In the latest round of cooling measures announced in April, we saw an increase in the Additional Buyer’s Stamp Duty (ABSD) rates to curb investment demand for residential properties.
For Singaporeans and Permanent Residents (PRs) owning their second property, the ABSD rates have been raised to 20% and 30% respectively.
The hike was most significant for foreigners, as the ABSD rate doubled from 30% to 60%.
Following the rate hike, Leo commented that investment demand will be diverted to other assets, including commercial properties which are not subject to ABSD.
“The cooling measures are to ensure housing affordability, so that residential properties cater to housing needs rather than investment demand. As a result, more investors are being diverted to alternative assets like commercial properties, such as shophouses.”
In fact, Singapore Christie’s International Real Estate (new name) began delving into the shophouse market segment back in 2011-2012. This was also when the government first introduced the ABSD.
Over a decade ago, Singaporeans purchasing their third and subsequent properties were subject to a 3% ABSD rate. For Permanent Residents, the rate was 3% for their second and subsequent properties. Meanwhile, the ABSD rate for foreigners was 10%.
“At that time, our forte was mainly residential units in Sentosa and Marina Bay. However, after the announcement of residential cooling measures, we wanted to explore another avenue of real estate investment to add value for our clients. Thus, we started our journey in the shophouse segment, cultivating our passion for it.”
As of the time of writing, Singapore Christie’s International Real Estate has sold over 10 shophouses this year.
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The Appeal of Investing in Shophouses in Singapore
Contrary to residential properties in Singapore, the main appeal of investing in commercial properties here is that they are not subject to ABSD. Likewise, investors do not have to pay Seller’s Stamp Duty (SSD) for them, allowing them to flip commercial properties quickly.
Both ABSD and SSD are applicable only to residential properties. This also means shophouses zoned for residential use are subject to these stamp duties.
However, unlike typical commercial properties, shophouses are one of the rarest types of real estate in Singapore, which makes them more attractive to investors.
Perhaps as Leo explained the difference between investing in residential and commercial properties like shophouses, “If a residential property is a commodity (e.g., a need to have a roof over one’s head), buying a commercial property, especially a shophouse, would be a collectible investment, an art piece with limited supply.”
He likens shophouse investment to finding an unpolished diamond, adding that it is an art.
“Firstly, every shophouse is unique. Secondly, they are a piece of heritage. Each shophouse has its own history. To spot a diamond in the rough among shophouses often requires some form of intuition, which is developed from one’s experience and deep understanding of the segment.”
There was once a client who fell so in love with the shophouse he made a big purchase on, that he went on to buy another five available shophouses along the same street.
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No Restrictions on Who Can Own Commercial Shophouses
Perhaps more importantly for investors, there are no restrictions on the ownership of commercial properties, including shophouses. This means they can be sold to foreigners.
On the other hand, landed residential properties are considered restricted properties that foreigners are not eligible to own. An exception to this rule is landed homes in Sentosa Cove. Foreigners can buy them, subject to approval from the authorities.
So it’s no surprise to hear about foreigners investing in shophouses here.
According to Leo, overseas investors account for around 20% to 30% of total shophouse transactions, and this proportion has been increasing. While they come from all over the world, they are mainly from Indonesia and Malaysia.
“However, we are seeing increasing interest from the Philippines as well.”
He adds that in Districts 1 and 2, almost 50% of the shophouse buyers are Permanent Residents and foreigners. Meanwhile, Singaporean buyers and companies mainly dominate the shophouse segments in Districts 7, 8, 14 and 15. In these areas, the proportion of foreign buyers is lower.
Most of his clients are business owners and investors.
How to Choose a Shophouse for Investment
Leo adds that the commercial property segment is very broad. “Some commercial real estate agents may be passionate about the hotel segment, while others may be passionate about industrial and commercial properties.”
Using the analogy of finding a raw, unpolished diamond, he elaborates that shophouses come in various forms. For instance, it can be a retail shop or a strata-titled shophouse, with the potential for a change of use to get a better tenant.
Depending on the zoning of the shophouse, the owner can apply to the authorities for a change of use. For example, some shophouses can be used for restaurants, while others cannot. Some may not even be allowed for any F&B business at all.
Leo further shares a tip on shophouse investment: don’t just look at the current rental of the property.
“An unpolished shophouse has a lot of potential for value-add and to increase the potential rental. This includes the potential for a change of use and enhancing the property layout for higher efficiency.”
If you are considering investing in a shophouse, feel free to contact us!
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