How to select a shophouse for investment?
Location, Price, and business usage allowed are key factors for rental yield.
If you have the ability to buy a row of Shophouses, then you can fetch a higher capital gain too.
Let us dive in.
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 achieve rental of $10 to $11 psf. That is ‘double’ the rent.
F&B usage types are also sub-categorized into the
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Restaurant and Eatery
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Bar/ pub
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Restaurant and Bar
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Night clubs
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Cloud/ Central Kitchens
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Takeaways only
Type 3 is most desired within the F&B subcategory and the rarest to find. If found, it is also Pricier because the rental yield is higher. Thus, the F&B license, liquor license, entertainment license is highly coveted by shophouse investors.
Only some locations allow such usage but 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 main road is too narrow and there are not enough parking lots, which may potentially cause traffic congestion.
Hence, if you find a Shophouse with F&B license in these locations, you will be paying a higher premium. The other way you can do it is to find a shophouse with possible approval. If you get lucky, it means 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!