Shophouse transactions are cooling as financing costs and interest rates rise

Market reports on shophouses by Knight Frank Singapore and PropNex Realty suggest a slowdown in shophouse purchases within the initial six-month period of the year, when compared with the same timeframe in 2022.

In the months of January through June of this year the number of shophouse transactions totalling $711.6 million. This represents an increase of 26% reduction in amount of transactions compared to $962.8 million in shophouse acquisitions that were part of the 119 deals reported in 1H2022.

“Were it not due to the current high interest rates the possibility of more shophouse sales in the first half of 2018,” says Mary Sai the executive director of market development for Knight Frank. She says buyers who depend more on financing through debt and the recurring income that positive carry like institutional investors will remain careful when it comes to buying this year.

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However, after the cooling measures of April, which resulted in the increase of stamp duty for buyers of foreign buyers of homes property between 30% to 60%, the number of foreign buyers buying residential property increased% up to 60% and the purchase of interest in commercial shops increased during 2Q2023 as compared with 1Q2023, claims Wong Siew Ying, head of content and research, PropNex Realty.

Based on caveated transactional data There were 43 sales of shophouses during 2Q2023, an increase from 32 transactions that were completed in the 1Q2023. The majority of shophouses that were sold during the quarter were located in the city fringe areas like Little India and Jalan Besar in District 8 and Geylang as well as Eunos in District 14. These were followed by the sales of District 1 which includes Raffles Place, Cecil and Marina.

There may have been transactions, mostly in the prime Districts 1 and 2 that weren’t taken care of in the hands of URA Realis. A lot of wealthy buyers prefer to keep their image and do not want to file a caveat whenever they purchase a property, is Sai of Knight Frank. Sai.

Freehold shophouses are favoured

Shophouses with freehold tenure remained the most sought-after asset for buyers, compared to leasehold counterparts. Of the 75 shophouses that were sold in the 1H2023 in the year, there only the 59 properties (78.7%) with freehold or 999 year leasehold tenures.

The value of transactions of shophouses that were freehold during the beginning of the year was $572.6 million. This was accompanied by an average land cost of $5,338 per square foot that’s up 13.4% from 2H2022. This price rise was driven by the an influx of private capital “squeezed” through the comparatively small investment market in this particular small-scale real estate investment segment Sai. Sai.

However leasehold shops did not perform equally, with the transactions valued at decreasing by 15.7% to $139 million in the first half of 2023, down from $164.9 million recorded in the 2H2022 period.

However the land value of 99-year leasehold shophouses that were sold in 1H2023 was boosted by major deals. The median land rate of $5,983 per square foot represents a significant 37.6% increase from the $4,348 per square foot established in 2H2022. The leasehold shophouse sales which were the most significant one was that of the 11 New Bridge Road for $23.8 million in May.

The most expensive shophouse purchase in the 1H2023 period was the purchase of six adjacent freehold shophouses on Serangoon Road for $62.5 million in January. The properties are located on a 9,042 square foot lot and the cost equates to $6,912 per square foot.

Then came an auction of the three-storey storehouse located at 37 Boat Quay for $30 million in May. The leasehold of 999 years property is located within the Boat Quay conservation area. The shophouse is situated on a 1,426 square foot site and the cost amounts to $21,034 per sq ft.

According to information from Knight Frank, the seller of the Boat Quay shophouse raked in profits of $25.7 million, which is the most lucrative among shops sold in 1H2023 after a period of holding of 23 years. It also realized the capital profit in the amount of 631.7%.

Another deal that left an impression was the adjoining four-storey shophouses on 433 and 435 Geylang Road, which also sold for 30 million dollars in the month of June. The property is located on the corner of a plot measuring 4,181 sq ft which is equivalent to $6,641 per square foot. The seller of the two Geylang shophouses held these properties on their property portfolios for over 23 years, which allowed them to earn the capital profit in the amount of 605.9%.

Rent growth

Shophouse investors, particularly those who depend on recurring incomes to fund the positive carrying capacity, will have plenty to anticipate in terms of rental and leasing activities in the market for shophouses, according to research conducted by PropNex.

The 2Q2023 period saw 903 rent agreements were signed. The total values of contracts in the quarter were $9.2 million, which was compared to $9.85 million in the prior quarter. Overall, the first six months of the year witnessed 1,825 leases for shophouses, valued at $19 million.

This was higher than the 1,814 rent transactions totalling $17.8 million that were recorded in the previous quarter and the 1,775 rental deals worth $16.5 millions in the 1H2022 period. In the end, rents for shophouses have continued to rise as the median rent stood at $6.19 per month. This is an increase of 2Q2023, a rise from $5.99 per month psf in the 1Q2023 period.

“The increase in rents at shops is likely to encounter some resistance during 2H2023 due to the slowing economy as well as inflation, which could reduce the spending of consumers,” says PropNex’s Wong. She also points out that one of the reasons is the limited supply of shophouses in rent markets, that is expected to increase rents in the next few months.

Shophouse Outlook

Looking towards the future, Wong says that changes to the Residential Property Act from July 20 will make it harder for foreigners to buy residential and commercial land and properties. This buyer group requires government approval to acquisition of land and property and zoning.

“We believe that the impact of this is likely to be minimal as only a tiny portion of the shophouses are zoned as residential and commercial, which includes the ones in Tan Quee Lan Street, Liang Seah Street, Purvis Street and Balestier Road,” says Wong.

This means that foreigners still holding shophouses for approval for residential and commercial use are less likely to offer these assets for sale, thereby tightening the overall supply of homes in the market niche She says.

Wong states that a possible impact of this amendment could be an increase in interest from foreigners as well as foreign companies for fully zoned commercial shops and putting price pressure that is increasing for this type of property.

Sai states that a an increasing interest from investors and buyers in buying shophouses will continue to propel demand and push prices to new heights in the next few months. “Locals are looking for trendy restaurants and tourist destinations with a business-minded approach to provide more variety and choices in the food and drink industry,” she says.

The shophouse market is expected to close this year with a transaction amount in the range of $1.3 billion – $1.5 billion, based on the strong growth in the past six months, Sai says. Sai.