IN the pre-war years, commercial retail space and residential properties were integrated by way of shophouses. When HDB developments came along in the 1960s, they came with HDB shops and/or shops with dwellings on the second storey. The general idea of these shops was to integrate commercial spaces into residential developments, to provide convenient retail and services to residents.
Strata commercial properties came about in the late 1960s and early 1970s when URA released parcels of land to developers who built developments such as Peace Centre, Shenton House, The Plaza, Golden Mile Complex, People's Park Complex and People's Park Centre.
Recent development trends
Most developers in those eras would launch and sell their commercial (office or retail) spaces in the open market. In recent years, developers, especially of mixed developments, hold on to the commercial units, presumably for investment reasons, and are inclined to sell only the residential units. Examples of such are The Lumiere, The Tennery and The Greenwich.
Another emerging trend is the 'shoe-box' concept in new mixed developments such as Viva Vista by Oxley Holdings. They are known to be one of the early practitioners of 'mickey mouse' units in the residential sector. It seems that they have transferred this concept to retail units in their mixed developments and it is fast gaining popularity. The 106 retail units in Viva Vista ranged from 120 sq ft to 740 sq ft in size. In 2010, these units sold like hot cakes and sold the highest number of strata shops compared to other buildings with strata shop space.
Approximately 86 units were sold at a hefty average price of about $2,700 per square foot (psf) as these units were popular with retail investors. Most of the retail units in Viva Vista, being small in size, were priced below $1 million - making it an attractive and affordable investment. This trend is also prevalent in Loft @ Nathan and Suites @ Katong.
Who are the buyers?
The cooling measures announced on Jan 13, 2010 to curb speculative buying of residential properties are likely to divert some investors and funds into the commercial sector. The commercial sector has always been dominated by local buyers (about 50 per cent) and companies (about 40 per cent). Unlike the residential sector, the commercial sector is not constrained by the Residential Property Act which bars foreigners from buying landed homes, that is, foreigners are allowed to buy any type of commercial property.
Nonetheless, the proportion of foreign investors in the commercial sector has remained relatively stable at just below 10 per cent since 2007 and unlikely to breach 200 units per year (Chart 1).
There is a general perception that foreigners prefer to invest in strata offices besides residential real estate in Singapore. This observation has been reinforced over the past three years, especially in 2010, where the number of transactions for strata offices exceeded those of strata shops and shophouses.
However, since 2007, we observed that strata shops faced a more stable demand while the foreign demand for strata offices fluctuated in tandem with the economy and financial sector. Although the number of transactions for strata offices in 2010 was the highest, the number of transactions for strata shops and shophouses almost doubled (Chart 2).
Salient notes on the commercial market
One of the key differences between buying into commercial and residential properties is that buyers are not allowed to withdraw CPF funds for the down payment. Commercial loan interest rates are generally higher at 2 per cent to 3 per cent and the loan-to-value ratios are around 60 per cent to 70 per cent. In addition, GST is payable if the vendor is GST-registered. Not allowing buyers to withdraw CPF funds immediately creates an entry barrier for a large segment of the market and prevents investors from over-leveraging. Hence, any diversion of funds and investors into this sector will be from investors who can afford the down payment upfront which indirectly lessens speculative activity. With the current investment framework in place for the commercial sector, it is likely that we will see sustainable growth and performance.
There are various options that retail investors can explore depending on price quantum, location and preference of property type.
Strata shops: Strata shops typically offer a rental yield of about 4 per cent to 6 per cent. Strata shops that are popular among retail investors tend to be in buildings with high pedestrian traffic and/or good accessibility.
Opportunities below the $1 million price are smaller units in Sim Lim Square, Peninsula Plaza and Orchard Plaza. Higher on the value stratum are larger units in the developments mentioned above or strata shops in neighbourhood developments such as Holland Road Shopping Centre, Bukit Timah Shopping Centre and Beauty World Centre. These developments are popular due to their good rental yield, affordability and the potential of increase in shopper traffic from the upcoming MRT stations.
Meanwhile, there is growing demand for retail units on the ground and lower floors of mixed developments. These are new areas of opportunities that retail investors can look out for. The most sought after mixed development under construction offering new commercial spaces in 2010 was Viva Vista due to its accessibility, good catchment and location.
Strata offices: Rental yields for strata offices vary from 4 per cent to 6 per cent. Investors can capitalise on the rising office rents and increase in demand from office tenants looking to expand or set up office in Singapore. Opportunities that can be explored are strata office units located within the central region in buildings such as International Plaza,
The Central, Peninsula Plaza, People's Park Complex and People's Park Centre. Office space in People's Park Complex and Centre is often in good demand by law firms because of its proximity to the Subordinate Courts and MRT station.
Medical suites: Medical suites are a niche market in the commercial sector that offers a rental yield of about 4 per cent to 5 per cent. Examples of medical suites are available in Novena Specialists Centre (NSC) by Far East Organization and the Orchard Medical Specialists Centre (OMSC) at Lucky Plaza. Asking prices for NSC and OMSC are currently going for about $4,200 psf and $3,300 psf respectively.
HDB shops/HDB shophouses: There has been renewed interest in HDB shops and shophouses due to the improved prices that have been recently transacted. HDB shops make good investments for their lettability and versatility. HDB shops and shophouses are versatile as owners are able to subdivide a unit and let it out to more than one tenant. Rental yields of HDB shops range from 4 per cent to 6 per cent and the prices vary depending on size and location.
Shophouses: Shophouses generally offer a rental yield of about 3 per cent to 5 per cent. Within the central area, shophouses that are in good demand are located in Districts 1 & 2 covering areas such as the Boat Quay, Chinatown, South Bridge Road and Tanjong Pagar. Another area of interest are shophouses located in Little India in Districts 7 & 8 as this area is fast emerging as a niche area for boutique hotels and the arts scene. Shophouses within the central region are typically priced within the $2 million to $5 million range.
The high price quantum is attributed to the centralised location and in the case of conservation shophouses, for its limited supply. Freehold shophouses are evergreen investments which offer capital gains in a hot market, whereas leasehold shophouses are attractive for their affordability and relatively higher rental yields.
Small office-home offices: This type of real estate has gained acceptance by both investors and owner-occupiers in the last few years. With work-life balance in mind and the hikes in office rentals, many find SOHOs' dual use of working space and accommodation a perfect solution for new startups and small firms. Due to their small sizes (usually ranging from 350 sq ft to 500 sq ft), capital outlays to buy or rent are affordable. Rental yields range from 3 per cent to 6 per cent depending on locations, sizes and furnishings provided. Examples of SOHOS are found in developments such as Soho@Central, The Tennery, The Modules & Soho Life.
On the back of healthy economic growth and strong domestic and foreign investor confidence in the commercial sector, commercial transactions will continue to be robust with improved prices and rentals. Before anyone jumps onto the bandwagon of commercial purchases and cause price hikes, one must consider the business costs, investment risks and financing restrictions. As long as one is not overly leveraged, holding commercial real estate for the mid to long term has benefited many earlier commercial investors in terms of capital appreciation and rental income.