By Mr. Propwise

On September 4th, 2012 the URA announced new guidelines that will effectively curb the future development of shoebox units, typically units smaller than 500 square feet, in suburban areas. Effective November 4th, 2012, the total number of homes that can be built for non-landed private residential developments outside the Central Area will be capped. We have previously covered the problems with shoebox homes, looked at their historical profitability, and even examined the issue of shoebox industrial units.

The proliferation of shoebox units became a cause for concern

One of the key factors for the government’s concern about shoeboxes is the four-fold increase of the stock of shoebox units from 2,400 units at the end of 2011 to around 11,000 units by 2015. The key question is how strong the real end user demand is, whether from tenants or owner-occupiers, especially in the suburban areas.

The sharp growth in shoebox units did not come from end user demand, but instead came from a rush by developers to flood the market with these units due to strong demand by mass market investors looking to dip their feet into a property investment that required only a moderate capital outlay with the promise of potentially high rental yields. This was a no-brainer for developers as it let them sell their developments at much higher per square foot prices and thus boost their margins.

While there is probably end user demand for these units from singles, childless couples and retirees, the URA became alarmed when shoebox units made up 50% to 80% of some housing developments. The increasing density of these developments would also put a strain on the ability of the local infrastructure such as roads to support a higher population than was originally planned for.

The new formula that will cap shoebox units

Thus from November 4th all new non-landed private residential developments outside of the Central Area will be subject to a cap on the number of homes based on the following formula:

Maximum number of homes allowed will be less than or equal to the Maximum Permissible Gross Floor Area (GFA) divided by 70 square meters

So for example, if the maximum GFA is 7,000 square meters (excluding bonus GFA), then a maximum of 100 units (= 7000 / 70) will be allowed to be built.

This formula doesn’t mean that shoebox units will no longer be built. It just means that developments can no longer be predominantly comprised of shoebox units. Following our example above, the developer can still choose to build 50 shoebox units of 30 square meters each (approximately 323 square feet), but it means that the remaining 50 units must be an average of 110 square meters each (or approximately 1184 square feet).

Specific areas, such as Kovan and Joo Chiat/Jalan Eunos, will have a more stringent cap on the total number of homes per development as they are already in a situation where the local transport infrastructure is strained. For these places, the maximum number of homes will be less than or equal to the maximum permissible GFA divided by 100 square meters, similar to the cap currently in place for the Telok Kurau area.

The impact of these shoebox guidelines on the property market

Minister Khaw in his blog has called the guidelines “measured and moderate”, and I agree. The guidelines are not draconian but are meant to encourage developers to build a range of different unit sizes and not just build “shoebox slums”, which are not considered to be family-friendly.

For current shoebox owners, this new regulation is not necessarily a bad thing, as the lower supply of new shoebox homes will reduce the competition for tenants for their units. The net effect will also be to slow the rate of growth of the number of shoebox homes, and limit this category as a proportion of the total housing stock. This will also potentially moderate overall home price increases as the mix of homes shifts away from shoebox homes with their higher per square foot pricing.

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