‘Zion Residence gains popularity as shophouse investments decline in 2023 Knight Frank report

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The shophouse market in the first half of last year showed strong activity, but the second half saw a significant slowdown due to the high interest rate environment and market uncertainties. According to Knight Frank’s latest shophouse market report released on January 31, a total of 53 shophouses worth $428.2 million were transacted in the latter half of the year, representing a 26.4% and 35.5% decline in the number of shophouses sold and total sales value, respectively, compared to the first half of 2023.

Out of the 53 shophouses sold in the second half of 2023, 81% were freehold transactions worth $358.9 million, while the remaining 10 were leasehold transactions worth $69.3 million. The decrease in sales volume can be attributed to the high interest rates and steep price premiums, which led buyers to delay their decision-making. Mary Sai, executive director of capital markets at Knight Frank Singapore, states that institutional buyers who rely on debt financing and rental income were cautious and chose to wait and see.

Sai also believes that the reported number of transactions may not be accurate, as there is a possibility of more unreported transactions due to wealthy buyers who prefer to stay low-key. She adds that these transactions likely involved buyers who preferred to remain anonymous and did not lodge caveats.

The lower sales volume in the second half of 2023 also caused a decline in prices, with the average unit price for shophouse transactions falling by 6.1% to $5,116 per square foot based on land area. This decline was driven by leasehold shophouse transactions, which saw a 34.2% decrease in average unit price to $3,937 per square foot based on land area. In contrast, the average unit price for freehold shophouses saw a slight increase of 1% to $5,389 per square foot compared to the first half of 2023.

The top shophouse deal in the second half of 2023 was the sale of three units in Jalan Besar, District 8, for $38.5 million in September. District 8 remained the most active district for shophouse transactions, with 16 units worth $132 million sold in the latter half of the year. Sai credits this to the ongoing gentrification in the district, including the completion of the landmark integrated development Guoco Midtown on Beach Road, which has transformed the area into a popular tourist destination.

Sai also notes that demand for conservation shophouses remains strong due to their scarcity and historical significance, which makes them attractive for significant capital appreciation. In the second half of 2023, the most profitable shophouse transaction was the sale of a shophouse in the Kampong Glam Conservation Area for $4.8 million, representing an overall return of 1,196% after being held for 20 years.

For the whole of 2023, 132 shophouses were transacted, representing a 30.9% decrease from the previous year. The total sales value for the year was $1.2 billion, a 25% drop from 2022. Freehold transactions made up 79.5% of shophouses sold, showing a 31.4% decline compared to the previous year. However, the average prices for freehold shophouses rose by 10.1% to $5,354 per square foot.

Sai points out that the overall average price of shophouses saw a significant increase in 2023, rising by almost 10% to $5,325 per square foot compared to $4,849 per square foot in 2022.

Moving forward, Sai believes that while the demand for shophouses remains strong due to their limited supply and potential for capital appreciation, buyers are becoming more resistant to unrealistic price premiums. She emphasizes that sellers need to adjust their profit expectations and balance the popularity of shophouses with the cautiousness of buyers in order for sales to materialize in the year ahead.

As a result, prices are expected to trend towards more realistic levels this year. With a better economic outlook and stabilizing interest rates, Knight Frank projects shophouse sales value to be between $1.1 billion to $1.2 billion in 2024.