion grill and bar, on the first level, with offices occupying the upper floors. It fetched $14 million in the latest transaction, which translates into $4,300 psf, a new record.
Prior to the Keong Saik Road deal, the record had been set by the sale of 21 Boon Tat Street. The two-storey, 999-year leasehold, conservation shophouse with an attic was sold for $16.5 million ($4,259 psf) in October. The property has a built-up area of 3,874 sq ft and sits on a land area of 1,759 sq ft. It boasts Michelin-star restaurant Cheek by Jowl as a tenant on the first level. The deal was brokered by JLL’s Lee.
In August, Lee brokered the sale of 64 Club Street, a 2,250 sq ft, two-storey shophouse on a 999-year leasehold site. It was a milestone transaction as it marked the biggest-ever deal on Club Street in terms of absolute prices at $21.8 million ($3,880 psf). The property has a gross floor area of 5,618 sq ft.
The property was able to command premium pricing because it is approved for full F&B use, says Lee. It is currently tenanted to Caffé B, a Japanese-Italian fusion restaurant. The shophouse was previously transacted in March 2013 for $12.98 million.
The shophouses at 27-33 New Bridge Road and 77 Boat Quay (next photo) were part of a portfolio of nine shophouses and a commercial building purchased by 8M Real Estate earlier this year for $82.5 million (Credit: JLL)
Change in buyer profile
In the past, shophouse buyers were a mix of investors and owner-occupiers. But with prices having risen, the buyer profile has widened to include local and overseas highnet worth investors, family offices and boutique real estate funds. They perceive conservation shophouses as good long-term investments. “Beyond the strong heritage value, conservation shophouses also offer capital preservation even in the midst of economic uncertainty,” adds Lee.
These buyers tend to zoom in on shophouses in prime Districts 1 and 2, particularly those in the CBD, Tanjong Pagar and Chinatown conservation areas, as a majority of the units are zoned for commercial use. That explains the record prices achieved for shophouses in these areas. For instance, the buyer of the shophouse at 64 Club Street was a Hong Kong family office. Meanwhile, the buyer of 21 Boon Tat Street and 31 Keong Saik Road was reportedly Singaporean James Heng, founder of homegrown tour operator Duck & Hippo group. The company was sold to London-based Big Bus Tours, an operator of open top bus sightseeing tours, which is now the biggest in the world.
Shophouses in the city fringe, for instance in the Joo Chiat and Tembeling Road, Balestier and Jalan Besar areas have an element of mixed-use, with commercial use on the first level and residential use on the upper floors. “Foreigners are restricted from buying such properties because of the residential component,” says Lee. For sellers of such properties, it means their pool of buyers has shrunk by half, as only locals are eligible. The residential component also means the property is subject to additional buyer’s stamp duty. “It’s a double whammy” he remarks.
77 Boat Quay (Credit: JLL)
Co-working drives demand
Co-working operators are a force to be reckoned with in the commercial space, and conservation shophouses are no exception. WeWork, for instance, has opened at 22 Cross Street, a shophouse in China Square Central complex, occupying a total of 28,700 sq ft. The US co-working giant has nine spaces in Singapore to date.
The Working Capitol has expanded beyond its flagship space at 1 Keong Saik Road, and taken up more space at the neighbouring 3 Keong Saik Road and 120 Neil Road. The combined floor space is estimated at 40,000 sq ft. It has also taken up another 30,000 sq ft at the shophouse on 89 Neil Road, which brings its total footprint in the area to 70,000 sq ft.
Another co-working operator Found has taken up 10,700 sq ft on the upper level of a row of shophouses at Cuppage Terrace and another 23,000 sq ft across four shophouses along Amoy Street.
“Co-working operators want to be located in more quirky spaces,” says Lee. Proximity to amenities like restaurants, cafes, bars and public transport is also a factor these co-working operators and companies located within their premises look out for, he adds. Some start ups have also opted to move into conservation shophouses as they realise they can turn the space into “a nice and fun environment”.
Hotel play
Wanderlust was purchased by 8M Real Estate this year for $37 million (Credit: JLL)
The largest buyer of shophouses this year has been 8M Real Estate, a boutique real estate investment firm founded by Ashish Manchharam. Its purchases earlier this year include a portfolio of nine conservation shophouses and a commercial building in the Boat Quay, Circular Road and New Bridge Road neighbourhood. The purchase price for the portfolio was $82.5 million.
In July, 8M Real Estate purchased the boutique hotel Wanderlust at 2 Dickson Road in Little India for $37 million. It is the latest in a string of boutique hotels purchased by the group. Earlier acquisitions include the former Club Hotel at 28 Ann Siang Road, which 8M Real Estate purchased for $52 million in June 2017. It has since been repositioned and reopened as Ann Siang House. Also in June 2017, 8M Real Estate paid $75 million for the former 79-room Naumi Liora, which occupied 10 shophouses along Keong Saik Road.
Rental rates for shophouses in gentrified areas have also increased. Keong Saik Road is an example. Once a “red-light district”, it is a popular entertainment and dining enclave with a wide mix of restaurants, cafes and bars today. “As gentrification continues and more upscale tenants are attracted to the area, capital values of these shophouses are likely to increase, and with it, rental rates,” observes Lee.
Shift to city fringe?
With prices of shophouses in the CBD area already at record levels, Lee expects some investors to look at shophouses in the city fringe, for instance those in the Beach Road, Jalan Besar, Little India and Joo Chiat areas. As capital values in these locations have not risen as much as those in the CBD area, investors will be able to purchase at higher rental yields, he adds.
Improved fundamentals in the office sector are also likely to have a positive impact on the rental rates and thereby improve yields of office space in shophouses in 2019, notes Lee. Prices are also expected to continue on an upward trend.