A guide to investing in Singapore shophouses
In recent years, Singapore shophouses have become a popular investment for private equity funds, family offices, and ultra high-net worth investors. This guide is for anyone considering investing in these properties.
What are shophouses?
Shophouses are the quintessential heritage buildings of Singapore. Like New York City’s brownstones or London’s terraced houses, they evoke nostalgia and a unique sense of place.
As the name implies, shophouses were originally designed to be a “shop” on the first floor with a “house” above for the shopkeeper and his family. Today, some shophouses are single-family residential homes but most continue to be mixed-use buildings with retail or F&B on the ground floor and either residences or offices above.
There are approximately 6,500 shophouses in Singapore built between the 1840’s and 1970’s. They are either two or three stories tall, built in rows, and shaded by a five-foot walkway to protect pedestrians from the sun and rain. Other distinctive features are red clay roof tiles, a central airwell to bring in light and air, and colorful decorative facades.
Where are shophouses located?
One of the main reasons shophouses have become such desirable assets is that they are located in prime areas. The Urban Redevelopment Authority (URA) has a conservation map that’s a good tool to see where shophouses are located.
- District 1: Boat Quay, South Bridge Road
- District 2: Chinatown, Telok Ayer, Amoy, Outram Park (Neil / Craig / Everton / Blair), Duxton Hill, Tanjong Pagar
- District 6: City Hall, North Bridge Road, Beach Road
- District 7: Jalan Besar, Kampong Glam
- District 8: Little India, Serangoon
- District 9: Emerald Hill, Cairnhill, Cuppage Terrace, River Valley (Kim Yam Road)
- District 12: Balestier Road
- District 14: Geylang
- District 15: Katong, Joo Chiat, East Coast Road
Districts 1 and 2 are also frequently referred to as “city center”, while District 9 is called “central”. The term “city fringe” is used to refer to all the other districts listed above.
What are the different kinds of shophouses?
Shophouses can be divided according to zoning, land status, historic status, and architectural style.
For foreign buyers or funds with foreign investors, the most important distinction is zoning. Commercial shophouses can be purchased by anyone but residential shophouses are only eligible for purchase by Singapore citizens. Singapore PRs can apply to the SLA for an exemption, but the standards for approval are quite stringent.
Land status refers to whether the land underneath the shophouse is freehold or leasehold (with a 999 or 99 years lease). Freehold properties, as can be expected, trade at lower cap rates.
Another key distinction is between Historic Districts, Residential Historic Districts and Secondary Settlements. Depending on what type of district the shophouse is located in, different rules for development and refurbishment would apply.
What are the investment strategies for shophouses?
There are several ways in which an asset manager can add value to a shophouse investment. The first is to implement a leasing strategy that brings in tenants who are willing and able to pay higher rents, such as an upscale F&B business. 8M Real Estate and Triple P Projects are two companies that have been very active and successful in pursuing this strategy in the District 2 areas of Telok Ayer and Keong Seik.
The second strategy is to add an office, residential, or hospitality operating business to the space. For example, the upper stories of a shophouse can be converted to a furnished office or a co-working space rather than rented bare to generate higher yield. In the residential sector, Lotus at Joo Chiat is a block of shophouses that have been converted to serviced apartments and Figment is a co-living operator that focuses exclusively on shophouses. Another common operating business is converting a row of shophouses into a boutique hotel.
A third strategy lies in shophouses that offer A&A (additions and alterations) opportunities, such as building on an additional story or a rear extension. While URA conservation guidelines typically prohibit modifying the front facade of a conservation shophouse, far fewer restrictions apply to the rear.
What are the expected returns from investing in shophouses?
Shophouses typically trade at very low cap rates. Their value lies not in their income-generating ability but mostly in their prime location, scarcity, architectural value, and value-add opportunities.
While yields are low (around 2% to 3%), shophouses as an asset class have more than doubled in value over the last ten years. In 2010, the average price of a shophouse was S$1,547. Prices reached a high around 2013-2014 at over S$4,000 per sqft, then dropped, but lately has been rising again. Last year in 2020, the average purchase price had risen to over S$3,000 per sqft. Recent price data can be found at Squarefoot Research, which compiles a list of shophouse transactions.
Will this capital appreciation continue? Two important factors suggest so: 1) the current rock-bottom interest rate environment, and 2) the fact that covid-19 has only made Singapore even more attractive for the wealthy. On the other hand, many of the commercial tenants in shophouses are in F&B or hospitality, which are sectors hit hard by covid-19. It’s therefore unlikely that rental income will increase substantially in the near future. If prices continue to increase, yields will be pushed ever lower.
In summary, shophouses are not particularly high-yielding assets but they have historically delivered extremely well on capital preservation and capital appreciation. Specific properties may also offer value-add opportunities.
