Investing in Singapore Shop Houses

Koon Seng Shop Houses

Shophouse almost always generates significant interest. They are one-of-a-kind development that make one feel sentimental about simpler times. Shophouses, whether used for residential or commercial purposes, may provide its owners with a one-of-a-kind property.

Here are some of the reasons why shophouses are so attractive to real estate purchasers and investors.

Full Commercial or Commercial / Residential / Institution Usage

URA Map Zoning

The flexibility of a shophouse’s residential and commercial potential makes it a superb investment vehicle. Shophouses have a color-coded zoning structure that allows investors to choose between commercial-only (dark blue) and mixed-use (pink) properties.

Shophouses in the dark blue Commercial district are restricted to business usage exclusively. These Shophouses might be seen as commercial real estate ventures, similar to apartments in a hotel or a storefront. One such analogy is real estate investment trusts. Shophouses are special because of this distinction. They are endowed with individuality, taste, and history.

The color pink indicates a mixed-use district. There should be no residential units built on top of the business sections. The ground level is reserved for business usage exclusively. Pink designated shophouses may be used for residential use without the approval of the URA or HDB.

Whether or whether the building is a HDB Shophouse will determine from whom you must seek approval. It’s worth noting, nevertheless, that foreigners can’t own pink designated Shophouses since they have the same restrictions as landed properties. Shophouses with residential components cannot be owned by non-residents without first receiving authorisation from the Land Dealings authorisation Unit (LDAU).

Sample of 4 storey Shop House

Why is it crucial that Shophouses may be used in a variety of ways? This is essential information for investors. It’s up to you to decide what kind of tenants or purchasers you’re trying to attract. From little shops and cafés to established legal practices and family-run eateries. Shophouses have a commercial market. The same is true for home use.

The immediate investor may benefit most from this adaptability. Unlike any other investment, real estate allows you to have both a location to live and do business. Shophouses provide buyers and tenants the convenience of a single building. Those who want to return to the good old days (although with air conditioning) of running a company out of their own homes may find this particularly appealing.

Flexibility in Shop House Ownership for Local, Foreigners and Companies

Shophouses’ adaptability is not limited to their intended use. It allows both international and domestic investors more leeway in their budgets. In this part, we’ll discuss the Total Debt Servicing Ratio (TDSR), the Additional Buyer’s Stamp Duty (ABSD), and your various exit strategies.

Good news: I have it for you. ABSD is not applicable to an investment in a fully functional commercial shophouse. Shophouses designated as either Residential or Residential with Commercial on the First Floor are the only types of Shophouses subject to ABSD. Shophouses with residential and commercial space within will have their ABSD calculated on a per-square-foot basis. This is fantastic news for both foreign investors and existing property owners in the host country. This is especially important in light of the recent property cooling measures and any potential changes to ABSD. You may retain more of your hard-earned money and benefit more from price appreciation if you pay less in stamp duty.

We are, of course, contrasting commercial Shophouses with single-family homes. If Shophouses include a commercial component, the difference in ABSD due would be somewhat reduced. Again, foreign investors are limited in their ability to purchase pink designated shophouses. Shophouses with the lightest shade of blue are off-limits to foreign investors.

Another major problem that most investors will have to deal with is TDSR. The most up-to-date property cooling measures (Dec 2021) provide for a 5% reduction in the TDSR, from 60% to 55%. This reduces the total amount that may be borrowed from the bank to fund the property purchase. Shophouses, whether utilized for personal or professional reasons, are affected by this. Both local and foreign residents are subject to this regulation. The TDSR applies even to legal entities created for the sole purpose of holding property.

Knowing the inner workings of TDSR will help you work around its flaws. TDSR regulations apply to anybody seeking a mortgage or a loan backed by real estate. However, this does not apply to business loans, which are evaluated using a distinct set of factors. If the borrower is a single proprietor or is forming a business for the express purpose of purchasing real estate, however, the TDSR requirements must be applied.

If you currently own property in Singapore but haven’t paid off your mortgage in full, TDSR rules may restrict you from getting a large mortgage on a second property. In terms of TDSR calculations, these assets might be helpful if they provide enough revenue to cover a mortgage payment, which brings us back to company ownership. As a result, company owners may utilize their assets as collateral to get financing for Shophouse acquisitions. If you’re genuinely contemplating going this way, you should consult with an accountant and get some financial guidance.

Foreigners can purchase Shop houses as well. As we’ve already established, Shophouses in dark blue zones are free from ABSD if they’re utilized for business. This is great news for anybody considering an investment in Shophouses, and especially those from overseas. When looking to cash in on capital gains, you’ll have a wider selection of potential investors to choose from. Demand is not confined to natives of this little island due to its attractiveness to outside investors. There are many potential purchasers from whom to choose.

Limited Supply of Shop Houses

Conversation shop houses

Only over 6,500 shophouses in Singapore have been designated as conservation areas. This figure will not rise until time travel is included. Preserved shophouses are more than just valuable real estate; they are also priceless historical artifacts. This makes preserved Shophouses more scarce than other types of commercial or residential real estate.

Conventional housing will continue to rise in popularity as new developments are introduced on occasion. While the current real estate market expansion is large enough to accommodate the expanding number of commercial and residential properties, the static small number of Shophouses would benefit even more. No new preserved Shophouses will be constructed, although the market for such properties is expected to expand rapidly.

Shophouses stand out when compared to other commercial and residential options. When compared to other housing options, even those that haven’t been preserved, shophouses hold their own. Shophouses that haven’t been preserved are still hard to come by, but when you do, you’ll find a more authentic, rural atmosphere. The word “Kampong Spirit” makes me uncomfortable. “Comfort food” better describes these Shophouses. Old marketplaces and HDB estates are filled with these ubiquitous yet easily recognizable symbols of the familiar and the ordinary.

The Values of Shop House Clusters

Clarke Quay Shop House Cluster

When discussing the “Kampong Spirit,” the uniqueness of each cluster of shophouses is critical. Are there bars, restaurants, and Instagram-worthy murals in that neighborhood? Clusters of shophouses are commonplace in Singapore. In most cases, the history of business in a given area gives a certain cluster its unique character.

Consider Clarke Quay as an example. Some of the best bars and eateries in town may be found in the storefronts here. Daytime hours see far less foot activity than do nighttime hours here. That’s only one example. It’s possible that other pockets of shops are busier during the day than they are at night.

The cluster’s reputation reveals the industries that thrive there. For those reasons, the neighborhood is likely to see a high volume of foot traffic. If you are a forward-thinking investor, you realize that such companies are probably going to be your tenants in the future. However, if you want to utilize the Shophouse as a base for your own company, it’s important to choose a location that works well with your plans. If you can get your head around this, you may attract the ideal tenants and clients.

Shophouse clusters have several advantages, including the agglomeration effect and the preservation of individuality. Complementary industries tend to congregate. There are economies of scale because of the near proximity of many similar enterprises.

Agglomerating or clustering together draws more consumers and suppliers than one firm can accomplish on its own, therefore even if the companies are competitors, the effect may be favorable. Therefore, if you want to invest in Shophouses for your own company, you should carefully choose clusters and make sure the businesses inside them are either in the same sector or provide complementary services.

The superstar effect is the final major advantage of Shophouse clusters. A Shophouse cluster’s star tenant is the key to attracting new consumers and tenants. The local economy would benefit as a whole from the increased foot traffic and media coverage, thanks to the beneficial ripple effect. While this may be bad news for rivals of the celebrity, it might be good news for companies that provide complementary goods or services.

Traffic Between Shop House and Shopping Mall

Some investors may overlook the apparent advantage of increased foot traffic that comes with Shophouses rather than traditional commercial leasing spaces. Allow me to contrast a Shophouse with a leasing space in a retail mall. Both locations have storefronts, but Shophouses also benefit from increased visibility and foot and street traffic.

Views from storefronts within an enclosed retail center or office building are often limited. Shophouses’ storefronts double as billboards, attracting the attention of passers-by in cars and on foot. In addition, shophouses tend to cluster in undeveloped regions. Shophouse facades are more eye-catching, convenient, and popular than their more traditional counterparts.

Shophouses, unlike those in enclosed malls, may take advantage of unrestricted outside foot traffic. People will still walk or drive even if the environment is hot or humid. Shophouses are visually appealing to passers-by for this reason as well as the advantages offered by clustering. In addition, the majority of Shophouse enclaves are located in pedestrian-friendly areas central to Singapore, making them convenient for residents from all over the island.

Style of Shop House Architectural Heritage

Shop House Architectural Heritage Style

Purchasing a Shophouse in Singapore is like purchasing a piece of the city-state’s history. This is an important consideration. If a business property’s exterior is made entirely of concrete, would you consider buying it? Maybe if you have a production line or are planning to make major improvements that cost a lot of money. Shophouses have inherent aesthetic value from a monetary perspective. Finding architects and builders to do the renovation for you saves you a lot of time and effort. You may potentially save a substantial amount of money this way, freeing up resources for other productive uses.

The “vibe” of a building may be as significant as the impact of seasonal or holiday-themed music on a party’s ambiance. This ambiance has an impact on human experience and social psychology. Every style of architecture, from Simple Modern to Art Deco, conveys a message to its audience that affects how they perceive and interact with the space.

A newfound focus on visual appeal has emerged in the Instagram era. Despite appearances, there is a lot of value in being “Instagrammable” for companies. Your storefront’s instagramability depends on its architecture. Either it attracts people’s attention or it doesn’t. It might cause visitors to pause, look again, and even do a U-turn to pay a quick visit. Especially that at Koon Seng Road where many often stop to take photo or even choose to take their wedding photo shoot there.

Price Trend between Shop Houses, Commercial properties and Condominiums

Price Trend of Shop house versus condo and other commercial properties
Source: PLB insight

Here, we’ll look at the relative success of apartment complexes, businesses, and shophouses (from best to worst, in orange, blue, and black, respectively). We calculate annual percentage changes using data from the last decade, 2012-2021. Shophouses fared better than private condos and commercial buildings in terms of sales and rental income during the last decade.

In spite of the COVID-19 crisis, the sales and rental rates of shophouses have increased dramatically over the last three years, making them a clear market leader. This information on Shophouse sales and rentals is only descriptive and cannot be used to predict future results. However, the last decade has proved that shophouses are head and shoulders above individual condos and commercial buildings.

Trend Home with a Heritage Feel

Trendy home with a heritage feel

Shophouses in Singapore have quickly become the new “dream home,” particularly among the country’s younger millennial generation. People with disposable income and a growing distaste for cookie-cutter architecture have created a market for custom-designed residences. Shophouses are becoming more popular as a kind of shared housing and rental unit.

Similarly, you may usually find a shophouse next to other establishments of interest like a café, restaurant, or bar. Gentrified Shophouse districts, in contrast to cookie-cutter developments, include unique facilities and ways of living. Changes are in store. Everything from the moment you step out of your front door through your regular morning run will be different. The appeal of Shophouses lies in its ability to provide a distinctive way of living. Before putting it in the hands of renters, investors may wish to try it out for themselves.

Living in Landed Central area even for Foreigners

Orchard Shop Houses

While we’re on the subject of housing and comfort, the analogy of landed property is hard to avoid. After all, landed properties are related to shophouses if you want to live in your investment. When comparing the two, one major distinction is that landed properties are more often found in a residential neighborhood. Compared to Shophouses, the conveniences and dining alternatives surrounding landed properties are significantly reduced.

In addition, unlike Shophouses, landed properties are not adaptable to multiple purposes. In continuation of our earlier discussion, landed properties, due to their inaccessibility to non-citizens, constitute a greater barrier to admission. Shophouses have a more diverse pool of potential purchasers, therefore selling them in the future shouldn’t be too difficult.

Singapore’s Efforts to Foster a New Cultural Dawn

Black and white colonial house

Singapore has long aspired to become Southeast Asia’s cultural epicenter. In an effort to broaden Singaporeans’ exposure to and enjoyment of the arts, the city has followed the Renaissance City Plan from the year 2000. Now, 22 years later, there is a far larger audience for artistic performances and festivals in Singapore than there was back then. Despite its lack of material value, this might lead to increased respect for historic homes.

Our colonial past is preserved in Singapore’s conservation shophouses. And the property itself will always carry the weight of that past. These Shophouses aren’t growing any younger as time goes by. Shophouses, because of its unique history and the high regard in which it is held by Singaporeans, are expected to continue to appreciate in value.

In Conclusion

    We think Shophouses are still a special kind of Singaporean real estate that gives buyers a lot of leeway. It is one of the top-performing real estate assets in terms of capital growth, making it an excellent investment for long-term wealth preservation.

    Recent rise in ABSD from 30% to 60% for foreigners, more will choose to park their wealth here in shop houses as buying procedure and cost involved at on par with local Singaporeans.

    Influx of wealthy foreigners also lead to the rise in shop houses prices and transactions. More are setting up family offices here to park their wealth and shop houses provided a good option as there’s no ABSD or SSD involved.

    This conclusion is supported by our arguments based on scarcity, accessibility, clusters, and history. We also anticipate somewhat improved performance over conventionally similar properties. Last but not least, before giving over the keys, an investor should have a feel for what it’s like to live there.