Oct 23, 2015
We take a Guru View at this investor favourite property sub-class, and at its market performance over the past few years.
By Chang Hui Chew
While most people bemoan how the sizes of their apartments have shrunk over the years, spend time in other metropolises and you'll quickly come to realize that we're actually behind the trend. For instance, New York is currently building pre-fabricated micro-apartments of about 270 square feet (about the size of a shipping container unit) right in the Brooklyn Navy Yard, for an upcoming project in East Manhattan.
The calculation is rather simple: land space in Singapore is finite, a hoarded resource. However, our economy needs an expanding population to grow, to produce and consume, and all these folks need roofs over their heads. We've already reached dizzying heights with our public housing programme with Pinnacle at Duxton's 50 storeys, so the only space left to utilize is the personal space allotted to each individual. Shoebox apartments, defined as units below 50 square metres (or 538 square feet), have emerged as a viable solution to these space constraints.
Selling shoe (boxes)
Shoebox apartments have traditionally been an investor favourite, as their smaller sizes reduce quantums, thus lowering barriers to entry. However, two particular property cooling measures, the Total Debt Servicing Ratio (TDSR) and Seller's Stamp Duty (SSD), have chilled the ardour of many investors.
This is because TDSR takes into account all of an individual's debts, including other mortgages, car loans and credit card debt, thus limiting the leverage available to investors. Investors therefore need to raise the amount of equity (i.e., down-payment) they put into the property, making the investment more expensive. Coupled with SSD, where an investor will need to pay up to a maximum of 16 percent of the selling price in stamp duties if he were to flip the property within five years, most individual players are choosing to sit on the sidelines, or put their money in real estate outside Singapore.
As such, shoeboxes, like the rest of the real estate market in Singapore, have seen volumes plummet after multiple rounds of cooling measures (refer to Figure 1). The only time shoeboxes broke through the 1,000-unit figure in the past 13 quarters was in Q2 2013, with three suburban projects (Bartley Ridge, D'nest and Urban Vista) seeing a decent number of shoebox units move. In the last four quarters, with both buyer and developer sentiments in the doldrums, only an average of 300-plus shoeboxes were transacted per quarter. While the past two quarters have seen volumes increase from Q1 2015's low of 189 transactions, it is too soon to suggest that we have reached an inflection point.
The majority of transacted volumes have been from project launches. Over the period of analysis, only an average six percent of all transactions have been resales, suggesting that current owners are choosing to hold rather than divest their units. Sub-sales, an indication of speculative activity, have dwindled to below 50 a quarter since Q4 2012, with SSD eating into investors' returns.
The pricing story has also been dismal. Developers like shoeboxes, especially in the more expensive city area and city fringes, as their smaller sizes mean they can increase the psf price while keeping quantums relatively lower. This in turn increases their profitability. Figure 1 shows that despite volumes falling sharply quarter on-quarter in 2012, median psf prices of shoeboxes continued to climb, before dropping in Q1 2014, due to the launch of The Hillford, with a median transaction price of around $1,100 psf due to its 60-year lease. Interestingly, median prices for shoeboxes only peaked in Q4 2014 at around $1,600 psf, while volumes fell to 270 in that quarter. Prices for shoebox apartments have fallen sharply since then, with the latest Q3 2015 figures at a 23 percent decline from a year ago, at about $1,200 psf. Over the last two quarters, we have seen developers price their projects more affordably, with suburban projects High Park Residences, Botanique at Bartley, Northpark Residences and Sims Urban Oasis seeing a higher volume of transactions. Of these, High Park Residences had the highest volume of shoebox transactions, and the lowest median price of $1,071 psf. What this also goes to show is that there is a lot of latent investor demand in the market, and that individuals will bite when they feel that the price is right.
These suburban projects are also demonstrating how investor demand is shifting from the more traditional city and city fringe areas to locations slightly further afield. Savvy investors are hoping to capitalize on the growth potential in what the Urban Redevelopment Authority (URA) has designated as growth areas, with commercial hubs outside the city centre. These include Paya Lebar Central (Sims Urban Oasis and Botanique at Bartley), Seletar Aerospace Park (High Park Residences), and Woodlands Regional Centre (Northpark Residences). However, the government, worried about shoeboxes crowding out the supply of family homes, implemented measures to curb the number of shoebox units in projects located in suburban areas designated for residential purposes in late 2012.
Waiting for the rental shoe to drop
The rental front for shoeboxes currently shows a rather mixed picture (refer to Figure 2), suggesting that it is a tenant's market, rather than a landlord's market. Over the last 12 quarters, the number of rental contracts signed (and declared to the tax authority) has increased, from around 250 in Q3 2012 to over 1,100 in Q2 2015. However, median rental prices for these contracts have fallen from a high of $6.88 psf per month to $5.11 psf per month in Q2 2015, a decline of 26 percent. This combination of price drops and contract increases does suggest, however, that there is an oversupply in the market, and prices are dropping to attract tenants, in order to get supply absorbed.
It is likely, therefore, that we will continue to see depressed rental rates going forward, as the supply of completed private residential units hitting the market will continue to rise, with over 21,000 units being turned over by end- 2015, followed by another 21,000 units in 2016, according to the Minstry of National Development. Out of this supply, a good chunk are shoeboxes, going by their popularity amongst developers. At the same time, rental demand looks to slow down, as expatriate compensation and benefits packages shrink. Furthermore, with the current lacklustre economic outlook, we might see financial and commodities companies exiting the country, thus reducing the tenant pool.
Median gross rental yields at the end of Q2 2015 look to be about 4.3 percent, according to the figures compiled by PropertyGuru. This figure is likely to compress slightly further when Q3 2015 figures are compiled at the end of this month. For investors wishing to enter the shoebox market, we strongly advise them to look very closely at the potential rental location, its accessibility, and the supply of competing units in the area, to ensure there will be a decent tenant pool available. Units in larger projects also tend to pay less in monthly maintenance fees, which will boost rental yields. Given the tight constraints of the unit, practical layouts that maximize the limited space, expansive high ceilings and quality finishings will also go a long way in making the unit more appealing to tenants, and stand out amongst the competition.
Figure 3 shows the volume of shoebox rentals since Q3 2014 for districts that exceed 50 rentals a quarter for over two quarters. However, simply because these districts have cleared 50 rentals a quarter does not necessarily mean they are more popular. Instead, these transactions are a function of demand and supply. For instance, in the first half of these four quarters, District 2 (Anson and Tanjong Pagar) barely registered a blip. However, it was with Spottiswoode 18 and Skysuites @ Anson coming on to the market that we saw transactions contract for that district spike. By that same token, District 14 (Geylang and Eunos) sees a good number of transactions per quarter, simply because of the number of smaller projects in the location.
One of the reasons District 14 sees a good amount of shoebox apartments is because of the perception of Geylang as a vice area. Because of this, properties sold between certain lorongs (streets) are less likely to be approved for mortgages by commercial banks, and buyers will need to turn to other financial institutions for their purchases. These typically have a higher interest rate, and therefore, developers make the units smaller to reduce quantums and increase affordability of those units.
Interestingly, the central districts of 9 and 10 did not do as well as districts in the city fringes, such as 14 and 15. District 11 also did not meet the criteria of clearing 50 rental contracts in a quarter. This is likely due to their higher rental prices, 12 percent higher than the overall median shoebox rent on the island, as of Q2 2015.
Walking forward
The traditional drivers that have made shoeboxes popular in other countries for owner-occupancy are not present in Singapore. For instance, shoebox apartments are often starter homes for young professionals and urban newlyweds overseas because of their lower costs, especially in the big cities. In Singapore, many young professionals are priced out of even shoeboxes because of the costs of private housing, while newlyweds have the much more spacious option of public housing.
Shoeboxes in Singapore have therefore become popular with individual investors, who find these smaller units more affordable. Furthermore, shoeboxes become viable retirement homes once the investor becomes an empty nester, and is able to sell his / her primary home with a good upside. With the raising of public housing and executive condominium (EC) income ceilings, young couples are more likely to go for these larger, subsidized alternatives. That leaves single professionals well-heeled enough to enter the private market, who would purchase shoebox apartments for owner-occupancy.
This dynamic is unlikely to change going forward. The only way more singles will enter the private market through shoeboxes is if overall prices fall significantly, below a level developers would find tolerable.
As such, investors will continue to be the focus of transactions for shoeboxes. As such, developers who wish to attract investors will need to price attractively, and make the units conducive for rentals. At the same time, investors need to keep in mind the potential rental demand for the area by looking at its growth and accessibility. For those who are currently renting out shoeboxes, they need to remember that it is a tenant's market right now and price accordingly, or throw in perks (like full furnishing) to sweeten the deal. Current owners should not be looking to exit the market yet, unless absolutely necessary. Overall resale activity has been quite poor, and current owners might find that they need to price at a loss in order to compete against brand new projects.
As an individual, I am a fan of shoeboxes, because I enjoy the process of editing my belongings, of finding smart solutions in small spaces, and the privacy it affords me as an individual in my own space. For Singapore's overall housing market however, shoeboxes are an interesting sub-type whose supply needs to be carefully managed, to prevent excessive supply flooding both the resale and rental markets.
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