SHOPHOUSE – Singapore’s Architectural Gem
By Square Foot Research
Shophouses are now more costly to own than ever due to its ever rising capital values. On average, the median price of shophouses has risen by nearby 20% annually over the last 10 years and now stands at a historical high of $4,111 psf.
Median Price
Once a humble compound, shophouses are now a much sought-after investment, judging from the trend in recent years.
Shophouses have also become more costly to purchase than ever. Median transaction price soared to $4,111 psf in 1Q14, an increase of 24.2% y-o-y and is now at its highest ever in history. In absolute price, the median transaction price is $4.2m in 1Q14.
Median transaction price of shophouses rose 5 times over the period from 2004 to 2013 (Table 2). On average, prices grew by 20% annually during the same period, making it the best-performing commercial properties in terms of capital appreciation (Figure 1).
The Unique Charm
The hype over shophouses is not unfounded. Shophouses are usually well-located in central region, with excellent frontage, and offer greater flexibility in terms of allowed use as opposed to the rigidness of other types of commercial properties.
In contrast to shops and office units, which are largely (more than 99%) strata-titled, most shophouses on the other hand, are land-titled. In addition, 85% of shophouses that changed hands since 1995 are freehold (Table 3), whereas the other types of commercial properties had much lower proportions.
Shophouses hold great intrinsic value serving as an embodiment of Singapore’s historical and cultural heritage, forming the main bulk of Singapore’s gazetted conservation buildings, and are sought after for their scarcity and dearth in supply.
In view of the Land Acquisition Act where the government has the right to acquire land compulsorily for public development projects such as in the case of constructing new MRT lines, shophouses located in conservation areas may have the added advantage of being protected from such redevelopments.
Sales
After the introduction of the Total Debt Servicing Ratio (TDSR) in June 2013, sales dropped by 60.5% immediately in the following quarter to 30 transactions, and have since remained at that level. Sales value however, continued the down trend, suggesting that the TDSR has affected the higher-value segment more. In fact, 1Q14 saw the lowest sales value since 3Q09 (Figure 2) and can be attributed to a drastic drop in transactions above $10m (Figure 3).
Rental Yield
Rental yield for shophouses has been on a down trend. Over the period from 1Q07 to 1Q14, capital values rose by more than 4 times while overall rents increased by only 72.8%. The rental yield compression does not appear to be slowing down as capital values are still on the rise despite the implementation of TDSR, which only slowed down sales volume.
Profitability
The number of unprofitable transactions has also declined over the years and has remained below 5% since 2010 (Figure 6).
Total gross profits from resale transactions peaked in 2013 with $358m, a 25% increase y-o-y, although the number of profitable transactions is actually lower by 25%, suggesting that the profit per transaction rose significantly due to the increased capital value over the year.
72.9% of the profits generated in 2013 came from first half of the year, before the TDSR was implemented.
Potential Risk
Should the government roll out cooling measures for the commercial property sector, such as introducing the Seller’s Stamp Duty (currently imposed on residential and industrial properties) the poor rental yield will be a huge drawback.
In addition, the TDSR has brought down sales volume, especially those above $10m, which may result in more volatile capital values.
Recent Shophouse Transactions
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