Singapore Shophouses Star At Auctions

Source : The Business Times, March 27, 2008

IT was a stellar year for the Singapore property market in 2007, and auction activity, a barometer of market confidence, did well in tandem by Grace Ng.

Auction sales hit a record $407.43 million in 2007, the highest in eight years and a shade below the figure achieved in 1999 when the market was recovering from the Asian financial crisis.

The record figure was mostly due to a vibrant residential market in the first half of 2007 where sales were dominated by high-end condominiums and old apartments with en bloc potential. The other sectors which had contributed to this remarkable result were shops/shop houses and development sites.

Owners are increasingly turning to auctions to sell their property. In fact, their numbers have been doubling every year since 2005. Last year, the number of properties put up by owners hit a 10-year high, with 810 properties auctioned with a value of $264.7 million. This compares with $129.54 million for 2006.

The transparency of the auction method is the chief reason for its popularity. This assures sellers that they are getting a good price for their properties. Its popularity extends beyond individual owners to companies that are looking to divest or restructure their property portfolio.

The auction market this year is likely to see a 25 per cent drop in value transacted to $300 million, as we expect fewer high-end homes and old apartments with en bloc potential to be put under the hammer.

However, those sectors that have yet to experience sharp price increases are likely to see more activity this year. One such sector would be commercial properties like shophouses. According to Urban Redevelopment Authority numbers, residential prices climbed 31.2 per cent in 2007, while the retail sector only gained 13.2 per cent.

Spotlight on shophouses

Last year, a total of 527 shops/ shophouse units were put up for sale via auction by both individual owners and companies. A total of $78.1 million worth of such units were sold under the hammer, against just $28.75 million in 2006. That’s a jump of 172 per cent!

The sale value of shops/shop houses is expected to moderate to $50 million this year due to the cautious mood in the market.

With the US sub-prime debacle crimping sentiment in the property market this year, particularly the lacklustre residential sector, savvy investors could consider turning their attention to strata titled shops, private shophouses or HDB shops.

Shophouses, like other types of property, are assets that can hedge against inflation, enabling investors to benefit when the capital value appreciates in times of rising prices. Additionally, for owner occupiers, the shop/shophouse acts as a hedge against rental increases. By purchasing a unit, owner occupiers are typically converting their monthly rent to mortgage payments, which could turn out to be much lower.

Auctions are a good avenue to source for shops/shophouses that are affordable, strategically located, limited in supply and have attractive yield or en bloc potential.

Many strata titled shops were successfully transacted at auctions at affordable prices, many of them below $500,000. Such a price range is considered a bargain, particularly when some of them are located in the heart of town or next to future MRT stations.

For instance, two strata titled shops at Excelsior Hotel and Shopping Centre located at Coleman Street, near the City Hall MRT station, were sold for $318,000 and $340,000, respectively. Additionally, several shop units at Grandlink Square, near the future Paya Lebar MRT interchange, were sold at prices ranging from $51,000 to $226,000.

There are also many attractive picks among HDB shophouses put up for sale by mortgagees at auctions and such properties are usually attractively priced. These shophouses consist of shop space on the ground level and living quarters, often a three-room flat, on the upper level. Considering the high cash over valuation done on some HDB flats, HDB shophouses priced between $600,000 and $700,000 are some of the attractive options appearing at auctions. Some successful transactions include HDB shophouses located in Chai Chee and Bedok North Avenue 1, which were sold for $640,000 and $700,000, respectively.

Investors and business owners see shops and shophouses as alternative office space, which is facing a current supply crunch. Shophouse units located near or within the CBD are in high demand and they are usually near MRT stations. For instance, a three-storey shophouse unit with dual frontage at Stanley Street was sold for $4.21 million last year. Similar properties include shophouse units located at Outram Park and South Bridge Road, which were successfully auctioned off at $2.73 million and $2.6 million, respectively.

HDB shops/shophouses located in high pedestrian traffic areas like the town centre, MRT station or bus interchange are in demand and can fetch record prices at auctions. For example, a shop unit at Heartland Mall in Hougang was sold for $8.5 million, while another shophouse at Upper Changi Road, which is situated beside an upcoming mall and near the Bedok bus interchange and MRT, was sold for $7 million at an auction last year.

Similarly, an HDB shop at North Bridge Road was sold for $528,000 last year, while a shop at Crawford Lane located opposite a future hotel at Victoria Street, was sold for $495,000 this year.

Limited supply

There are a limited number of strata titled shop units available in the market as the majority of shopping centres in Singapore are owned by Reits like CapitaMall Trust, Frasers Centrepoint Trust and Macquarie MEAG Prime Reit.

For new developments like the Icon at Tanjong Pagar, the developer would usually hold on to the commercial component for lease instead of selling the individual units.

Conservation shophouses are popular with investors due to their limited supply and architectural characteristics. Last year, a three-storey conservation shophouse located in the Kampong Glam conservation area and near the MRT station was sold for $2 million. Another shophouse at Prinsep Street, opposite the future Singapore Art School, was sold at an auction for $3.78 million.

Attractive yield

One compelling reason why investors are keen on shops/shophouse units is because such properties can generate a yield of 4-6 per cent. The yield attained from such investment exceeds the paltry interest rate of fixed deposits which is currently under 2 per cent.

En bloc potential

Shop/shophouse units that are located within old developments usually attract keen bidding at auctions. Investors would have explored the possibility of such old developments being sold collectively in future. Last year, two shop units in Katong Plaza, which had en bloc potential, were successfully auctioned for $225,000 and $325,000, respectively.

Grace Ng is deputy managing director and auctioneer at Colliers International