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Should we buy a shoebox apartment in NE Singapore?

Saturday, June 27, 2015

I was talking to someone who said he bought a second property for investment, a shoebox apartment in NE Singapore and said that he should be able to get a bit more than a 4% yield. He seemed quite pleased with himself and said that any yield lesser than 4%, he wouldn't consider.

Singapore Real Estate Exchange said before that 4% represents a psychological barrier when it comes to rental yields for investors seeking income from residential properties. There seems to be some truth in this. However, if we subscribe to the Rule of 15, 4% looks less attractive and does not provide a sufficient margin of safety.

There are many things that should be considered but basing our expectation of future rental performance on what are currently the market rates could lead to disappointment as more supply to the Singapore non-landed residential real estate market is on the way.

With vacancy rate at 7.2%, some experts are expecting vacancy rate to hit 10% by 2016. Wonder why? See this chart:

Source: URA.

A vacancy rate of 10% in the next few years is plausible as the inflow of foreign workers to Singapore has slowed down dramatically while more private non-landed properties are completed.

Experts have observed that there will be more completed condo units in the suburbs in particular and this will depress rents in OCR further.

"Between H2 2014 and 2015 alone, close to 30,000 units are expected to be completed, substantially greater than the previous two years' supply of 23,000 units. Of this, about 56 per cent will be in the suburban areas, and is thus likely to exert a further strain on rents as potential tenants will have greater bargaining power," said Ms Lee Lay Keng.

"The imminent supply glut could lead to a flight to quality, as some tenants will be able to move closer to the CBD for the same rental budget. The result is that the OCR (outside central region) residential landlords may get the short end of the stick," added Mr Nicholas Mak.

Source: The Business Times.

I have an inkling that Mr. Mak is right and it would mean higher vacancy rates in OCR in future. It might not just be a problem of depressed rents in OCR but depressed resale prices as well.

Remember also that ABSD is part of the total cost of buying that second or third property. ABSD, therefore, depresses the rental yield of these properties, all else being equal. The person I spoke with did not consider ABSD as part of the cost of the property. "It is an expense", he said. Sounded like an accountant.

Unless a residential property is able to offer a higher rental yield and, by that, I mean 5% to 6% which doesn't satisfy the Rule of 15 either, it really isn't a very good investment in an environment of worsening oversupply and impending interest rate hike.

In District 19 - which encompasses Punggol, Sengkang and Hougang - 2,300 new units have hit the suburban precinct in the past year.

This will be followed by a further 3,000 condo units over the next 12 months, with the completion of projects such as Sim Lian's 882-unit A Treasure Trove and Keppel Land's 622-unit The Luxurie.

"Because these areas have seen the largest increase in the supply of non-landed units in the past year, they are likely to see the most rental pressure as tenants would have a wider selection of options, increasing their bargaining power," said DTZ research director Lee Lay Keng.

Source: The Straits Times.

I know that a shoebox apartment in NE Singapore now might seem attractive from a price point. However, if we have done our homework, we might feel less confident about its prospects.

Related posts:
1. Rule of 15.
2. Pay the ABSD?
3. Where to buy shoebox apartment?

Curious about how life is like in a shoebox apartment? Read:
Home is a hut in the sky.


cookie said...

if its freehold n the person has a long investment horizon eg 20 years, do u think it might not be a bad idea?

AK71 said...

Hi Paul,

The combination of the location (D19) and the type of residential property (i.e. shoebox apartments) makes for a bad investment, I believe. The fact that there is going to be massive oversupply is likely to make the outcome much worse.

How long is it going to take for that oversupply to be digested? I have no idea. It depends partly on government policies. So, I don't have an answer for you as to whether it is a good idea. In such an instance, of course, it is really not an investment anymore. It is more a speculation. However, it does not change the fact that the combination of location and type of residential property does not make investment sense, generally speaking.

Shoebox apartments' prices have proven to be quite resilient even in the current slowdown in the property market. I am sure that it is due to the smaller quantums with the exception of those in CCR. They are less demanding to buy and hold on to. However, buyers should exercise prudence and not buy just because the prices are lower.

RCR is where shoebox apartments do better in terms of rental yield and demand continues to be relatively strong, not in OCR. I would even say that RCR is doing better than CCR where sky high prices and asking rents have been declining.

AK71 said...

“The build-up (of supply of ECs) in Punggol and Sengkang is going to be an issue when the units go into the resale market,” said Mr Ku Swee Yong, Chief Executive of property agency Century 21 Singapore.

With a glut of units becoming eligible for resale at more or less the same time 5 to 10 years after TOP, there is no guarantee that there will be sufficient demand to allow owners to sell when they want to at a price they deem to be acceptable, he added.

Source: Today Online.

Those who bought private condos in D19 in recent times or are buying now would do worse in the next 5 to 10 years as they cannot compete with the sellers of ECs when it comes to pricing.

AK71 said...

Some of my replies on my FB wall:

I told him that when I bought my properties, I was able to at least smell 6% yield. Now, 2 to 3 years on, it has become a low 5+% yield. It could decline further in the next 2 to 3 years... Since he started out at 4+% yield now, what is it going to be like 2 to 3 years later? He started to look a bit worried then.

My properties are in RCR which is considered more resilient in terms of rental demand compared to OCR and CCR too... There will be some hardship for many newly minted landlords in the next few years, I suspect. -.-"

... it really depends on how much he could get if it could be rented out at all 3 to 4 years down the road when the full force of the oversupply is felt... -.-"

Depends a lot on luck. Too many monks. Too little porridge.

I really do believe in "flight to quality". Why would I want to stay in D19 when I could be closer to town, paying similar rent for a similar size apartment? (The foreigner would think like this.)

This is especially the case for shoebox apartments because a 10% difference in rent could be only $200 to $300 a month.

AK71 said...

Shoebox units - defined as up to 506 sq ft in size - fell in value by about 4 per cent last year but that was still the smallest decline in the four segments of completed non-landed private homes covered in an index complied by the National University of Singapore.

The outlook appears gloomy for small units given the high number of completions due in coming years, while leasing demand seems patchy.

When the concept of shoebox units kicked off in 2009, they were mainly in the central region but by 2011 they were being incorporated into projects islandwide.

The trend became so pronounced that the Urban Redevelopment Authority noted in September 2012 that as many as 50 per cent to 80 per cent of then- new projects outside the central area consisted of shoebox units.

Some of these projects will be completed this year and next year, said analysts.

Mr Mak said that about 6,200 shoebox units will get their Temporary Occupation Permit over these two years, including units at The Promenade@Pelikat and The Hillier, which were both launched in 2012.

Suburban shoebox homes have "untested leasing demand", said Mr Ong Kah Seng, R'ST Research director. "In the suburban areas, these homes will face competition from HDB flats, which offer more space for almost the same rent... Expatriates also do not seem to have moved to the suburban areas from the central region and city fringes."

While these flats were meant for singles or young couples, some families invested in them as they were more affordable, noted Mr Ong. "Coming to completion, they may face some challenges as the units aren't sufficiently large for their living requirements, (while) at the same time, leasing demand is competitive," he said.


pf said...

If I, as an expat, need to in D19, I probably prefer a hdb flat for the bigger space and cheaper price. Or maybe I'll just go home.

Hee hee...

AK71 said...

Hi pf,

You have hit the nail on the head. For $2,000 a month, an expat family could rent a 4 room flat in D19, I guess, instead of a shoebox apartment in a private condominium in the same area. ;)

pf said...

In my opinion and preference, if I am an expat, the only shoebox unit worth to stay in is tanjong pagar. It has a shopping mall, wet market, super markets, 2 hawker centers, numerous eateries, night life, easy access to work....and laid back all at the same time.

But of course that is provided work place is around raffles place/tanjong pagar or even city hall area.

All other locations are not as ideal....need to balance location, size, convenience and rental rates.

Nick said...

Nearly 22,000 units are projected to obtain TOP this year and a further 21,000 units next year. Completions are expected to push up vacancy rates and the slowdown in the hiring of foreign expats is another contributor to the decline in private residential leasing demand.

According to Savills "Single-digit vacancies will rise to double-digits by year-end or second quarter next year. Leases for suburban condo units are being renewed at rental rates around 15 per cent lower than leases two years ago."

Might not be the right time to invest in private property for yields.

AK71 said...

The glut in the Executive Condominium (EC) market is set to get worse with new launches adding a wave of supply into a housing segment where take-up has been generally lacklustre.

CDL did not reveal indicative pricing for The Brownstone, with a company spokesperson saying this will be done closer to the booking date.

The 638-unit EC is located next to the upcoming Canberra MRT Station along the North-South Line. The project comprises eight blocks of 10- to 12-storey apartments, with sizes ranging from 732 square feet for a two-bedroom unit to 1,711 sq ft for a five-bedroom penthouse.

As many as seven new EC projects are expected to be launched later this year. As of May, 4,176 EC units remained unsold, compared to 2,738 in May 2014.

Analysts, including Mr Ong Kah Seng and Mr Alex Sun from property research firm RST, have recently said that demand for ECs, with the exception of Lake Life in the Jurong Lake District, had been sluggish at prevailing price levels.

They said that the median sale price of about S$800 psf can no longer be supported for projects in locations such as Punggol, Sengkang, Woodlands, Sembawang and Choa Chu Kang, but added that sales will improve significantly if developers cut prices as the sandwiched class are still interested in the hybrid housing type.


AK71 said...

"...vacancy rates of private residential units jumped 1.4 percentage points in the quarter to 8.9 per cent, the highest since 9.1 per cent in the second quarter of 2000."
- Jul 22, 2016 (ST)

AK71 said...

"... 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.

"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.

"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.

"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."


AK71 said...

New reader:
"I wanted an idea about life in a shoebox apartment and did a Google for "living in a shoebox apartment". That was how I found your blog. The link to your own experience living in a shoebox was enlightening and, thanks to you, I am having second thoughts about getting a shoebox in NE Singapore. If you don't mind, I have a few questions..."
(The rest of our conversation has been excluded.)

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