Shophouse transactions cool amid higher financing costs and interest rates

/ EdgeProp Singapore |

August 4, 2023 11:03 AM SGT

Separate shophouse market reports by Knight Frank Singapore and PropNex Realty point to a moderation in shophouse acquisitions during the first six months of this year, compared to the same period in 2022.

Between January and June this year, there were 75 shophouse transactions amounting to $711.6 million. This is a 26% drop in terms of transaction value compared to the $962.8 million worth of shophouse acquisitions from 119 deals recorded in 1H2022.

“Were it not for the current high interest rate environment, there might have been more shophouse transactions in 1H2023,” says Mary Sai, executive director, capital markets at Knight Frank. She adds that buyers who are more dependent on debt financing and recurring income for positive carry, such as institutional investors, will continue to be cautious in considering their acquisitions this year.

However, following the cooling measures in April, which saw a doubling in additional buyer’s stamp duty for foreigners buying residential property from 30% to 60%, buying interest in commercial shophouses picked up in 2Q2023 compared to 1Q2023, says Wong Siew Ying, head of research and content, PropNex Realty.

Based on caveated transaction data, there were 43 shophouse sales in 2Q2023, up from the 32 deals done in 1Q2023. The majority of the shophouses sold in the last quarter were in city-fringe areas such as Little India and Jalan Besar in District 8, as well as Geylang and Eunos in District 14. This was followed by sales in District 1 covering Raffles Place, Cecil and Marina.

There could have been some transactions, primarily in prime Districts 1 and 2, that were not captured by URA Realis. Many of the wealthy buyers prefer to maintain a low profile, and therefore do not want to lodge a caveat when they make a purchase, says Knight Frank’s Sai.

Freehold shophouses favoured

Freehold shophouses continued to be the favoured asset among buyers compared to their leasehold counterparts. Out of the 75 shophouses sold in 1H2023, there were 59 properties (78.7%) with freehold or 999-year leasehold land tenures.

The total transactional sales value of freehold shophouses over the first six months of this year amounted to $572.6 million with an average land rate of $5,338 psf, an increase of 13.4% from 2H2022. This uptick in price was supported by strong demand as private wealth “squeezed” into the limited investible market for this niche real estate investment category, says Sai.

On the other hand, leasehold shophouses did not perform as well, with transactional value of done deals falling 15.7% to $139 million in 1H2023, from $164.9 million in 2H2022.

However, the average land rate of 99-year leasehold shophouses sold in 1H2023 was buoyed by landmark deals. The average land rate of $5,983 psf represents a substantial 37.6% increase from the $4,348 psf set in 2H2022. Among the leasehold shophouse transactions, the most noteworthy was the sale of 11 New Bridge Road for $23.8 million in May.

Overall, the most expensive shophouse deal in 1H2023 was the sale of six adjoining freehold shophouses along Serangoon Road for $62.5 million in January. The properties sit on a 9,042 sq ft plot and the price translates to $6,912 psf.

This was followed by the sale of a three-storey shophouse at 37 Boat Quay for $30 million in May. The 999-year leasehold property is in the Boat Quay conservation area. The shophouse sits on a 1,426 sq ft site, and the price translates to $21,034 psf.

According to data from Knight Frank, the seller of this Boat Quay shophouse raked in a profit of $25.7 million — the largest among shophouses transacted in 1H2023 — after a long holding period of 23 years, and realised a capital gain of 631.7%.

Another transaction that made a mark was a pair of adjoining four-storey shophouses at 433 & 435 Geylang Road, which also fetched $30 million in June. Situated on a corner plot of 4,518 sq ft, the price translates to $6,641 psf. Similarly, the seller of these two Geylang shophouses had held the properties in their portfolio for 23 years, enabling them to realise a capital gain of 605.9%.

Growth in rents

Shophouse investors, especially those who rely on recurring income as the basis of their positive carry, have much to look forward to in terms of rents and leasing activity in the shophouse market, according to research by PropNex.

In 2Q2023, 903 rental contracts were signed, and total contract values during the quarter stood at $9.2 million, compared to $9.85 million in the previous quarter. Overall, the first half of this year saw 1,825 shophouse rental transactions worth $19 million.

This outperforms the 1,814 rental transactions amounting to $17.8 million recorded in the preceding period, as well as the 1,775 rental transactions worth $16.5 million in 1H2022. Overall, shophouse rents continued to climb, with median rent standing at $6.19 psf per month in 2Q2023, up from $5.99 psf per month in 1Q2023.

“The growth in shophouse rents is expected to find some resistance in 2H2023 owing to the slowing economy and inflation that could dampen consumer spending,” says PropNex’s Wong. But she points out that a mitigating factor is the limited availability of shophouse space in the rental market, which will prop up rents in the coming months.

Outlook for shophouses

Looking ahead, Wong says that changes to the Residential Property Act from July 20 make it more difficult for foreigners to acquire commercial and residential land and properties. This group of buyers now needs government approval for the purchase of land and property with that zoning.

“We believe the impact will likely be limited as only a small portion of shophouse stock are zoned ‘commercial and residential’, including those in Tan Quee Lan Street, Liang Seah Street, Purvis Street and Balestier Road,” says Wong.

However, this means that foreigners currently holding on to shophouses with approved commercial and residential use will be less inclined to put these assets on the market, tightening the overall supply in the niche market, she says.

Wong adds that a potential spillover effect of this amendment could be a spike in interest among foreigners and foreign entities for fully zoned commercial shophouses, adding to the upward pressure on prices for this category.

Sai says that strong buyer and investor interest in shophouse acquisitions will continue to drive demand and the growth of prices to new highs in the coming months. “Locals are also on the lookout for shophouses in trendy dining and tourist locations with entrepreneurial intentions to create greater diversity and epicurean choices in the food and beverage scene,” she says.

The shophouse market will likely end this year with a total transaction volume of $1.3 billion to $1.5 billion, given the positive momentum over the last six months, says Sai.

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