In our last shophouse segment, we covered the types of shophouses, their eligibility and accessibility. We had a detailed postmortem about the purchase and holding cost of the shophouses. But how do you make a profit? Which shophouse should you buy to get the highest rental yield in Singapore?
- Know shophouse usage like the back of your hand!
- What happens if the usage you wish for is not in the approved list of usage for your shophouse?
- What type of shophouse usage can maximise your rental yield?
- How to buy an F&B allowed shophouse at an affordable price?
- What to do if your shophouse is in a NO-NO Zone!
- Is it worth paying a premium for shophouses with an F&B licence in the NO-NO Zone?
- River Valley Shophouse in No-No Zone.
- Amoy Street Shophouse in Yes Zone.
- How to maximise your chances of getting permission for F&B usage?
- What do you need to do?
- What will you get?
- Want to know more about shophouse deals that are profit-generating machines?
Read more about The hacks you should know before investing in a shophouse.
1. Know shophouse usage like the back of your hand!
There are 3 main types of shophouses:
- Commercial shophouse
- Residential shophouse with Commercial at 1st storey
- Residential and Commercial shophouse
Based on the location and shophouse type, the usage of your property will vary. While some usage automatically comes when buying the property, others need approval from relevant authorities.
Let’s have a glance at the wide range of shophouse usage available:
- Food & Beverage (F&B)
- Shop, office and services
- Education establishments
- Sports and recreation
- Community-related uses
To know about the usage in more detail, check our URA’s considerations of property usage.
To check the allowable usage for a specific shophouse, access the URA shophouse usage portal.
2. What happens if the usage you wish for is not in the approved list of usage for your shophouse?
You can apply to change the use of your property from the Urban Redevelopment Authority (URA).
URA works with licensing agencies like Land Transport Authority (LTA), Singapore Police Force (SPF) and National Environment Agency (NEA) to evaluate whether your proposal meets the requirements for change.
If they see that the change of use you applied for does not cause any amenity conflicts to neighbourhood premises, they will approve your application. However, once your application is granted, you will have to apply for necessary permits and licenses separately from the relevant authority through GoBusiness Licensing Portal.
3. What type of shophouse usage can maximise your rental yield?
Of all the different shophouse usage, F&B has the possibility of fetching you the highest rental yield. For example, if your shophouses allow usage for retail or office space, you can fetch a rental of $5 to $6 per square foot (psf) at best.
However, the same shophouse with an F&B license will fetch you approximately $10 psf. You will have 50% more rental yield just by having an F&B license.
That being said, there are 5 categories of F&B:
- Restaurant (Dine-in)
- Bar/pub (Dine-in)
- Restaurant and bar (Dine-in)
- Takeaway shop (No-dine in)
- Night clubs (Dine-in)
- Cloud kitchens (No dine-in)
Which type of F&B above will maximise your shophouse rental?
F&B – Restaurant with bar.
Look for an F&B where you can dine in and that has a liquor-related license that also allows an entertainment hub like a nightclub. Such establishments offer food, fun and recreation to customers, all in one neat package.
Shophouses that offer all 3 of these usages are rare. Such properties are high in demand because people like to eat there, unwind and have a good time after a long day at work. So, if you can manage to buy this kind of shophouse, your rental yield is sure to go UP! UP! UP!
However, such shophouses do not come cheap! The cost of these properties will be higher and the competition will be neck to neck.
4. How to buy a shophouse at an affordable price?
I personally structure a shophouse portfolio that has the potential of converting to F&B usage but has not been converted yet. The prices of these shophouses are comparatively lower than the ones that automatically come with an F&B licence.
Once you buy the property, you will have to apply for a change to approve F&B usage for the place. If you have already done your research and due diligence, you will know there is a good chance of the relevant authority granting your approval. And once they grant it, your investment value increases right away.
5. What to do if your shophouse is in a NO-NO Zone!
While some shophouses can be allowed for F&B subject to approval by the authority, others are simply a no, no!
Here is a list of locations that are not allowed for Shophouse F&B usage:
- Balestier road
- East coast road
- Joo Chiat road area
- Changi road
- MacPherson road
- Upper Serangoon road
- Upper Paya Lebar road
- River Valley road
- Geylang road
- Bukit Timah road/ DUnearn road
- Tanjong Katong road
- Greenwood avenue
- Sembawang road
- Serangoon garden way
- Kampong glam
- Kampong Bahru Road/ Spottiswoode park road
- Jalan yang
- Thomson village
- Bedok area
- Little India historic district
To know about the non-allowable areas more specifically, check out this URA circular.
The key reason the authority does not allow shophouses with F&B licenses in these areas anymore is because of the inconveniences they cause. F&Bs often pull a lot of crowds. This causes traffic congestion. Besides, the bars and nightclubs cause loud noises, which can disturb the surrounding neighbourhood, especially in residential areas.
If you are lucky, you can still find a shophouse with an F&B license in the No-No zones. But since they are extremely limited in supply, you will have to pay a premium to acquire them.
6. Is it worth paying a premium for shophouses with an F&B licence in the NO-NO Zone?
The rental yield is the highest for shophouses with F&B licenses in these areas. People will see your unique establishment that they do not see in their surroundings. So, they will crowd your place, increasing the demand for your shophouses exponentially, ensuring a higher rental.
There is a golden rule for commercial properties. For every $1,000 psf you invest, you must fetch a rental yield of $2 psf.
You should only buy a shophouse at a premium if you get it at a market price or costs lower than the market price. Meaning your shophouse’s rental must match your cost or outweighs it.
However, these types of properties are not easy to come by. But my decades of knowledge and skills in analysing the attributes of shophouses helped me to find a shophouse that is a good value to invest in.
Check out the difference in rental yield between an F&B allowed shophouse in the No-No Zone, a Non-F&B shophouse in the No-No Zone & an F&B allowed shophouse in the Yes Zone.
River Valley Shophouses in No-No Zone.
The River Valley area is in a No-No zone. The area has a row of shophouses where famous eateries like Boon Tong Kee are operating. But the area usually does not allow any loud music and alcohol establishments.
However, there is a corner shophouse at 397 in River Valley. It is a mixed shophouse (commercial and residential) with F&B and liquor licence. It houses the popular bar, Partners in Crime, which draws impressive business. The property was last transacted in 2018 for $7 million and had the capacity to fetch 2-3% of rental yield.
A similar property, at 405 River Valley Road, was also transacted at the same time. This property is in the light blue zone in the master plan and is only permitted for takeaway foodshop (No dine-in).
The shophouse does not have the license to house any restaurants, bars or nightclubs. That is why, the selling price for this shophouse is only $4.4 million, 37% lower than the River Valley shophouse at 397 road. The rental yield for this particular property is $8,000-$9,000 psf.
So, you have to evaluate if the price discrepancy between the 2 River Valley shophouses is worth it or not. The thing that is working for the 397 road shophouse is that this corner property has an excellent mixture of tenant profiles from surrounding premises that draws in more crowd. And they have a bar with loud music to entertain people that other F&B looks.
It creates a unique demand that the surrounding shophouses cannot provide. Paying a premium for such a demanding shophouse pays off because they are always sought after by businesses who are ready to pay a good rental.
Now, let’s take a glance at the costing and rental yield of an F&B shophouse in Amoy Street, which is in a Yes-Zone.
Amoy Street Shophouse in Yes Zone.
Shophouses with F&B and bars on Amoy Street are a more likely possibility than the former example. It is a high-end area that has a lot of restaurants, happening bars and gathering joints. Your shophouse establishments will have ready traffic of customers from surrounding premises.
Getting an F&B license here is highly likely as the authority approves this area for such kinds of businesses. The ground floor of the shophouses can easily fetch a good rental of $10 to$12 psf. However, if the F&B is on the upper floor, your rental yield will dramatically fall to $5 to $6 psf. That means on average, your shophouse can fetch up to a $7 rental yield psf.
That is still a good rental except that the price of shophouses in this area is exceeding faster than its rental yield. As I have mentioned before, the golden rule of investing in a commercial asset is that for every $1,000 psf you invest, you should be able to fetch a $2 rental yield.
However, recent transactions show that shophouses in the CBD area have an asking price above $7,000 psf. On average, they are selling at $5,000 psf. This means the property must at least fetch a rental yield of $10 psf to be a good investment. But it is falling short by $3 as the current rental yield of shophouses in Amoy Street hovers around $7 psf.
- 397 River Valley shophouse in the No-No Zone that has an F&B license where dine-in is allowed.
- 405 River Valley shophouse in the No-No Zone allows Takeaway shops where dine-in is not allowed.
- Amoy Street shophouse has an F&B license and is located in a Yes Zone.
It makes sense to buy an F&B allowed shophouse in a No-No zone at a premium only if your income, in this case, rental yield, outweighs your cost. And this is what the 397 River Valley shophouse possesses. So, if you can find a shophouse similar to that, it is definitely a good investment worth buying at a premium.
7. How to maximise your chances of getting permission for F&B usage?
In recent times, approval for change of application is getting increasingly stringent. You need to submit a business proposal, a concept and a layout plan for URA’s evaluation. Previously, URA did not ask for a business concept to process the application. But now, you have to describe the crowd flow surrounding your shophouse and whether you have sufficient parking to manage them. Now, if you add a bar or nightclub license along with F&B, the chances of approval are even slimmers.
What do you need to do?
Hire a team of professionals to ensure you have all the documents to get URA to grant your application successfully.
- Scope an area where the shophouse is under market value and has a high demand.
- Ensure the shophouse has the capacity to draw $2 for every 1000 psf.
- Apply to URA to convert your shophouse usage to F&B with bar/nightclub.
- Acquire all the required licenses to legally operate.
What will you get?
A rolling money machine! A shophouse with good fundamentals that will maximise your rental yield more than the others and a handsome capital appreciation. I personally do not guarantee a capital appreciation to my clients. But of all the properties I helped my clients buy and manage under me, they have never once had a depreciating property, be it recession, pandemic or any amount of global events befalling us.