'Beware oversupply of shoebox apartments'

Experts warn investors that thousands of them are set to flood market

By Gan Yu Jia, The Straits Times, 19 Apr 2012

PROPERTY analysts have issued a blunt warning to investors keen to buy so-called shoebox apartments in hopes of capital gains and good rental returns.

The strong interest in these units - mainly 500 sq ft or smaller - is playing a central role in fuelling the robust demand in the overall private property market.

Analysts at major research firms cautioned that investors should look before they leap even though the price tags look tempting, given the units' small size.

They said investors should understand that thousands of these tiny homes are set to flood the market in the next year or so, which could mean headaches in getting a tenant - or a good resale price.

The analysts said most buyers for such units tended to be investors rather than owner occupiers, many of whom lived in HDB flats that were larger than the shoebox units they were buying.

A report by BNP Paribas Group noted a spike in private units purchased by HDB dwellers since 2008, many of which were shoebox-size, 'which we believe is not for owner occupation'.

A Citi Investment Research report added: 'Judging by the increase in proportion of smaller units sold, we believe there has been an increase in investment demand.'

A research report by Nomura Group pointed out that the number of completed shoebox units could triple next year.

Most units scheduled for completion are mass and mid-market projects and more than half of such units were purchased by HDB dwellers, it said.

It added that shoebox units completed in the past two years had turned in a 'mixed' investment performance - with varying levels of rental demand among different developments.

'While rental demand for projects such as Parc Imperial... appears healthy, demand for others like Kembangan Suites appears comparatively slow,' it said.

The BNP report also stated that tighter immigration rules may mean investors would face even more difficulty finding enough tenants for the units.

'Facing an uncertain demand ahead, we believe the physical market could start to feel the first pains of oversupply as early as (the second half of next year) via softening rents and buyer sentiments,' it said.

The researchers also warned that rising interest rates could dampen home demand. 'Coupled with other risks such as an earlier-than-expected climb in interest rates, this could indeed have a significant impact on the financial well-being of HDB households, which typically have less holding power,' said Nomura.

Likewise, the BNP report warned that a rise in mortgage rates could hurt home affordability, 'unless household income rises faster or home prices fall faster'.

Investor Leona Lo, who has just bought a 463 sq ft shoebox unit in Petir Road, said she is not concerned that the surge in the number of shoebox units next year will hurt rents if she intends to lease hers out.

'You must always like what you buy. We've also chosen very carefully. In the area we've chosen, Bukit Panjang, there are no visible shoebox developments, so we'll be the first,' the public relations consultant said. 'It's not saturated like in the East Coast.'

She added that she had just sold a 430 sq ft shoebox apartment in East Coast Road, which she had previously rented out at a yield of 'above 2.5 per cent - more than break-even'.

Shoebox flats rake in higher rental yields

But experts warn rosy times are not expected to last as increasing supply hits market

By Esther Teo, The Straits Times, 20 Apr 2012

TINY 'shoebox' homes here are raking in much higher rental yields for investors than other apartment types but experts warn the good times might not last.

Data from the Singapore Real Estate Exchange (SRX) found that gross yields for shoebox apartments were 5.4 per cent in the first three months of the year.

This is well above the 2.5 to 3.5 per cent yields that residential properties typically return to investors.

The SRX shoebox yield was based on the average rent of $6.51 per sq ft (psf) per month for the 197 leasing deals inked in the period. The average unit price of the 123 shoebox homes sold then was $1,450 psf.

Typically, rental yield is calculated by dividing the rental sum received over 12 months into the cost of the unit. But SRX calculated the yield by dividing the average psf rent over 12 months by the average psf price of units sold in the first quarter.

Shoebox units are typically 500 sq ft or smaller and can be found in projects like Parc Imperial, Thomson V One and Prestige Heights.

A total of 42 shoebox units at Prestige Heights have been rented out since the start of the year, SRX's data showed. They enjoyed average rents of $6.89 psf per month with yields at 4.9 per cent.

Just last month, a 409 sq ft unit at the Balestier Road project was leased for $2,850 while another 420 sq ft apartment secured a tenant at $2,700 a month in February.

There were 16 leases signed for shoebox units at Heritage East in East Coast Road, with average rents of $6.30 psf and yields of about 5.1 per cent.

SRX collates and displays transactions by the major property agencies, accounting for more than 80 per cent of resale transactions in the market.

Experts say investors have flocked to the shoebox segment in droves, attracted by the affordable prices - typically less than $1 million. In fact, about one in seven buyers picked up new homes 500 sq ft and smaller last year, according to R'ST Research.

And the climbing yields seem to be the main driver pulling investors in.

Yields of these tiny apartments have climbed from 4.4 per cent in the first quarter of 2010 to 5.4 per cent in the first quarter this year.

This is more than double the rental yield of 2.4 per cent in the luxury segment, according to analysis by Citi Investment Research. It also dwarfs the 3.6 per cent yield in the mid-end segment and 4.1 per cent yield for mass market homes.

But these high yields are not expected to last as an increasing supply of completed shoebox homes enters the market.

The number of these small homes is expected to double from about 4,100 units later this year to 8,200 units by the end of 2015.

Experts note that many of the completed shoebox apartments are in good locations such as in the city fringe area and River Valley area and are thus commanding decent rentals now.

Many of the upcoming units, however, are in suburban areas, which might not be able to support similar rent levels.

Mr Tan Kok Keong, OrangeTee's research and consultancy head, said that while a dip in prices of shoebox flats could cause yields to rise temporarily, yields are likely to trend towards the norm of 2.5 to 3.5 per cent in the long run as supply picks up.

He expects the yield gap between shoebox units and typical residential yields to narrow to between 0.5 and 1 per cent from 2014 onwards.