Rising wealth hub to drive demand for shophouses, strata offices
Shophouses and strata offices are alternative commercial space in the city centre where office rents are high and commercial vacancy remains tight, and remain popular investments among investors.
Colliers International expects the rising affluence of Asia and the growing popularity of Singapore as a wealth management hub for family offices to drive demand for small to medium-sized real estate investments like shophouses and strata offices.
It noted that the city-state has increasingly become the jurisdiction of choice for single-family offices due to its availability of talent pool and professional services, conducive business environment and government incentives, as well as its quality of lifestyle.
In 2020, transactions for shophouses remained active despite the pandemic, with total investment volume falling only 0.8% year-on-year to $909 million. The majority of the deals were transacted between $2,000 and $5,000 per sq ft (psf), which translates to a yield of about 2% to 3%.
In fact, while shophouse sales volume dropped 46.1% year-on-year in Q2 2020, investments for shophouses jumped 51.1% year-on-year in Q4 2020, reflecting the “rising demand for repurposing prime shophouses for new work, live, play trends, such as co-living and co-working”.
“Shophouses are very versatile, it is flexible in its allowable property usage, which means that owners can redesign and repurpose their shophouse usage strategically depending on the property cycle and market demand, albeit subject to relevant authorities’ approvals,” said Steven Tan, Senior Director for Investment Services at Colliers International.
“Shophouses provide alternative commercial space in the city centre where office rents are high and commercial vacancy remains tight.”
Aside from the usual boutique investors, shophouses have received stronger institutional interest from property funds as well as investment firms, he said.
Meanwhile, transactions in strata offices dropped in 2020 due to office market uncertainties from increased telecommuting.
Colliers Research, however, expects the office market to recover by end-2021, driven by declining new office stock and tech occupiers. The CBD office market outlook will also be supported by longer-term drivers like the Greater Southern Waterfront and CBD Incentive schemes.
And while strata offices are relatively scarce – representing less than 20% of total office stock, particularly in the CBD – Colliers International Senior Manager for Investment Services John Bin said strata offices offer investors “exposure to the wider Singapore office market at an affordable investment quantum of about $1million to $5 million, with yields of 2% to 3%”.
Capital values of CBD premium and Grade A offices increased 62% to $2,436 psf last year since 2009, while rents grew 55% to $9.57 psf.
With this, Colliers Research expects “a five-year rent and capital value annual growth of 3.7% and 3.0% respectively over end-2020 to 2025, on growing occupier demand from Singapore’s position as a top business location in Asia, and benign new supply”.
Source: CommercialGuru, 31 March 2021