Should we buy a shoebox apartment in NE Singapore?

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.