Are Shoebox Residential Units Profitable Investments?

By Mr. Propwise

Shoebox apartments (aka “mickey mouse” apartments) have become increasingly popular in recent years, with caveats lodged rising from fewer than 30 in 2004 to more than 1,900 units in 2010. They are becoming a more prominent feature in our private housing landscape – they made up just 6% of new private home sales in 2008, but that figure has doubled to 12% in 2010.

While there is no industry accepted standard definition of what constitutes a shoebox unit, Minister Khaw Boon Wan has categorized them on his blog as apartments that were smaller than 500 square feet.

The natural choice for budding investors?

Due to their lower total costs (usually less than $1m per unit), they have become the vehicle of choice for budding investors who only have a moderate amount of cash to put to work, while promising decent potential rental yields of 3% to 5%. For example, a $500,000 unit (400 square feet at $1,250 per square foot) would only require $100,000 (if taking an 80% loan) to $200,000 (if taking a 60% loan) of cash plus CPF to buy. And if you assume that you can rent it out at $1,500 per month, then you’re looking at a gross rental yield of 3.6%.

Based on the calculations above, it sounds like shoebox units are potentially decent investors, and the thought of picking up a unit has indeed crossed my mind (and that of other investors I know as well).  But I’ve always held back because of the high per square foot prices, which instinctively tell me that I’m not getting a great deal.

Can shoebox units be good investments?

So it was with great interest that I read a new report released by local property consultancy firm Ascendant Assets. The report, which was recently covered by The Straits Times and believed to be the first in-depth study of this phenomenon, does a detailed analysis of 3,780 shoebox unit caveats lodged with the URA from 1998 to 2010 of to reveal the trends in the market and the profitability of shoebox unit transactions.

One finding was that based on the transactions of these units so far, sub-sales (before the CSC was received) and re-sales have generally been profitable, with an average profit of $106,426 and only 4.4% of owners selling at a loss. The maximum gain recorded was $332,000.

However, there were a significantly higher percentage of profitable sub-sale deals compared to resale deals. Could this be because it is easier to sell these units off the plan as opposed to live as the buyers will then see how small these units actually are in reality?

I believe that this trend of the majority of sub-sale and re-sale transactions of shoebox units might not continue going forward given:

1. Property prices may not keep going up as they have in the past two years

2. The total number of completed units will increase from 1,100 to 3,800 by 2014, creating more supply in the market (and competition for buyers).

3. The harsh Sellers Stamp Duty imposed by the government at the beginning of 2011 makes it unprofitable to flip the unit as a sub-sale transaction, increasing the risks of being stuck with a unit that might be difficult to rent or sell upon completion.

Perhaps the real winners from the growing trend of shoebox units are the developers, who are able to bump up their per square foot prices (and margins) by shrinking the size of the units. Indeed the Ascendant Assets’ report found that only shoebox units sold by developers were able to get top absolute and per square foot prices.

So be careful if you’re considering investing in such a unit!

The report covers several more interesting findings with lots of graphs and figures, including the psychological price ceiling for sub-sale/re-sale shoebox units, profitable locations of investing in shoebox units etc., and is recommended for anyone interested in investing in this segment. Ascendant Assets has kindly made it available for sale for a modest price on this site. Click here to buy it.

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