Wealthy investors and family offices drive demand for shophouses in H1

Changes to the Residential Property Act may raise prices further and tighten already limited supply.

Private wealth buyers have pivoted their eyes to shophouses as a means for capital preservation, driving a total of 75 shophouse-related transactions in the first six months of 2021.

The implementation of increased Additional Buyer’s Stamp Duty (ABSD) rates for the residential sector in April 2023 drove up high-net-worth (HNW) investors and family offices’ interest in commercial properties such as shophouses. A total of 75 shophouse transactions amounting to S$711.6m was recorded in H1, a 7.2% increase from the last six months of 2022, according to data from Knight Frank Singapore.

It is more than likely that even more shophouses exchanged hands between January and June that were not reported nor were caveats lodged, said Mary Sai (蔡竺樾), executive director, capital markets, for Knight Frank Singapore.

Despite the rise, however, the numbers were actually lower than the sales reported for H1 2022, when S$962.8m in sales value were logged. Sai said that this may be due to high interest rates.

“Were it not for the current high interest rate environment, there might have been more transactions. Instead, some institutional buyers that are more dependent on debt financing and recurring rental income for positive carry, treaded with more caution before making acquisitions,” Sai said.

Residential Property Act
Siew Ying Wong, head of research and content, PropNex warned that recent changes to the Residential Property Act (RPA) beginning 20 July could put a damper on the sales of shophouses.

This could make it more difficult for foreigners to acquire commercial and residential land and properties.

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“One potential outcome from this RPA amendment could be an increased interest among foreigners and foreign entities for “fully” commercial shophouses – this may put some upward pressure on prices in view of the limited availability of such properties for sale on the market,” Wong noted.

“Another potential effect of the RPA change is that foreign entities or investors that are presently holding on to shophouses with approved commercial and residential uses may be less inclined to sell, further tightening the supply of shophouses available for sale,” he added.

To demonstrate, transactional sales values for freehold shophouses added up to S$572.6m during the first half of 2023, with an average price of S$5,338 psf on land, according to Knight Frank SG. This is 13.5% higher from the previous half year. 

Knight Frank’s Sai said that this shows that private wealth has already squeezed into the limited investable market for this niche real estate asset class.

Rental market stable
Over 900 rental contracts were inked in Q2, for a total of S$9.2m, according to data from PropNex. Median rentals during the quarter grew to $6.19 per square feet (psf) per month, a result of tight occupancies.

“Shophouse prices are poised to remain resilient in the second half of 2023 given the limited stock as well as renewed interest amongst foreigners and investors, in the light of higher ABSD tax rates for residential properties for these groups of buyers,” said Wong.

Based on Knight Frank data, of the shophouses transacted in H1, 78.7% of 59 uits had 999 year or freehold tenures, making up the majority of the total.

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Leasehold shophouses, meanwhile, did not perform as well in H1, with the transactional value 15.7% lower at S$139m compared to S$164.9m in H2 2022. However, a total of 16 transactions were recorded, reflecting an increase from the 14 units that were sold in H2 2022. 

Even though the transaction and sales volumes in H1 2023 were fairly similar to H2 2022, the average price of S$5,983 psf on land represented a substantial 37.6% increase from an average of S$4,348 psf on land in H2 2022, with shophouse prices running against the grain of tentative caution that is characteristic of other real estate sectors at the moment. 

District 8 is top sales hotspot
District 8 s aw 27 shophouses trading hands from January to June, selling for a total of S$259.4m.  It was also the only district that registered more than ten shophouse transactions, Knight Frank’s Sai said, with demand driven by the continued gentrification and growing popularity of Little India as a hip tourist destination. 

The sale of the six adjoining freehold shophouses along Serangoon Road for S$62.5m made up the bulk of sales volume in District 8, taking the top spot in the top five deals of H1.

As conservation shophouses are highly coveted for their heritage value, cultural qualities and limited quantity in the market, supernormal profits from capital appreciation are regularly observed the longer the asset is held, Sai noted. 

“Between January and June 2023, 15 shophouse sales made returns of more than 100%,” she said.

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For example, the sale of 37 Boat Quay located within the Boat Quay Conservation Area at S$30m– held for 23 years– translated to a 631.7% profit, the highest in H1.

Other notable deals with sizable returns included the sale of two shophouse units along Geylang Road for $30m which gained 605.9% after being held for a similar 23 years.