City&Country: Singapore-- Singapore non-residential properties see strong sales in 1H2011 auctions

At property auctions, it’s not the newest or the most glamorous properties that get sold, but the grittiest. This was evident at Jones Lang LaSalle (JLL)’s property auction on June 23, when two properties were sold under the hammer.

One was a petrol station on a 20-year lease located at Jalan Ahmad Ibrahim in Jurong that went for S$9.61 million (RM23.71 million).

The other was a shop unit at Fook Hai Building along South Beach Road. The opening price for the shop unit was S$5.5 million, and active bidding drove the final sale price 20% higher to S$6.6 million. The 6,405 sq ft street-level shop unit has a mezzanine level and basement. It’s unoccupied, but going by the prevailing market rental rates of S$5 to S$6 psf a month, the gross rental yield on the property, based on the transacted price, is 5.8%, says Mok Sze Sze, head of auctions at JLL.
Fook Hai Building is a classic example of buildings erected in the 1970s: a mixed-use development with shop units, offices and apartments. The building has a 99-year lease, with 60 years left.

Traditionally, investors are put off by the relatively short leases on such commercial properties, says Mok. The successful buyer of the shop unit at Fook Hai Building is said to be a Singaporean investor. Mok attributes the strong interest in the shop unit to its prominent frontage, location directly opposite the upcoming Parkroyal Hotel on Upper Pickering Street and proximity to the Telok Ayer MRT Station on the new Downtown Line. “Hence, there’s potential for future capital growth,” she notes.

What investors like
Since the start of the year, investors have been making a beeline for well-located shophouses, strata-titled commercial units as well as industrial property even as they shun condominiums and apartments. The exception is landed homes, where there is still interest, given the limited supply, says Mok.

Non-residential properties, namely commercial and industrial properties, made up S$49.97 million, or 72%, of a total of S$69.25 million worth of properties sold at auctions in 1H2011, according to data by JLL. This is a significant jump compared with S$28.07 million transacted in 1H2010.

JLL led the market in terms of total value of transactions at auctions, accounting for 36.3%, or S$25.165 million, of sales in 1H2011 (see chart). “The number of enquiries for commercial and industrial properties is generally higher than for residential properties, as some investors have decided to stay on the sidelines owing to the recent cooling measures and announcement on the increased supply of HDB flats and private housing units coming on-stream,” says Mok. “The stock market’s performance and the financial issues in Europe and the US have also affected investor sentiment.”

Typically, residential sales form the bulk of auction activity and accounted for 39.7% and 55.1% of total auction sales in 1Q2011 and 4Q2010, respectively, according to Colliers International in its July 1 report. However, in 2Q2011, there were only four residential transactions at property auctions totalling S$4.53 million, or just 10.9% of the S$41.38 million sold that quarter.

Grace Ng, Colliers’ deputy managing director, attributes the fall in sales value of residential transactions in 2Q to the measures taken by the government in mid-January 2011 to cool the residential-property market, as well as the stalemate between buyers and sellers as a result of the gap in sellers’ asking prices and the prices buyers are willing to pay.

Asking prices for strata-titled shop units and shophouses have soared 20% to 30% since the start of the year, says Ng. There’s also a certain amount of yield compression as a result, she adds. Gross rental yields for shop units that were at 5% before are now trading at 4% or less.

This is most noticeable for strata-titled shop units in the prime areas, especially in the Orchard Road-Scotts Road location. Units at the freehold Far East Plaza, which was completed in 1983, continue to be actively traded, with current prices pretty close to record levels.

At the recent JLL auction, a shop unit at Far East Plaza was put up for sale with an opening price of S$5.2 million and subsequently withdrawn. The unit measures 861 sq ft and is located on the fifth level. It is said to be leased to a foot reflexology centre at a monthly rental rate of S$8.50 psf, which means its gross rental yield, based on the existing tenancy, is 1.69%.

The asking price for the unit translates to S$6,400 psf. That’s pretty much in line with the latest transaction prices. The most recent transaction was for a 409 sq ft unit on the second level. It changed hands for S$2.7 million (S$6,601 psf) in May, according to caveats lodged with the Urban Redevelopment Authority. In April, a similar-sized unit on the third level was sold for S$3.5 million, or S$8,557 psf. That’s still not the highest psf price achieved in the building, though. That title goes to a 215 sq ft unit on the second level that was sold for S$2 million (S$9,290 psf) in July last year.

Meanwhile, an intermediate double-storey shophouse unit at Joo Chiat Road was sold for S$3 million by Knight Frank at its June 30 auction. The property sits on a freehold land area of 1,467 sq ft and has a total floor area of 2,300 sq ft. It is located opposite Joo Chiat Complex and is currently tenanted at a monthly rental rate of S$6,500 until November 2012. Based on the prevailing rental rate, the gross rental yield is 2.6%. The shophouse unit last changed hands in late 1998 for S$1 million.

The recent buyer of the unit is said to be a Singaporean investor, looking at a medium- to long-term play, as there’s potential to build a three- to four-storey rear extension behind the original two-storey shophouse, notes Derrick Loi of Knight Frank. The price obtained at the auction is in line with market-transaction prices, says Loi. A shophouse along Joo Chiat Road changed hands for S$3.1 million last month.

“There are a lot of enquiries, but some buyers feel that prices are too high, as sellers are pricing their shophouses at S$400,000 to S$700,000 above valuations in the Joo Chiat area,” says Loi. “Sellers have also been adjusting their prices upwards every few months and they are hoping to reel in foreign investors. However, buyers are still predominantly local investors.” As a result of the price escalation, gross rental yields for shophouses, which were hovering at 5% two years ago, were compressed to 4% last year, and have been further driven down to 2.5% to 3% this year, he adds.

Shophouse at Tras Street for sale
Knight Frank is marketing a three-storey intermediate conservation shophouse unit at Tras Street, a short walking distance from the Tanjong Pagar MRT Station. The 999-year leasehold property sits on a land area of 1,617 sq ft and has a total floor area of 4,684 sq ft. It is currently leased to a pub at a rental rate of S$16,900 a month. Based on the guide price of S$6.88 million, the yield works out to 2.95%.

Colliers sold a conservation shophouse unit at Hong Kong Street for S$5 million at its auction in May, also to a Singaporean investor. The adjacent unit was sold early last month for S$4 million. At its June 18 auction, a shophouse along Madras Street in Little India was sold for S$1.88 million. “Conservation properties will continue to see strong take-up rates, with interest mainly in the growth areas such as Beach Road, Ophir Road and Little India,” says Colliers’ Ng.

Even factories and strata-titled industrial units have seen strong interest at auctions. For instance, Colliers sold a third-level 3,132 sq ft unit at Hiang Kie Industrial Building at Woodlands Industrial Park E for S$583,000. Other industrial properties sold at auctions in 2Q include three strata factory units at Tagore Industrial Building on Upper Thomson Road, which fetched S$960,000, and a unit at Alpha Industrial Building in Jurong that went under the hammer for S$430,000.

At the recent Knight Frank auction, a double-storey detached factory unit with a three-storey ancillary office space was sold for S$3.25 million. The property is located on Sungei Kadut Way in the northernmost region of Singapore and sits on a land area of 37,807 sq ft. It has just 12 years left in its 30-year lease. The buyer is said to be a potential business occupier.

Asking prices for these industrial properties, especially those near MRT stations, have also soared and are generally 20% to 30% higher compared with the start of the year, says JLL’s Mok.

It looks like commercial and industrial properties will continue to drive the auction-sales market in 2H2011, with landed homes possibly making a comeback, says Colliers’ Ng.

Cecilia Chow is City & Country editor at The Edge Singapore

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 868, July 25-July 31, 2011