Source: First published in TODAY on 17 December 2010 and subsequently published in the book Real Estate Riches written by Mr Ku Swee Yong.
In the first part of the series, we discussed the reason fueling the popularity of shoebox units. Moving on to part two of the series, we will delve deeper into the financial aspect and the outlook of shoebox apartments.
The Economics Of Investing In Shoebox Units
The term ‘shoebox’ apartment is generally defined as a studio or a one-bedroom apartment that has less than 500 sq ft of strata area. The area includes, say, about 15 per cent allocated to balconies, planters, bay-windows, aircon ledges and, in some cases, bomb shelters. Therefore a 380 sq ft one-bedroom unit might have a real usable space of about 330 sq ft in the living/ dining, kitchen and bedroom.
How do the economics stack up? Per square foot prices and rentals generally go up when the sizes of the apartments go down. So in several recent launches, the one-bedroom units fetched, for example, $1,200 psf while the three-bedroom units transacted at below $1,000 psf — a 20 per cent premium that arises because the smaller unit with a lower selling price quantum has a wider reach.
As for rentals, let’s take a hypothetical example, say, in River Valley today. A one-bedroom 550 sq ft unit may lease for $3,800 a month, a 900 sq ft two-bedroom unit may lease for $5,500 a month, while a 1,200 sq ft three-bedroom unit, $6,500. The rentals per square foot increase as the sizes of the apartments drop (see Table 1).
However, up to a point, the equation fails to apply. In this example, a 350 sq ft studio unit in River Valley may, for instance, fetch about $2,800 per month in rental. However, that is near the limit of how high rentals can go for shoebox units. This unit is similar in size as the deluxe hotel rooms in the River Valley area. If we tried to push rentals beyond $3,000 per month, that is, above $100 per day, it may be more economical for the low budget tenant to take a long-term let with a hotel around River Valley, given the more flexible lease terms that include daily housekeeping, electricity, fully furnished/equipped rooms and probably complimentary laundry. He would also save on rental whenever he travels out of Singapore.
As for costs, if every single apartment in a development were shoebox-sized units, their share values would be five for every apartment.1 The maintenance fees and sinking funds for the common areas and shared services would be equally borne by all the owners of the development. However, if a project had some shoebox units mixed with larger sized two to four-bedroom units, then the shoebox units will contribute proportionately higher maintenance fees and sinking funds. So, when we sum them up, the yields — net of maintenance fees and sinking funds — become narrower between shoebox units and their larger sized cousins.
Should the economy weaken and vacancies run high, and normal two-bedroom units are available for rent at $3,000 to $4,000 per month, how would shoebox units stand up to price competition? I wonder what new social challenges may prevail in the future for those developments that contain a wide mix of units.
In developments where the $600,000 shoebox or one-bedroom units were bought by investors and the $2 million four-bedroom units purchased by owner-occupiers, will the low-budget tenants from the shoebox units make good neighbours for the rest? Will there be poor cousins in a rich compound just like I was a poor student living in a 120 sq ft bedsit within the posh Kensington neighbourhood? In such a mixed development, will investor-landlords be willing to contribute that little extra to maintenance and sinking funds as compared to house proud owner-occupiers?
We’ll just have to observe as such heterogeneous projects, most still under construction today, become mature and fully occupied estates over the next five to 10 years.
The Outlook For Shoebox Apartments
In land scarce Singapore, space is a real luxury. While trying to improve the quality of life, we also need to maximise the use of every square foot of land. HDB flats have risen up to 50 storeys. Shrinking apartment sizes is another way to satisfy the demand from more, and smaller, households. The proliferation of shoebox apartments should be an expected consequence of the steadily increasing population density.
I sincerely hope that we will never see Singapore’s condominiums slide to Hong Kong’s cramped apartment sizes, or London’s bedsit-sized units. The goal is to achieve a balance between quality living and the best use of space. Perhaps shoebox developments of the future will contain bathtub-sized swimming pools, a two-stroke lap pool in the sky garden, parking lots for QQs, the use of disposable BBQ pits, gyms that are fully mirrored with a single fold-away multi-station fitness equipment supplied by mail order (call within the next 30 minutes…) and a vertical fitness station provided via jogging tracks alongside the staircase, just to name a few innovative features. Cramped spaces anyone?
1 Under current share value allocation rules, apartments of less than 50 sq m (538 sq ft) are allotted share value of five, larger apartments up to 100 sq m (1,076 sq ft) are allotted six, and so on, increasing by one share for every additional 50 sq m of strata area.