Thursday, July 9, 2009

Shophouses: best of both worlds

They have traditionally been good investment properties as they are very lettable and are suitable for both business and residential use

IF YOU'RE looking for a property investment that could allow you to own a bit of Singapore's history and offer attractive yields at the same time, you might consider buying a shophouse.
These shophouses can be found lining the main streets of Singapore. They are typically two- to four-storey buildings with distinctive facades and form part of the city's architectural heritage since many were built before the war.

Shophouses are built on land zoned for commercial or residential use, with commercial use reserved for the first storey. Most of them are found in conservation areas, namely:

  • The historic districts of Boat Quay, Chinatown, Kampong Glam and Little India;
  • The residential historic districts of Blair Plain, Cairnhill and Emerald Hill;
  • The secondary settlements of Balestier, Beach Road, Geylang, Jalan Besar, Joo Chiat, River Valley, Tanjong Katong and Tiong Bahru.

Outside these conservation areas, there are clusters of shophouses in Killiney Road, Serangoon Gardens, Holland Village, Pasir Panjang and Thomson Road.

Shophouses have traditionally been good investment properties as they are very lettable being generally able to provide both business and residential use. But if they fall within commercial zoning, they are strictly for retail use or offices.

Before the mushrooming of shopping complexes, most retail trades were found on the ground floors of shophouses with ancillary offices and dwellings on the upper floors. This explains the popularity of shophouses among family businesses and small operators as they can house all their trade operations and accommodation under one roof.

Due to limited supply and their unique design, shophouses hold their value well especially if they are located in the Central Business District or near MRT stations. Their values will also command a premium if there is a possibility of change of use to boutique hotels or boarding houses.

Sales activity
A total of 1,148 shophouses changed hands between 2006 and the first half of this year, representing about 40 per cent of all shophouses transacted since 1995. A record 526 shophouses were transacted in 2007, which points to prices becoming so attractive that owners who felt some pride of possession were tempted enough to sell.

In the first half of this year, several shophouses have been sold for decent profits. This is remarkable considering that property prices have suffered a major drop since end-2008.

Rental yield
Generally, yields of shophouses are fairly attractive, as some tenants are willing to pay rental premiums to enjoy their unique features. It is possible to achieve net rental yields of about 6 per cent or more for shophouses in choice locations which have been refurbished and fully restored.
Some shophouses within shopping belts such as Orchard Road can possibly fetch double-digit rents of $20 to $40 per sq ft (psf) a month, which are levels commanded by prime retail space.

Elsewhere, such as Holland Village, where shophouses are used as bank branches, spas and food & beverage outlets, rents range from $12 to $20 psf.

Notes to buyers - what to look out for
As with most property transactions, getting funding is pivotal to the buying decision. Since July 2006, Central Provident Fund savings cannot be used to finance a shophouse purchase. As such, getting a bank loan is critical.

With most banks granting loans of 70-80 per cent of the purchase price or valuation (whichever is lower), prospective buyers must have cash upfront for the remaining 20-30 per cent.

And should the shophouse require addition and alteration, a budget of another few hundred thousand dollars must be set aside.

Shophouses sited on land zoned residential are essentially terrace buildings with 'tolerated' commercial uses and the occupants have to pay Temporary Occupation Licence (TOL) fees to the relevant authority for the non- residential usage.

Some of these buildings are found in Blair Road and Onan Road. Buyers cannot assume that the building erected on residential zoned land can continue to run as a shophouse when there is a transfer of ownership.

Temporary Occupation Licence (TOL) fees
Some older shophouses have balconies or parts of the building encroaching on state land. In some cases, TOL fees are payable on a yearly basis for these encroachments and buyers have to be aware of the amount payable.

Road lines
Shophouses that face the main road are often affected by road lines. If the property is adversely affected - say, by a major road line - it will be more difficult to get bank financing as there is the risk of government acquisition for road widening.

However, if the shophouses are conserved or located within a conservation area, they are generally safe buys as these are 'protected' areas.

Building features
a) Shophouses with external side staircases are usually preferred by investors as they can lease the various floors to different tenants because of easy access to the upper floors via the external staircases. b) Shophouses with concrete upper floor slabs also appeal more to buyers because they have higher loading than those with timber floors.

High plot ratio
Some shophouses under commercial zoning have plot ratios of three or four which are not fully utilised. In such cases, the owners can build rear extensions up to the maximum height allowable for the area. This increases the usable floor area and value of the property.

Possible change of use
Change of use to commercial or retail use is permitted in the historic districts subject to the Urban Redevelopment Authority's approval. However, note that the strictest form of conservation is practised in these districts.

Corner Units
Corner shophouses are sought after because they occupy more prominent sites in the row of buildings. In addition, they usually have more window openings at the sides and bigger end walls for advertisement signages.

Most shophouses do not have carpark lots within their compound so having a public carpark nearby or access to parking in buildings in the vicinity is a major consideration.

With sentiment improving in both the stock and property markets in the past three months, shophouse activity is stirring again. As commercial space is facing a rental correction now, buyers of investment shophouses have to be aware of the challenging rental prospects in the short term.

Notwithstanding that, their limited supply and potential for capital appreciation make shophouses gems in the long run.

The writer is executive director and auctioneer, Knight Frank

Source: Business Times, Property Supplement, 9 July 2009

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