5 tips for investing in shops and shophouses

The number of commercial units, typically shophouses and strata units for office and shops, sold in 1H 2010 remained similar to that in 2H 2009. A total of 495 commercial units were transacted in 1H 2010, reflecting a 4 per cent decrease compared to that in 2H 2009.

Although economic conditions have tremendously improved in 1H 2010, the number of commercial properties transacted was subdued, underpinned by limited supply and a stalemate in sellers’ asking prices and owners’ offer prices.

The limited supply meant limited choices for potential buyers while for sellers, the limited supply of strata commercial properties meant that there would be no urgency to sell their properties in case prices appreciate with further economic recovery.

Nevertheless, the total value of commercial units transacted was $976.9 million, 12 per cent higher than that in
2H 2009. The encouraging value of commercial units transacted in 1H 2010 could be the result of a shift from an interest for units in the lower price-band, to units in the mid price-band.

In 2009, due to the adverse economic conditions, investors and buyers were cautious and preferred to purchase commercial units which were affordably priced in the lowest price band.

Most transaction activities of strata shops and shophouses still remain in the Central Region (planning areas like Outram, Rochor, Kallang, Geylang). Meanwhile, strata office investors are shifting their interest to fringe areas like Beach Road, Middle Road and East Coast vicinity.

Buying Shops & Shophouses – What should you look out for?

* Financing

As with most property transactions, getting funding is pivotal to the buying decision. Since July 2006, CPF savings cannot be used to finance commercial purchase. As such, getting a bank loan is critical.

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

Currently, many banks are offering commercial loan packages at promotional rate of about 2.3 per cent which is a booster for many investors who are considering buying commercial properties for investment or owner occupation.

* Location

Location is one key consideration in the buying decision for any property, more so for shops and shophouses. As shops/shophouses are for retailing purposes, they should be in conspicuous locations and sited where human traffic is high.

In a shopping mall, one has to pay a premium for shops in the main shoppers’ concourse and facing the escalator where most shoppers will pass by when shopping. In the case of shophouse, its visibility from the main road and easy access to carparks are essential factors for consideration.

Good locations of shops/shophouses generate better rentability and therefore higher rental yields if they are held as investment properties.

* Tenure

Statistics in 2H2009 & 1H2010 have shown that most buyers for shophouses preferred freehold properties while about half of the strata shop transactions in the same period were 99-year leasehold strata shops.

Differences in values between the two tenures can be in the region of 15 per cent to 20 per cent depending on the balance years of lease and other factors.

In recent years, many buyers of commercial properties have embraced 99-year leasehold properties in their investment portfolios as they are more affordable and have higher rental yields because of their lower capital values.

* Zoning

This is essential to note when buying shophouses. Shophouses are usually erected on land zoned “Commercial” or “Residential with Commercial on Groundfloor Only”.

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.

Buyers have to note that they cannot assume that the building erected on residential zoned land can continue to run as a shophouse when there is a transfer of ownership.

* Road line

This must be factored in when buying shophouses. 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.

Outlook for commercial units

Strata Office

The commercial property sales market is expected to continue to improve in 2010, in tandem with an expected economic recovery. Sales activity for strata office units is likely to reflect moderate increase, as investor sentiments for strata office units improve.

Potential buyers of strata offices are likely to continue to remain less sensitive to the tenure of strata offices. About two-third of strata offices transacted in 2H 2009 and 1H 2010 were 99-year leasehold strata offices. This trend is likely to continue, given limited supply, lower capital outlay and attractive yields of leasehold strata offices.

Strata Shops

The number of shop units transacted is expected to remain similar to the current number. However, due to limited new supply of strata shops, transaction prices is expected to be stable and there is potential for some capital appreciation.

Additionally, while strata shops are generally older and may be thought to be losing their appeal, there are certain trades which can only be supported by strata shops. These include lower-cost retail services, offering personable and customized services for regular customers.

About half of strata shops transacted in 2H 2009 and 1H 2010 were 99-year leasehold strata shops. This is likely to continue in 2H 2010.

Shophouses

Shophouses are expected to remain favourable for buyers, underpinned by limited supply and unique design. Some potential buyers will also feel that owning shophouses will be more tangible than renting as the unique value can only be actualised through owning.

Buyers are expected to remain keen in freehold shophouses. Currently, only about a quarter of shophouse transactions are leasehold, reflecting buyers’ strong desire to have a lasting interest in shophouses.

By Mary Sai, Executive Director Auctions (Commercial), Knight Frank