Consider these when buying shoebox units

Using new sales caveats from 2012 onwards as a proxy, there are at least 9,600 shoebox units island-wide that have recently been, or will soon be, completed. Geylang has the highest supply pipeline with at least 1,200 units. However, its proximity to the CBD, Paya Lebar growth corridor and industrial areas in the East mitigates the risk of severe rental downside.

However, shoebox rents in the North-East Region will be under pressure given at least 2,000 shoebox units have recently been, or will soon be, completed. While the development of the Punggol Creative Cluster and Learning Corridor will boost rental demand, competition for tenants will be stiff. In addition, there will a bumper supply of new HDB flats that will soon fulfil their five-year Minimum Occupation Period, which will compete in the rental market. The full impact on shoebox rents, as a result, has yet to be felt.

Estimated number of shoebox units that have recently been, or will soon be, completed

Source: URA, The Edge Property. Graphic by Kim SY

Projects in the pipeline with a substantial number of shoebox units include Midtown Residences, Parc Centros, Riversails, The Promenade @ Pelikat and Vibes@ Upper Serangoon. The vacancy rate for apartments and condominiums in the North-East Region stood at 12.3% and 11.9% respectively as at 1Q2016.

The East Region trailed closely with at least 1,500 shoebox units that have recently been, or will soon be, completed. The bulk of these are located in Pasir Ris from projects such as D’Nest, Ripple Bay and The Inflora. The vacancy rates for apartments and condominiums in the East Region stood at 8.7% and 10.4% respectively as at 1Q2016.

Shoebox rents have fallen by more than 20% since their peak

Landlords of shoebox units have lost about $600 per month, or a quarter of their rental income, as rents plunged from their peak in 3Q2013. Monthly rents for shoebox homes, defined here as those measuring 500 sq ft or less, dived 23% from $2,792 in 3Q2013 to $2,139 on average in 1Q2016. The analysis is based on rental data mined by the URA.

In contrast, the average rent for all private, non-landed homes has fallen by a slower 12% over the same period. Shoebox rents have also performed worse than large units with four bedrooms and above. The average rent for the latter has fallen by a slower rate of 15%. Meanwhile, the average rent for two-bedroom units has declined by around 13%.

For investors, this means having 1.6 percentage points shaved off their rental yields. Assuming they purchased the units direct from the developer at $1,327 psf, which was the median price for shoebox homes in 2010, they would have enjoyed 6.2% gross rental yields when the units were completed and rented out in 2013. However, today’s rent would knock the yields down to 4.6%.

Mass-market segment led rental fall

Although a 4.6% gross rental yield is mouth-watering, potential investors should note that the performance is not uniform across market segments. The mass-market segment, or Outside Central Region, has performed the worst by far. Shoebox rents in this segment tumbled 24% from $2,502 per month in 3Q2013’s peak to $1,906 psf in 1Q2016.

The most compelling reason for this is competition from HDB flats. For the same rent, or around $1,900 per month, tenants have the option of renting three-room HDB flats in mature estates, which include Ang Mo Kio, Bishan, Bukit Merah, Clementi, Kallang/Whampoa, Marine Parade, Queenstown, Serangoon and Toa Payoh. The other option is a four-room HDB flat in non-mature estates.

In the high-end segment, or Core Central Region, shoebox rents declined by a smaller percentage of 17%, from $3,269 per month in 1Q2013 to $2,698 in 1Q2016. Those in the city fringe, or Rest of Central Region, fell 21% from $2,675 to $2,103 per month over the same period.

On a y-o-y basis, the high-end segment performed the worst, with shoebox rents falling 8% compared with 4% in the city fringe and 5% in the mass market. This is likely due to a temporary spike in the supply of shoebox units in recent years.

The steep rental fall was confined to just a few projects. Shoebox rents at Illuminaire on Devonshire and Robertson Edge fell by a double-digit percentage owing to competition from newer projects in their vicinity including Espada, RV Edge and Vivace. In the CBD, shoebox rents at The Clift also fell steeply, presumably because of competition from Skysuites @ Anson, which was completed in 2014. Owing to a limited supply pipeline, we expect this trend to reverse, with the high-end segment outperforming other segments in the coming years. Q-o-q, shoebox rents held firm in 1Q2016 with a 0.1% increase in the high-end segment, but dipped 1.1% in the city fringe and 3.4% in the mass market.

For tenants, this poses an opportunity to live in the prime districts. In 2013, a $2,300 rental budget afforded them shoebox units in Telok Kurau or Kovan areas. Today, it is possible to rent units at Loft @ Stevens, RV Edge or Wilkie 80 at similar or slightly higher rents.

This article appeared in The Edge Property Pullout, Issue 725 (April 25, 2016) of The Edge Singapore.

Related Articles From TheEdgeProperty.com.sg
Sansiri launches Ralph Lauren-styled luxe condo in Bangkok
JUST SOLD: Condo in Kallang sold for $1.91M profit
Luxury condo liquidators’ sale
Alexis ‘shoebox’ appeal sustained