Tuesday, September 2, 2014

Weather forecast for shoeboxes: Stormy with a likelihood of flood!

According to a ST report today, owners of shoebox apartments outside of the city centre may be in for a fix next year. This is because of the 53,900 new condo units expected to come onstream within the next 30 months, most will be small or shoebox apartments with a floor area of up to 506sqft.

The greater choice available may spell bad news for suburban shoebox homes, which have a limited appeal given their location and relatively cramped living space.

Shoeboxes became popular in 2009 and of the 12,097 units sold since then, about 47% were in the city fringe areas and around 37% in the suburbs. There are no official figures available on the number of shoebox units that are on the market, but URA's projection in September 2012 put it at about 2,400 units as at  2011, with the figure rising to 11,000 by the end of next year.

These small homes featured heavily at newly launched projects from 2009 to 2012, including the 293-unit Alexis in Alexandra Road, the 138-unit Parc Imperial in Pasir Panjang Road and the 72-unit Suites @Guillemard in Lim Ah Woo Road. Although these apartment type tend to sell at a higher psf because of their small size, they were popular with investors due to the smaller total quantum, which make them more affordable. 

Rental yields of shoebox units typically range from 3 - 4%, higher than the 2 - 3% yields for residential developments islandwide. However, rents for shoeboxes are expected to soften in line with the flood of newly completed condos. 

Outlook for capital appreciation for shoebox units also appears bleak - the median prices (psf basis) have risen by about 24% in the four years since the Q2 2009. Median prices fell by 5% against a 2% depreciation for non-landed homes after tighter property financing rules were imposed in Q2 2013. 

Despite so, there were 710 shoebox units sold in the first half of the year.

Followers of SG PropTalk will probably know how big of a fan (NOT) the wife and I are when comes to shoeboxes. And we have posted quite a bit on this subject since 2011 - just key in "shoebox" on our "Search this Blog" function to find these. Our previous blog posts had also generated numerous comments and even debates about the liveability and long-term prospects of such unit type. 

While we agree that shoeboxes will continue to see some demand from singles and DINKs (double income, no kids), and probably expats on local employment terms, we have always been of opinion that the number of units that have come/are coming onto the market since 2009 far exceed the actual demand for such units.  

We also firmly believed that majority of shoebox units that were purchased since 2009 were not for self-stay - we do not have the figures to substantiate our claim so we are prepared to "agree to disagree" on this point.

For existing owners who have bought shoeboxes for investment purposes, they will be competing for rentals with not just the brand new units that are expected to flood the market next year but also with the bigger apartments. Given the current depressed state of the rental market, which looks to get worse next year, landlords are likely to drop asking rentals to get tenants rather than leaving their apartments vacant. This will sure to put additional downward pressure on rental yields for shoeboxes - given a choice between a shoebox and a bigger apartment at about the same monthly rent, it is a no-brainer as to which a potential tenant will opt for. 

And to add salt to injury, existing owners - especially those whose units are outside the city centre - may find it near to impossible to resell their units profitably, thus fulfilling the prophesy of a "cannot rent, cannot sell" scenario that we made back in 2011-12...


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