Are 1-bedroom units a good investment?

PHOTO: Stackedhomes

It’s probably no surprise to hear that one and two bedroom units in a new launch are always the first to sell out. You don’t even have to look too far for evidence on this either.

To give you an example, recent new launches like Midtown Modern (90 per cent of one and two bedroom units sold at launch), Irwell Hill Residences sold over 50 per cent of its units (81 per cent of its units are one and two bedroom), and One-North Eden on the weekend – selling out its one and two bedroom units by 10am.

Make no mistake, this could be down to developers understanding which unit type moves the fastest. So for most new launches today you’d see that majority of the unit types will be dedicated to the smaller one and two bedroom units.

But there’s no question that much of it is all down to its low quantum, as these small units represent the lowest barrier of entry to those looking to get into property investment.

In this article, we look at whether it’s worth jumping into old-school, single-bedder condo investments:

The performance of 1 bedroom units since 2011

District Breakeven Loss Profit Breakeven Loss Profit Loss (quantum) Profit (quantum)
1 1 37 10 2.08 per cent 77.08 per cent 20.83 per cent -$110,322 $53,562
2 1 24 60 1.18 per cent 28.24 per cent 70.59 per cent -$66,317 $64,578
3 1 16 66 1.20 per cent 19.28 per cent 79.52 per cent -$40,488 $77,841
4 11 4 0.00 per cent 73.33 per cent 26.67 per cent -$35,037 $36,950
5 16 42 0.00 per cent 27.59 per cent 72.41 per cent -$53,946 $64,975
7 9 0.00 per cent 0.00 per cent 100.00 per cent $90,450
8 25 15 0.00 per cent 62.50 per cent 37.50 per cent -$53,440 $35,954
9 58 39 0.00 per cent 59.79 per cent 40.21 per cent -$128,346 $70,268
10 32 36 0.00 per cent 47.06 per cent 52.94 per cent -$98,115 $78,960
11 34 18 0.00 per cent 65.38 per cent 34.62 per cent -$82,056 $60,399
12 1 76 218 0.34 per cent 25.76 per cent 73.90 per cent -$40,090 $63,370
13 18 98 0.00 per cent 15.52 per cent 84.48 per cent -$60,000 $68,562
14 168 528 0.00 per cent 24.14 per cent 75.86 per cent -$45,212 $61,757
15 2 107 156 0.75 per cent 40.38 per cent 58.87 per cent -$45,913 $48,157
16 1 46 120 0.60 per cent 27.54 per cent 71.86 per cent -$38,140 $72,896
17 14 126 0.00 per cent 10.00 per cent 90.00 per cent -$42,879 $59,271
18 25 229 0.00 per cent 9.84 per cent 90.16 per cent -$24,642 $70,866
19 2 86 488 0.35 per cent 14.93 per cent 84.72per cent -$28,503 $63,783
20 2 49 0.00 per cent 3.92 per cent 96.08 per cent -$87,500 $86,595
21 39 92 0.00 per cent 29.77 per cent 70.23 per cent -$43,832 $40,854
22 3 31 0.00 per cent 8.82 per cent 91.18 per cent -$24,467 $82,958
23 46 89 0.00 per cent 34.07 per cent 65.93 per cent -$32,319 $45,061
25 9 178 0.00 per cent 4.81 per cent 95.19 per cent -$43,148 $91,513
27 1 14 87 0.98 per cent 13.73 per cent 85.29 per cent -$35,444 $73,861
28 6 124 0.00 per cent 4.62 per cent 95.38 per cent -$32,341 $103,838

For the table above, we restricted our findings to units of 600 sq. ft. or below; units of this size would be considered a one-bedder today. We are looking at size because the term “one-bedder” has changed over time; for old condos there are even 900+ sq. ft. units that are labelled “one-bedders”.

We have also kept to transactions dated Jan 14, 2011 or later. This is when the Sellers Stamp Duty (SSD) was imposed. Transactions before this date could have been sub-sales (e.g., buying and selling the unit before it’s even completed), which would distort the view of potential returns.

The given rental yields are approximations based on available rental data; the given yield corresponds to the year of the sale.

Some key findings regarding 1 bedroom units

  • Prime region 1 bedroom units fare the worst for gains
  • There’s continued evidence that 1 bedroom units have superior yields
  • Returns can get worse over longer holding periods
  • Leasehold has generally outperformed freehold
  • Smaller 1 bedroom units generally lose more
  • Overall, profitable transactions significantly outnumber unprofitable ones

1. Prime region 1 bedroom units fare the worst for gains

PHOTO: Stackedhomes

There’s an old saying that, if you want to invest in a 1 bedroom unit, you should only consider prime or central locations. The theory is that expatriate tenants will always favour places like District 9 or 10. Perhaps that’s true when it comes to rentability. When it comes to gains however, the opposite applies: prime region one bedroom units have the lowest percentage of profitable transactions.

For example, in District 1 (Marina Square, Raffles Place) 37 out of 48 recorded transactions were unprofitable. District 11 (Newton, Bukit Timah) saw 34 unprofitable transactions out of 52.

Close to the prime region, District 7 (Bugis, Beach Road) did manage to get a 100 per cent score on profitable transactions; but it’s questionable if this really counts, as there were only nine transactions.

Overall, we look at the top 10 districts for percentage of profitable transactions, only two are in the RCR. All others are Outside of Central Region (OCR), and none are from the CCR:

RCR, District 7 (Bugis, Beach Road) – 100 per cent (but only nine transactions)

RCR, District 20 (Bishan, Thomson) – 96.08 per cent

District 28 (Seletar, Yio Chu Kang) – 95.38 per cent

District 25 (Woodlands) – 95.19 per cent

District 22 (Jurong) – 91.18 per cent

District 18 (Pasir Ris, Tampines) – 90.16 per cent

District 17 (Changi) – 90 per cent

District 27 (Sembawang, Yishun) – 85.29 per cent

District 13 (MacPherson) – 84.8 per cent

District 19 (Punggol, Sengkang) – 84.72 per cent

This is due to the low quantum of single-bedders in the OCR. Even today, it’s possible to find new 1 bedroom units in the OCR that are priced below $750,000. This allows significant room for appreciation.

That said, gains don’t take into account your rental income. Once you factor this in, the overall returns could still place a high-cost, prime region condo ahead. As is, suffice it to say that – if you’re not expecting to rent out – a prime region 1 bedroom unit could be a dicier investment.

2. There’s continued evidence that 1 bedroom units have superior yields

Size category to rental yield (gross) < 2.5 per cent 2.5 per cent – 3 per cent 3.5 per cent – 4 per cent 3 per cent – 3.5 per cent 4 per cent or more No Data
Less than 400 sqft 0 (0 per cent) 5 (1 per cent) 209 (24 per cent) 113 (44 per cent) 124 (26 per cent) 27 (6 per cent)
401 – 500 sqft 4 (0 per cent) 85 (4 per cent) 776 (44 per cent) 838 (41 per cent) 67 (4 per cent) 135 (7 per cent)
501 – 600 sqft 11 (1 per cent) 150 (10 per cent) 385 (44 per cent) 641 (27 per cent) 29 (2 per cent) 235 (16 per cent)
Grand Total 15 240 1370 1592 220 397

It’s a common saying that one bedroom units have the best rental yields among private property segments. The data so far continues to provide evidence that this is true.

The majority of one bedroom units (1,592 units) managed estimated gross rental yields of three to 3.5 per cent. Out of some 3,400+ one bedroom units tracked, only 15 units fell below a yield of 2.5 per cent.

ALSO READ: Are new launch big bedroom units getting more expensive?

For reference, the typical gross rental yield of a private residential unit in 2021 is between two to three per cent (HDB flats average five to seven per cent due to their lower quantum).

Investors who have less interest in gains, and just want to collect rent, will continue to favour these small units.

3. Returns can get worse over longer holding periods

Holding Period Breakeven Loss Profit Breakeven Loss Profit Loss (quantum) Profit (quantum)
> 5 years 6 683 1813 0.24 per cent 27.30 per cent 72.46 per cent -$53,642 $60,919
3 – 5 Years 3 206 991 0.25 per cent 17.17per cent 82.58 per cent -$51,844 $75,119
Less Than 3 Years 1 23 108 0.76 per cent 17.42 per cent 81.82 per cent -$67,049 $92,180
Total 10 912 2912 0.26 per cent 23.79 per cent 75.95 per cent -$53,574 $66,911

Among transactions where the unit was held for more than five years, about 72.4 per cent were profitable. However, this increases to 82.5 per cent for units held for three to five years.

Even among units held for less than three years, the percentage of profitable transactions is higher (81.8 per cent).

It’s hard to pinpoint the exact causes. However, one factor could be the huge spike in property prices leading up to 2013 (this was the cause of the cooling measures, which remain in place today).

From our start point of 2011 to 2013, we can see property prices climbing:

PHOTO: Stackedhomes

In addition to this run-up, there was a shoebox craze at the time; one that was only starting to subside in 2012. Due to the rising property market, many investors were eager to dive in even with limited capital; shoebox units were the most affordable units to them.

These buyers, who accepted inflated prices near 2013 but held for more than five years*, could account for many unprofitable transactions.

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On the other hand, those who bought in 2016 or later would have entered at a time when cooling measures had muted demand and prices. This likely improved their resale gains.

*The intuitive reaction would be to hold and try to ride out the down period, because the cooling measures were deemed “temporary”. Few thought they would last – and in fact be intensified – over the next seven years.

The other reason, coming from perspectives on the ground, is that buyers who have waited so long are eager to move on. Many of these buyers are ready for their next step up, which involves selling off their one bedroom unit to buy a bigger condo, a cluster landed property, etc.

However, some have been frustrated to find it’s a tougher environment to sell, due to the ABSD (most buyers of one bedroom units are investors who already own another home). In addition, buyers have shown a general preference for new one bedroom units, rather than older resale units.

As such, some sellers are ready to drop their asking price to ensure a quick sale. Note that, even if they don’t see resale gains, they may not have experienced a financial loss. Many have received more than five years of rental income at this point, which makes a low selling price more palatable.

4. Leasehold has generally outperformed freehold

Tenure Breakeven Loss Profit Loss Profit Loss (quantum) Profit (quantum)
Freehold 3 567 1048 -6.68 per cent 8.60per cent -$55,125 $52,000
Leasehold (60-years) 4 72 -2.84 per cent 9.66 per cent -$15,240 $43,450
Leasehold (900+ years) 37 39 -6.27 per cent 9.90 per cent -$49,664 $63,229
Leasehold (99-year above) 7 304 1753 -5.93 per cent 13.68 per cent -$51,660 $76,871
Total 10 912 2912 -6.40 per cent 11.70 per cent -$53,574 $66,911

This is because freehold units can have a premium of as much as 20 per cent, over leasehold counterparts; so it’s unsurprising that, as a whole, leasehold sees more profitable transactions (13.68 per cent, versus 8.6 per cent for freehold).

What is surprising is that, even when held for over five years, freehold status doesn’t seem to help much.

For freehold properties held for over five years, 63 per cent of transactions are profitable. For leasehold properties held over five years, the percentage increases to 82.7 per cent.

Even adding lease decay as a factor, investors seem to be better off picking leasehold one-bedders.

5. Smaller 1 bedroom units generally lose more

Size category Breakeven Loss Profit Breakeven Loss Profit Loss (quantum) Profit (quantum)
401 – 500 sqft 6 377 1522 0.31 per cent 19.79 per cent 79.90 per cent -$44,002 $67,897
501 – 600 sqft 3 385 1063 0.21 per cent 26.53per cent 73.26 per cent -$68,327 $69,306
Less than 400 sqft 1 150 327 0.21 per cent 31.38 per cent 68.41 per cent -$39,767 $54,544
Total 10 912 2912 0.26 per cent 23.79 per cent 75.95 per cent -$53,574 $66,912

Interestingly enough, if you were to divide the 1 bedroom units by different classification of unit sizes, you’ll find that one bedroom units that are less than 400 sqft (studios, usually), actually have a greater percentage that are loss making.

Perhaps there is a certain size barrier that most people can’t cross as of now. When it comes to purchasing it as a new launch before it is built, naturally that most affordable quantum price tag is attractive. But once it is built and sold on the resale market and buyers can see the real thing, that small size can be off putting to some.

6. Overall, profitable transactions significantly outnumber unprofitable ones

There are only five districts where 1 bedroom units saw more unprofitable than profitable transactions: districts 1, 4, 8, 9, and 11.

In most other districts we checked, the number of profitable transactions took a clear lead – only district 10 was at a near 50-50 split, with profitable transactions leading by around three percentage points.

ALSO READ: One-North Eden review: Attractive rentability with an element of ownstay

This suggests that, while 1 bedroom units are a more speculative investment than conventional-sized units, they’re not as risky as sometimes portrayed.

The key concern in 2021 is the buyer demographic

In the near term, most buyers are HDB upgraders – they’ve made up the majority since late 2019. The problem here is that HDB upgraders tend to be family units; one-bedders are too small to fit them.

On top of this, there are concerns about how many foreign tenants we’re likely to see, while the Covid-19 pandemic is ongoing.

PHOTO: Stackedhomes

As such, this could make one bedroom units a tough sell in the near term; especially for resale units, as sellers need to contend with the slew of new launches. A one bedroom unit may not be right for every investor, despite the apparently high yields and low entry costs. 

This article was first published in Stackedhomes.