The list of overrated things is pretty long in 2012. But up there with K-Pop and Donald Trump’s business sense, we ought to add shoebox apartments in Singapore. These stylish, glorified broom closets are under 500 sq ft, making them useful only for singles, short staying foreigners, and storing bodies till the police are gone. Some people haven’t caught on to why shoebox apartments are a waste of money, hence this article.
What are Shoebox Apartments?
There’s no minimum size for shoebox apartments, but they tend to range from 100 – 500 sq. ft. Also called “Mickey Mouse” apartments, they have a lower overall cost when compared to proper apartments…but a higher cost per square foot.
Shoebox apartments were all the rage in 2011, seeing a slide in November ’11. Their sudden spike in popularity has all the appearance of a fad, which makes for a risky investment. If you’re thinking of getting a shoebox apartment, here’s five reasons not to:
- Maintenance charges are unaffected (in condominiums)
- Higher cost per square foot
- Competition in rental rates
- More profitable as sub-sale units
- The “hot potato” factor
1. Maintenance Charges are Unaffected
Maintenance charges are part and parcel of condo living. Someone’s got to clean your sweat off the gym machines, and buy chairs for the security guards to snore in. The thing about maintenance charges, however, is that they stay the same irrespective of your unit size.
The people staying in a penthouse pay as much for maintenance as someone in a shoebox apartment. That alone should disqualify it as a “budget” buy. By getting a shoebox apartment, you’re relegating yourself to the role of a cash cow; you help pay maintenance, and you don’t take up as much space as the “serious” residents.
True, you get to enjoy the facilities as well. But with the amount that shoebox apartments cost, you could have rented / bought a bigger HDB flat, and then joined a private club.
2. Higher Cost per Square Foot
Shoebox apartments have a lower quantum than HDB flats, but their cost is far from cheap. The average HDB flat costs about $500 – $800 per square foot, whereas shoebox apartments can exceed $1000 per square foot. In areas like Raffles Place and Tanjong Pagar, shoebox apartments have been recorded to exceed $2000 per square foot.
That means the lower prices of shoebox apartments are deceptive; you’re paying more and not less.
On top of the higher cost, shoebox apartments have no “aging in place” factor. HDB flats are designed to accommodate your family for most of your life; shoebox apartments are too small to raise a Labrador in, let alone a child. What’s the point of paying twice the per square foot price for something that lasts half as long?
Unless, of course, you intend only to rent it. Which is also not the best idea, because of…
3. Competition in Rental Rates
Don’t even tell me about the “genius” of buying shoebox apartments to rent. That’s about as clever a move as “don’t hit when you’ve drawn two aces.”
In 2011, everyone saw the benefits of buying shoebox apartments to rent. And I mean everyone. The problem is, shoebox apartments hit a record high (1,999 units) in 2010, and 2011 came close to that (1,867 units). This is what we can decisively call a potential surplus.
So, we have a lot of units, and a lot of people who want to rent them out. The end result? More competition than an India vs. Pakistan cricket match. Shoebox apartment rentals are set to fall, and potential landlords are already bracing themselves. Unless you fancy the idea of joining a rental rate price war, a shoebox apartment is a terrible idea.
4. More Profitable as Sub-Sale Units
Shoebox apartments are more profitable as sub-sale units. That is, they’re worth more before completion. Once a shoebox unit is completed, the value tends to slide by 20 – 30%. Probably because people stepping into the actual place wonder whose fridge they’re in.
Previously, shoebox apartments were popular amongst the house flipping crowd. These investors buy and sell units before completion, to rake in maximum profit while bypassing stamp duties. If you buy from a house flipper, you’re getting the short end of the stick; you’ll be waiting a few years just for the unit to reach its original value.
Incidentally, the government imposed additional stamp duties toward the close of 2011. This makes shoebox units risky even to house-flippers.
5. The “Hot Potato” Factor
Right now, shoebox apartments are a hot potato. They’re short term investments, which are bought and sold at profit asap. The last person buying the unit is the ultimate loser: After a time, it’ll be hard to unload the unit at a desired profit. When that happens, the last resort is to rent it and hope for the best. In which case, see point 3.
Getting back to the “hot potato” issue: don’t assume you can easily unload a shoebox apartment for a profit. If you intend to flip it, you’re joining a game of musical chairs. One where the loser ends up a few hundred thousand dollars short.
Still, if you must buy, at least make a careful comparison of the home loan rates. Use free service websites like MoneySmart to find the appropriate package. Simply enter your property type and desired loan amount, and MoneySmart will find the cheapest available home loan packages. A MoneySmart mortgage specialist can also contact you, to give further advise on choosing the right home loan.
What do you think of shoebox apartments? Comment and let us know!