Small units, big challenges: Mass-market shoebox rents dip 3.5% in 3Q2015

Small units, big challenges

Mass-market shoebox rents dip 3.5% in 3Q2015

By Lin Zhiqin / The Edge Property | October 17, 2015 10:00 AM MYT

Preliminary estimates indicate that rents for shoebox units dipped 1.9% quarter-on-quarter in 3Q2015. Mass-market shoebox units led the decline as monthly rents fell 3.5% or $73 from $2,089 in 2Q2015, to $2,016 in 3Q2015. On a brighter note, shoebox rents in the city fringe stayed unchanged from the last quarter at $2,380 per month. In the high-end segment, monthly shoebox rents fell 2.1% or $59 from $2,815 in 2Q2015, to $2,756 in 3Q2015.

Shoebox units in the mass market continue to face strong competition from HDB flats for tenants. For the same rents, tenants could get a three-room HDB unit with two bedrooms and share their rental expenses with a flatmate. Based on HDB subletting contracts, the island-wide monthly rents for HDB flats averaged $1,958 for three-room units and $2,297 for four room ones in 3Q2015.

On the other hand, shoebox units in the high-end and city fringe segments are more attractive, particularly to tenants who work in the CBD as they can save on commuting costs and time. At the same time, they offer value alternatives to bigger units.

The analysis was based on a basket of properties tracked by The Edge Property. The figures differ slightly from those in our previous article owing to changes in the basket. Shoebox units are defined as private non-landed homes that are up to 550 sq ft in size in this article. "High-end segment" refers to the Core Central Region (CCR), while the city fringe and mass market refer to the Rest of Central Region (RCR) and Outside Central Region (OCR), respectively.

Between 3Q2013's peak and today, shoebox rents have fallen around 18% or $500 from $2,905 to $2,371 per month. Segment- wise, monthly rents for shoebox units have fallen 20% in the high-end submarket, 14% in the city fringe and 22% in the mass market.

In comparison, rents for non-shoebox units have been more resilient. The URA rental index for private non-landed homes fell 7.2% in the high-end segment, 3.1% in the city fringe and 6.7% in the mass market between the last peak and 2Q2015.

The soft rental market continues to dent the profitability of shoebox transactions. Based on URA caveat data, 8% of residential shoebox units (15 of 185 transactions) were sold at a loss in the secondary market. In comparison, only 3% (eight of 307 transactions) of shoebox units were sold at a loss in 2013 and 7% (14 of 215 transactions) in 2014.

In the city fringe, the average loss for unprofitable shoebox transactions has risen from $31,080 (5%) in 2014 to $60,395 (10%) year to date. Similarly, those in the mass market rose from $25,509 (4%) to $79,112 (13%) over the same period. Bucking the trend was the high-end segment. The average loss for its unprofitable transactions pared down to 6%. The trend echoes the relative rental resilience in the various market segments. But the average gain per profitable transaction has generally diminished from last year's.

Nonetheless, shoebox landlords have strong holding power owing to the affordability of the units. According to JLL, only six shoebox units were listed for auction in 3Q2015, down from nine in the same period last year. "We do not expect [a] significant increase in such units put up in 2016 and perhaps one to two more units in 4Q2015," says JLL head of auction Mok Sze Sze.