City&Country: The Edge Investment Forum on Real Estate 2011-- ‘Don’t sell upon receiving the keys’

Shopoffice investors should aim to sell only three years after a handover from a developer to maximise their earnings, says Reapfield Properties Sdn Bhd senior vice-president Gerard Kho.

“We have 800 agents on the ground and based on our research on 30 to 40 projects over the last five years, shopoffices typically appreciate at an average 56% from the developer’s price upon handover. It goes up 67% a year later and 105% the following year. The second year sees higher appreciation because there would be more tenants by then while anchor tenants would have already moved in.

“So don’t sell your property upon receiving your keys,” says Kho, whose talk at The Edge Investment Forum on Real Estate 2011 was entitled “Talking shop — investing in shopoffices/houses”.

Calling it the three-year maturity rule, Kho says the rule is based on research conducted by Reapfield Properties on previous transactions.

“This means that an investor must have holding power for at least three years,” he explains. Rental yields on shopoffices average 7% in the first year and drop to 5.3% a year later.

Kho defines shopoffices as commercial units with retail components on the bottom two floors and an office component on the top floors. They usually come with parking. Shopoffices differ from shophouses, which are typically 2-storey units with retail activities on the ground floor. 

There are certain considerations when choosing a shopoffice to invest in, says Kho. “Look out for the fundamentals — the type of activities taking place in the area and how vibrant they are. Also, what houses are coming up in the area. Look at rental yields and if there are attractions for shoppers such as hypermarkets or easy public transport.  

“Sometimes it is worth paying a premium for something you know will do well. Investors must look into a location where all the businesses are doing well. They should look out for shopoffice units that front heavy activity,” he says.

Investors should also look at a slightly “mutated” model.

“A mutated model is what you see in Solaris Dutamas, where the ground floor and first level offer retail space facing the main road; the second and third levels have retail space facing the inside; and the fourth and fifth levels provide commercial office space. This maximises rents. In traditional models, you may only get the first two levels for retail and the rest for commercial use.

“Even though your shop does not face the main road, you can still do very well if it faces the centre of activity. In Sunway Giza in Kota Damansara, for example, the retail shops facing inwards (where recreational and entertainment activities are held) are actually doing better in terms of capital gains and rental yields compared to traditional shoplots facing the main road,” he adds.

More residential developments in an area also mean more activities, he says, citing Puchong and Kota Kemuning in Shah Alam, which are supported by the high number of residences there.

Whether the property tenure is freehold or leasehold does not make much difference to value, Kho notes, as investors may not hold a shopoffice investment as long they would a residential unit. Shopoffice investors usually aim to earn maximum returns on their investment in a minimum amount of time and then sell the unit.

He identifies five potential areas for shopoffice investment in the Klang Valley, namely Seri Kembangan/Taman Equine, Solaris Dutamas/Mont’Kiara, Bistari de Kota/Kota Damansara, Kota Kemuning and Puchong.

“Seri Kembangan is next to Putrajaya and most homebuyers and tenants in Seri Kembangan and Serdang work in Putrajaya and Cyberjaya. This is because Seri Kembangan has more retail activities and amenities like banks while housing is more affordable. Many residential developments are also coming up in Seri Kembangan and Serdang. So there is a growing population there,” he says.

He notes that Solaris Dutamas, a six-level commercial development, which has seen capital appreciation of 150% two years after handover, still has great upside potential as a number of tenants have not moved into the commercial blocks. Its rental yield has stayed at 5% for the two years after handover.

Other positive factors are the existing population from condos in Mont’Kiara and future population growth in Solaris Dutamas. The developer, Sunrise Bhd, also has a reputation to maintain and will ensure that the development does well.

In Kota Damansara, Kho singles out Bistari de Kota as a relatively affordable area for new or first-time shopoffice investors. The 2-storey shopoffices there are selling at between RM1.25 million and RM1.3 million, and the area is 90% occupied. Kota Damansara is also expected to have four MRT stations.

As for Kota Kemuning, Kho describes it as a location that “feeds itself”. “Kota Kemuning has an interesting population of medium-high to high-income earners and more homes are coming up, which means a growing population to support commercial activities there. The prices of shops there are still 30% to 40% lower than those in Subang. Rental returns and capital appreciation have been increasing over the last few years,” Kho says.

Meanwhile, Puchong is booming and turning into a commercial hub. Its shopoffice values appreciated between 37% to 80% at handover, depending on the location. Rental yields are between 5% and 7%.

Shopoffice investments can offer a number of benefits over residential property, Kho says. Tenants usually refurbish the place, so investors can lease it as an empty shell.

“If you are lucky, you can get very good tenants to renovate the shop for you and that adds value to your property. Tenants will then have vested interest in the property. If business is good, it is quite unlikely for tenants to move their business elsewhere.”

In response to a question from the floor on traditional shophouses, Kho says shophouses in some locations are doing very well and could be more attractive for rents than for capital appreciation.
Shophouse investors, he advises, must look at the potential for businesses on the ground floor, which is where most of the money is generated.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 854, Apr 18-24, 2011