Shophouses - Investing in a piece of heritage

My childhood days were spent in a pre-war shophouse owned by my great-grandparents, who operated a traditional Chinese medical hall on the ground floor, and resided on the upper levels. I spent many carefree afternoons playing with other children in the rear court, roaming along the five-foot way and hiding up in the attic. Even though this row of traditional shophouses along Upper Bukit Timah Road have made way for new developments, those memories remain vivid in my mind, fuelling my interest in this asset class.

Shophouses are an iconic part of Singapore’s built environment, reflecting our multicultural influences in their architecture - from Malay roof eaves to decorative Peranakan tiles to the Art Deco façade popular in 1950s’ architecture. Although many were lost during Singapore’s urban development, those that remain today are governed by strict conservation rules and guidelines for restoration and adaptive reuse in a bid to preserve them.

Investing in Shophouses

The market for shophouses, though small due to their scarcity, is a lucrative one. They traditionally hold their value even during market downturns, and many investors are interested in owning a piece of heritage. Based on URA Realis data, total transaction value of shophouses hit a historical high in Q1 2018, topping the previous market peak in the first half of 2013. This was supported by one or two large transactions. For the rest of 2018, we expect demand for shophouses to remain stable.

In general, shophouses with a winning investment profile offer a prime location, prominent frontage, strong tenant profile and are zoned for F&B, hospitality or retail use. Buyers are drawn to invest in shophouses for a number of reasons, including their heritage value, location or unique charm of a specific property or distinctive architecture. Upgraded shophouses, or those with potential for further enhancement also stand out to investors.

The typical entry yield of shophouses is in the range of 2% to 3%, depending on the balance lease or if it has freehold tenure. Some buyers are willing to accept lower entry yields if they feel there is potential to rejuvenate the tenant mix or good potential to value add to the property. This could increase the current rents significantly leading to higher mid to long term yields. Otherwise, buyers usually favour stronger yielding assets that provide them with greater stability to hedge against rising interest rates. There are also investors who are attracted to the heritage value or nostalgia factor of such properties and are willing to enter at lower yields to own a piece of history.

Contiguous, adjoining units of shophouses are prized assets as they offer higher efficiencies. Investors are attracted to the prospect of buying a row of shophouses as it is akin to buying a boutique building. It also gives them the flexibility to explore change of use of the property by leveraging the larger floor plates. That said, single storey shophouses remain attractive as their quantums are more palatable.

Investor Profile

Ultra-high net worth individuals who take mid to long term views on preserving their capital, are attracted to shophouses for their future capital appreciation. We also see steady interest from family offices or small and medium-sized businesses who invest in shophouses to hedge against volatility in the office rental cycles. With the positive rental outlook and tapering office supply pipeline, some businesses invest in shophouses as a strategy to lock in their long-term operational costs.

Those who are drawn to the shophouse market tend to be seasoned investors who like the potential for capital appreciation and the yield play offered by this asset class. While those who traditionally invest in residential properties may consider alternative asset classes, we do not expect a strong surge in demand for shophouses simply because of higher Additional Buyer’s Stamp Duty rates which took effect after 6 July 2018. Savvy investors will base their decisions on a host of factors such as office rental market, interest rate environment and macroeconomic conditions. CBRE foresees that demand for shophouses as well as strata offices will remain consistent in the next two to three years against the backdrop of tight office supply and rising rents.

Recent Trends

In general, prices of shophouses have remained stable, with a few stand-out assets traded at higher price points. In recent years, there are more shophouses put up for sale by families who have owned these properties for generations and are looking to divest and redistribute the funds. Most of these families either used the premises as residences or offices. After they have moved or sold the business, they would be looking to make better use of their funds by cashing out as they no longer need the premises.

There also appears to be a major shift in tenant profiles in shophouses, with strong demand from established F&B tenants, and businesses keen to explore non-traditional spaces and non-conventional office layouts. Owner occupiers also like the flexibility of being able to operate their businesses 24/7 out of a shophouse as well as the convenience of surrounding amenities.

Shophouses in CBD continue to remain popular with buyers due to their prime locations. However, there is growing interest for shophouses in city fringe locations such as Jalan Besar, Kampong Glam, Little India, and in the east, specifically along East Coast Joo Chiat roads.

These fringe locations are seen to be under the radar and could present significant growth potential. Many of them have under-utilized plot ratios or extension permits that have yet to be utilized. This provides leverage to increase the gross floor area and flexibility to configure the floor space to suit the buyer’s needs. Such units are highly sought as buyers believe they can “perform their magic” and exercise creativity in the restoration process, incorporating both old and new elements into the property.

As scarce and highly-prized cultural icons in Singapore, the biggest draw of shophouses as an asset class is that they are future-proof. Investors are also attracted by the intrinsic value in buying into a piece of heritage; where remnants of a bygone era or a chequered past are etched in stone.

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