How to select a shophouse for investment?
Location, Price, and business usage allowed are key factors for rental yield in this shophouse investment.
If you do have the ability to own few Shophouses in a row, then of course you can fetch a higher capital gain too.
Let us get to the basics first.
Business usage can be the first determinant in choosing the right investment. If a shophouse usage is for retail, it can fetch about $5 per square foot (psf) in a convenient location. If in the case where the same shophouse unit has a F&B licence, it can get rental of $10 to $11 psf. That is ‘double’ the rent. Why is that so?
F&B usage types are also sub-categorised into the
Restaurant and Eatery
Restaurant and Bar
Cloud/ Central Kitchens
Type 3 is most desired within the F&B subcategory and the rarest to find. If found, it is also Pricier simply because the rental yield is higher. Thus, the F&B license, liquor license, entertainment license is highly coveted by shophouse investors.
Limited locations allow such usage so if you bought a shophouse and would like to apply for change of use, you can apply with URA, subject to clearance from Singapore Police Force (SPF), National Environment Authority (NEA), Singapore Civil Defence Force (SCDF) to evaluate your proposal. One such case I managed, did not allow for F&B licence (dine in) because the road is too narrow and it was not allowed, because there are not enough parking lots and may cause traffic congestion.
Some locations are not allowed for F&B usage, https://www.ura.gov.sg/Corporate/Guidelines/Circulars/dc16-10#appendixa
Hence, if you do find a Shophouse with F&B license in these locations, it means you are paying a higher premium, but it is worth it. The other way will be to find a shophouse with potential approval. If that does happen, you will get an instant capital gain.
Dollars and Cents
Every Shophouse investment should be a business case, in dollars and cents. I encourage you to develop a sense for numbers. First find out what was the transacted prices and rental rates in the location you are looking at. Then check the permitted business usage, current crowd pool. Compare it to the other shortlisted shophouses you have in your list. Check your costs and ensure you have the funding needed, the loan you can take, and financing you are able to get. In every business, there is cashflow needs where you must care of. Lastly, determine what kind of PSF you are aiming to rent. Finally, after you have cleared all these, looking for a tenant that can afford the rental you need is also important. If you have clarity on break even, then it is easier to decide whether you are buying it under value or not?
Although recent transactions show that Shophouses had increased in terms of capital gains, we should firstly secure the rental yield. Capital gains are a welcomed bonus in years to come. Sometimes getting an impressive tenant will also help you in your next purchase because these tenants are constantly looking for locations to add to their portfolio. (e.g., Bubble tea brands)
Contact me today at 90098981 to discuss more!