are shoebox condo units good investment choices

In recent years, there has been a trend of property buyers gravitating toward low quantum, high cost per-square-foot units. A typical example would be compact or “shoebox” units, which are less than 500 sq ft, or the ever popular two-bedders.

Shoebox units are both the darlings of investors and developers alike.

For investors, it means a low-entry price level; for developers, it means higher profitability.

When the trend towards the development of shoebox units was so rampant, URA had to step in twice to regulate the maximum number of such units for each project, namely outside the Central Area. The underlying concern is the potential strains and stresses on infrastructure.

In this article, I want to address whether this is the right approach from an investment perspective. A lower quantum is attractive for reasons such as a lower cash outlay, but investors need to consider other factors such as rentability and future demand.

shoebox unit
A shoebox unit is typically 500 sq ft or smaller, which is sufficient for a single or couple

Why Investors Love Small Units?

Impact of Cooling Measures

The year 2013 was the defining moment of Singapore’s property scene since the government rolled out a series of drastic cooling measures.

With the introduction of measures such as Total Debt Servicing Ratio (TDSR), lower Loan-To-Value (LTV) and increase in Additional Buyer Stamp Duty (ABSD) rates, they altered the buying behaviour of property investors.  

On the back of these policies and increase in property prices, the number of shoebox units proliferates.

The bottom line is affordability. Smaller in size translates to low quantum prices (overall prices).

For investors buying their second or third property, low quantum price renders a lower Additional Buyer Stamp Duty (ABSD).

Total Debt Servicing Ratio (TDSR) affects how much one can borrow to avoid buying beyond one means.

For those who are taking their second or subsequent loans, the LTV drops drastically. It means more cash outlays.

Investors are also thinking ahead of their exit strategy. A lower entry price level also translates to a relatively lower exit price level, making it easier to sell in the future.   

In many cases, these are units that trade space for a prime location or more upscale facilities. You may not be able to afford a regular-sized condo in a prime location like Bugis or Orchard, for example, but you might be able to buy a single or two-bedder unit in these places.

It’s expected that the low quantum, combined with excellent location, will provide good rental yields – this is why many investors are quick to snap up such small units during the initial launch.

shoebox units are attractive because of low quantum price
Apartment sizes of new condo projects are getting smaller so that while the cost per sq ft has gone up, it keeps the quantum prices low to make it more affordable

Some Recent Examples of Mad-Rush for Small Units

Normanton Park

Mega-project Normanton Park was the first launch for the year 2021. On 16 January, the first day of launch, about 600 out of the 1840 units were sold. About 80% of the units sold were one-bedroom and two-bedroom units. The overall average price was $1,750 psf.

Reef at King’s Dock

The same phenomenon happened on 30 January 2021 at the launch of Reef at King’s Dock. The developer sold 280 of the 300 units released on a single day, including all the 116 one-bedroom and one-bedroom-plus-study units.

The prices ranged from $2,000 to $2,800 psf, with average price achieved at $2,330 psf. The starting price was only $924,000. This is considered ‘cheap’ for such a prime location, considering the future plans for Greater Southern Waterfront.

Midtown Modern

During the recent launch of Midtown Modern in Bugis on 22 March 2021, buyers snapped up around 90 per cent of the one-bedroom and two-bedroom units. The price of units ranged between $2,401 and $3,501 psf. Interestingly, the developer also sold nearly half of the three-bedroom units.

At an average price of developer price of $2,800 psf, Midtown Modern is priced higher than the average condo price in Singapore. It is even higher than some freehold new projects in Core Central Region (CCR).

However, the smaller units have a quantum (overall cost) similar to what you would find mass market condos, despite the prime Bugis location.

The entry price was as low as $1.1xm.

It is evident, smaller condo units are highly sought-after by investors.

midtown modern sales
Most of the one and two-bedders at Midtown Modern were snapped up on the first day of launch.

Are these shoebox and smaller units better investments just because of the low quantum?

Here are the facts we should consider as investors:

  • We shouldn’t be too quick to presume rental yields will be better
  • Don’t forget that you need rentability as well as rental yield
  • Consider where future demand will come from
  • Remember there are always newer compact units and two-bedders, when the time comes to sell
  • There are potential problems with making a compact unit your first property

We shouldn’t be too quick to presume shoebox unit rental yields will be better

Based on data from Edgeprop, shoebox units generally enjoy high rental yields, both inside and outside the Central Region.

While it’s generally true that a lower quantum can mean better yields, many investors are too quick to jump to conclusions. This is especially the case when prices have gone up so much, and rental rates have not caught up as much.

As a guide, for 99-year leasehold property, you should be expecting 3% and above rental yield. For shoebox units, it can go up to between 3.5% to 4.5%.

But do you get these rental yields for all shoebox units?

Example of V on Shenton

Let’s take a look at V on Shenton, which is right in the heart of the Central Business District. It was completed in 2017.

A 452 sq ft unit fetched a rental of $2,500 in March 2021. The owner bought the unit in 2012 for $1.147m. The yield works out to a mere 2.6%.

Another level 39 474 sq ft unit drew a higher rental of $3,000. Based on the purchased price of $1.28m, the yield is only 2.8%.

shoebox unit low rental yield
The compact units in V on Shenton have an average rental yield of 2.6% to 2.8%

Midtown Modern: A Case of Over Optimism?

During the recent hot sale of Midtown Modern, quite a number of shoebox units were sold above $3,000 psf. The highest was $3,468 psf.

Will these units be able to achieve at least 3% of rental yield?

To achieve 3% for a unit bought at $3,000 psf, you would need to rent it out at $7.50 psf; for 3.5% it has to be $8.75 psf.

On the other hand, for a unit purchased at $3,468 psf, you have to achieve $8.67 psf for 3% and $10.11 psf for 3.5%.

With prices hitting as high as almost $3,500 psf for the compact units, will they be able to achieve high rental yields? (Source: Edgeprop)

Using Duo Residences As A Guide

What is the market rental in the Bugis area? The best comparison would be DUO Residences (an integrated development that is just six minutes down the road). It was T.O.P. in 2017.

The highest rental ever achieved at Duo Residences was $8.20 psf, a rare case in July 2019.

Four units did achieve $7.80 psf. 11 others above $7 psf.

Of course, Midtown Modern would be newer than Duo Residences when it is ready for occupation, so we can assume it can command a higher rent. So $8 psf is not unattainable, but perhaps only a lucky few.

But $10 psf? It would be like scaling Mount Everest!

duo residences rental yields
The rental transactions at the nearby Duo Residences is a good guide for Midtown Modern though we can expect higher rents when it T.O.P. in a few years (Source: Edgeprop)

I know we are making a few assumptions here.

I’m only trying to make the point that just because a compact unit has a lower quantum, it doesn’t guarantee you would be getting a better yield than, say, a bigger unit with a higher quantum.

It’s necessary to deep-dive into the numbers, and compare specific units and projects, when hunting for yield (if you have trouble finding the data needed, do drop me a message so I can help).

Don’t forget that you need rentability as well as rental yield

Rentability and rental yield are not the same, but they are both important. Rentability refers to how quickly and easily you can find a willing tenant; rental yield is the ratio of rental income to cost.

Investors must consider rentability very carefully for smaller units, because you cut off certain tenant demographics.

A single working expatriate may be willing to rent a compact unit, but most families will not.

This ties you to one demographic (single and couple expats), along with the pitfalls of that particular type of tenant (e.g. they tend to sign shorter leases and are less “sticky”; they’re willing to move to wherever the cheapest unit is. Families may not do that in the short term, as they may already have children going to a school nearby, and a lifestyle routine).

tenant profile of shoebox units
Foreigners with families are a demographic you’ve ruled out entirely, if you choose a small compact unit

Some questions you need to ask yourself when buying a shoebox unit for rental income

The choice of location is crucial when buying a shoebox apartment.

One has to ask, where will the potential tenants come from?

What kind of tenants will you get?

Do they have the earning power and budget to match the rental yield you hope to achieve?

If you were to buy a one-bedder unit in Central Region and you need to rent it out at $3,000 a month to get a respectable rental yield, who would likely rent from you? Is there enough demand from this group of tenants?

Or would they rather pay $2,500 a month for a similar size apartment in Rest of Core Region (RCR) instead of Central Core Region (CCR), and commute 15 minutes by MRT each day? To make up for the travel inconvenience, they get to enjoy cheaper dining and grocery options in the heartland neighbourhoods.

Compact units don’t always appeal to students or budget-conscious singles as much as we assume. A bigger two-bedder (something in the range of 650 sq.ft. or above) may be more attractive to these tenants, as it allows them to take on a roommate and split their rental costs.

type of tenants for shoebox units
It is crucial to find out if you are likely to rent out to singles or couple professionals who have the budget to wholly bear the rent of your shoebox unit.

Some locations may be more likely to attract families

Buying a ‘mickey-mouse’ apartment in a development that is within 1 km to a popular primary school or near an international school is not advantageous because your tenant pool or future buyers of your apartment will likely be family nucleus.

Finally, there’s more “give” with regard to bigger units. You can sometimes persuade a tenant to take on more space than they intended; but it’s much harder to persuade tenants to rent a unit they consider too small (e.g. you might be able to persuade a single expat to rent a two-bedder, but it’s much harder to persuade a family of three to rent your compact unit).

This also means you need to…

Consider where future demand will come from

future MOP estatesIt’s less common for homeowners to move from a bigger home, such as a 5-room HDB flat, into a compact condo unit or two-bedder. It does happen (some retirees do this), but that’s not where the bulk of demand comes from.

HDB upgraders – which generally means families – are currently the ones driving private home sales. DBS, for instance, expects that private home sales will mostly be sustained by upgraders; a fact that has been unchanged since around last year.

This is also on the back of about 20,000 flats reaching their Minimum Occupation Period (MOP) annually.

When you choose to buy a compact unit, you should consider your exit plan: who do can you sell the unit to eventually, and what will demand be like?

The wave of HDB upgraders entering the market are probably not going to be interested in such small units, which could dim your resale prospects.

HDB upgraders – which generally means families – are currently the ones driving private home sales.

Singapore’s private homes market is sustained by HDB upgraders – most of these are families, who won’t accept small and squeezy units.

At Navis, we have identified some housing estates where the bulk of HDB flats will fulfil their 5-year Minimum Occupation Period (M.O.P.).

What is the significance?

It means your condo (three or four-bedder and not shoebox unit) will be highly sought-after by these HDB upgraders. Hence, buying a bigger condo unit will bode well for a higher potential of capital appreciation.

Generally, most people prefer to stay in the same neighbourhood because of familiarity unless for compelling reasons.

(If you are interested to have the list of future M.O.P. housing esates, you can write me.)

When investing in a shoebox unit, you may argue that “future landlords” will buy over the unit from you, because of the (presumed) good rental yield. But to this, we need to…

supplies of shoebox units
The market won’t run out of small units anytime soon, given how much developers love them. This means you need to contend with constant new supply.

Remember there are always newer compact units, when the time comes to sell

There will benew launch or resale no shortage of these. In fact, we may have an oversupply in the future.

Between 2012 to 2018 alone, the number of shoebox units has ballooned from 2,500 to 28,000. The number is still growing.  

Now if an investor is going to buy a compact unit for its rental yield, will they buy it from you?

To answer this question, do consider who you’re buying your compact unit from right now. Quite probably, the unit you’re considering is a new launch, not a resale compact unit. It would make sense for many reasons; a fresher lease, probably lower renovation costs, newer facilities, etc.

So put yourself in the shoes of a future buyer, and you’ll understand why you shouldn’t count on “future investors” to buy over your one-bedder.

There are potential problems with making a compact unit your first property

If you’re young and eager to get into property investment, you may be thinking of buying a compact unit for rental, and then living with your parents for the time being.

Think this over carefully, as it could cause some issues later. For example, what will you do if you want to settle down later? As the owner of a private property, you cannot apply for an HDB flat.

(Remember that you need to wait 30 months after selling your property, if you want a BTO flat)

downside of buying a shoebox unit
Before picking a small unit as your first property, consider what you’ll do if you want to settle down later, and need more space

There’s also the risk of being in a property downturn, at the time when this happens – it can be painful to have to wait for prices to rise (you don’t know when that will happen).

If you make your first private property a larger unit, you at least have the option of moving into it when you want to settle down (even if you’ll lose the rental income). Do think this through, before deciding on a compact unit as your very first property.

In short, don’t be too quick to buy small units because of the attractive quantum

In some cases, it may be wise to wait and save up more, and then commit to a three-bedder later.

Or, at least start with a two-bedder, which will give you some mileage till your second child comes along.

Also, don’t purchase a property with immediately attractive numbers – consider what will happen when you need to sell the property, 10 or 15 years down the road.

A successful property investment needs two correct decisions – not only buying right, but also being able to sell right. Drop me a message on Facebook if you’re uncertain, and I can help provide some clarity for your decision.

If you would like to have better clarity, you can book me on the calendar below for a virtual non-obligatory discussion.

property wealth planning pwp

Danny Han is a licensed property agent since 2005.

As a kampong (village) boy growing up in Holland Village, he has so many fond memories. He grew up with pigsty (yuk!), cemetery, swamp and communal-living (with 10 families under one roof). His childhood games were gasing (spinning top), marbles, kites, spider-fighting and tree-climbing. An open-air cinema was his source of entertainments. 7th-month Hungry Ghost wayang (Chinese opera) and getai (concert) was a once-a-year event that brought the entire village together.

What Danny is passionate about is not just about showing clients properties around Holland Village, but also enjoys sharing anecdotes and nuggets of information that are part of his growing up years.

Danny is a foodie. During his free time, he enjoys going out with his wife, a retired academician, on a food hunt or just to enjoy a nice cup of latte. He also has some foodie kakis who mix work with food. They then share their gastronomic experiences through food blogs. So do watch out, because every time he shows you a property, he will tell you what are the best food nearby!

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