We’ve discussed the oversupply of shoebox apartments before. And now, a Straits Times article confirms it: Shoeboxes are headed for a bigger crash than me after three Tequila shots. There’s some immediate danger here, so if you own a shoebox, or plan to buy one, now’s a good time to reconsider. And I’m saying that like a nagging back-seat driver who’s screaming: “Watch out for that bus!” Annoying doesn’t mean wrong. So pay attention:
What Are Shoebox Apartments?
A shoebox is any apartment’s that’s 500 square feet or under. Hence the name; it’s like living in a box that people usually raise hamsters in.
Shoeboxes cost more per square foot than their larger counterparts. But as a plus, the small size means a lower quantum (overall cost). For people who can’t afford a real upmarket apartment, but want to live the high life in a half-assed way, it’s a perfect compromise. It was also a favourite amongst investors, who counted on high rental yield.
Yeah, shoeboxes started becoming the rage in ’08. When property developers realized people would buy them, it was like discovering they pooped solid gold. It meant they could charge more money for smaller apartments. They got in on the act faster than opposition parties on an MRT breakdown, and as a result…
There is Now an Oversupply of Shoebox Flats
The number of shoebox flats is expected to hit 3800+ by 2014. That’s out of proportion to demand.
Remember: Shoebox flats aren’t fit for families. In some cases, we’re talking living rooms that make phone booths look like the lobby of MGM Grand. Likewise, struggling bachelors won’t find them more affordable than a small flat. That means a very specific demographic is in mind here: Young professionals without children. And those aren’t in unlimited supply.
The three problems now facing shoebox flat owners are:
- Reduced rental yield
- Resale difficulties
- Heightened vacancy risk
1. Reduced Rental Yield
Considering the number of shoebox apartments for rent, landlords better brace for a losing battle. The sheer availability of shoebox flats suggests an imminent price war, and the only winners will be the tenants.
Even landlords with existing tenants aren’t safe. Some poaching is inevitable, as other landlords attempt to lure tenants with newer locations, lower prices, and better amenities. If you own a shoebox flat, start worrying about lease renewals. Unless your tenants remain isolated and clueless, they’re going to be more assertive in negotiating. And right now, you versus them is like a lower secondary schoolgirl arm-wrestling Mike Tyson.
If you’re a landlord and you own a shoebox flat, start working on enticements. Lower prices and try to stretch leases for as long as possible.
2. Resale Difficulties
Historically, shoebox apartments have fared better as sub-sale units. Upon completion, the property actually becomes harder to offload. And that situation is now aggravated by over-supply.
With so many options on the market, there are few factors raising the value of existing units. Likewise, the appeal of high rental yields is now gone, so investors are bound to look elsewhere. Finally, shoebox apartments get little love from would-be home owners. It’s usually people with families who decide to buy; and unless they intend to raise sardines, they aren’t buying a shoebox.
Sellers will probably have to bank on location. If a shoebox is located near a train station, for example, odds are the over-supply won’t do as much damage. I think; no promises there. Less fortunate sellers will have to emphasize the low quantum, and shove the shoebox toward the next sucker in a big rush.
3. Heightened Vacancy Risk
Vacancy risks for shoebox apartments are higher. I don’t just mean it’s harder to get tenants; I mean the cost of a vacant shoebox is higher as well.
Private condominiums have monthly maintenance fees, which add to the cost of outgoings and loan repayments. That a shoebox unit is smaller has no bearing on these fees. Consequently, landlords bear a heftier price for a vacant shoebox.
Costs aside, there is the issue of finding tenants. It’s believed (or rather hoped) that measures like the Additional Buyers Stamp Duty (ABSD) will cause foreigners to rent rather than buy. And indeed, rental income has been rising for some time now. But it shouldn’t be assumed that foreigners will necessarily turn to shoebox apartments. Many expatriates, for example, are beginning to show less interest in the central locations which shoebox owners like to tout.
And as stated in point 1, over-supply will always cause a drop in rental income. The rental price for a shoebox is set to become quite rigid, with even minor deviations making the unit undesirable.
Do you think there’s a hope for shoebox apartments? Comment and tell us about it!
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