Does it pay to invest in Shoebox units?

RESIDENTIAL MARKET

It may not pay to invest in shoebox units

A RECENT report has identified hot spots across Singapore for "shoebox" condominium homes but has questioned the viability of these tiny condominium units as investments.

Even before the Government's move this week to restrict the ballooning number of shoebox condominium units outside the central area, market experts were raising a red flag.

These homes of less than 50 sq m used to be mainly in the central areas, but many small studio apartments are now springing up on the outskirts.

An analysis by Maybank Kim Eng found that the highest number of new shoebox apartments has been sold in Balestier, MacPherson and Geylang. Since 2005, 2401 shoebox condominium homes have found buyers in these areas.

This is followed by the city and south-west areas with 1371 units, and the East Coast area with 1359 units changing hands.

The stock of completed shoebox condominium units is expected to reach 11,000 units by the end of 2015, with 3800 of these in suburban areas, the Urban Redevelopment Authority said.

Experts note that while shoebox units with affordable price tags, typically less than $1 million, are usually bought for investment, those in suburban areas might not pull in rental yields similar to centrally located condominium units.

The Maybank Kim Eng report noted that rental yields in central areas may not be representative of potential yields in suburban areas.

The lack of transactions of completed units in the resale market could also suggest a certain level of difficulty in realising capital gains on shoebox units, it added.

However, data found that rental yields for shoebox homes in suburban areas were 4.77 per cent in the second quarter of the year.

This is comparable to the yields of 4.75 per cent for shoebox units in the city centre and 4.86 per cent for similar units in the city fringe regions.

But experts say these yields might not hold in the long run as a slew of new suburban shoebox units get built.

Of the 11,000 shoebox units, 2,200 units will be in the city centre and 5,000 units are set for the city fringe region.

As the completions gain momentum, yields are likely to be compressed across the board but suburban shoebox units far from MRT stations and amenities are likely to be the most vulnerable.

Suburban areas will also see tens of thousands of private homes completed in the coming years and shoebox condominium units will face stiff competition for tenants. Rents for central shoebox units are expected to fall by about 1 to 2 per cent in 2014 while those in suburban areas will see larger drops of 6 to 7 per cent.

Source: The Straits Times – 8 September 2012