Small in size but they could grow in demand

PHOTO: Small in size but they could grow in demand

SINGAPORE - The rental market for shoebox units seemed bleak a few months ago for Mr Aaron Wan, but those dark clouds seem to have lifted in recent weeks.

"The rental market, honestly, had been quiet in recent months," said the 25-year-old tax consultant, who owns a 409 sq ft shoebox unit near Serangoon MRT station.

But Mr Wan said that with recent measures such as curbs on permanent residents (PRs) buying Housing Board resale flats and mortgage restrictions having been introduced, "demand for small units should surge", and added: "I'm not worried."

He expects to get a rental yield of at least 6 per cent on his apartment, which he bought for about $500,000 last year.

Shoebox apartments - which are less than 50 sq m or about 540 sq ft each - have been popular among property investors over the past couple of years, thanks to their relatively high rental yield and cheaper total cost compared with larger private homes.

Gross yields of shoebox units ranged from 3.6 per cent to 5.8 per cent a year in the second quarter of this year, according to data compiled by consultancy Knight Frank for The Straits Times.

This was higher than the 3.3 per cent to 4.9 per cent rental yield range in the first quarter.

The top gross rental yield for shoebox homes in the second quarter was 5.8 per cent at the freehold 34-unit R66 Apartments near Farrer Park MRT station.

One factor that could lift the shoebox rental market is a recent government policy requiring new PRs to wait three years before buying a resale HDB flat. This could prompt some PRs to rent small apartments, said consultants.

"Competition for tenants in the private residential market, especially for shoebox units, could ease arising from higher leasing demand, while rents in this market are expected to hold up despite increasing supply," said Knight Frank research head Alice Tan.

However, consultants cautioned that prospective shoebox investors should take into account the location of the project.

Only shoebox units in suburban regions have seen an increase in prices from the first quarter of this year to the second quarter.

Shoebox units outside the central region saw their average prices climb 12.5 per cent to $1,375 per sq ft (psf) in April to June from the preceding three months.

That figure was also up 13.4 per cent from the preceding year.

Their more expensive counterparts in the city centre suffered an average price dip of 1.8 per cent quarter on quarter to $2,256 psf over the same period. That price was a marginal 0.3 per cent higher year on year.

It was worse in the city fringe, where shoebox unit prices tumbled 16.2 per cent to $1,500 psf in the second quarter from the preceding three months. Prices were 5.5 per cent higher year on year.

However, there are some signs of a price rebound in the segment.

Shoebox home resale prices climbed 2 per cent from June to July, according to the latest Singapore Residential Price Index.

Resale transactions also seem to be improving slightly. Though resales of shoebox units make up a tiny percentage of overall transactions, the proportion grew from 3.2 per cent in the first quarter to 5.6 per cent in the second quarter.

"The tentative rebound in the proportion of resale shoebox units suggests the changing investment objectives of buyers, who now look for lower price quantum shoebox units available in the resale market," said Ms Tan.

She said buyers were going for affordability because of recent mortgage restrictions imposed in June under a total debt servicing ratio framework capping borrowers' debt-to-income ratios.

Shoebox units accounted for a markedly greater proportion of home purchases below $1 million in the second quarter of this year compared with the first, according to consultancy DTZ in a report last week.

That percentage rose from 17 per cent in January through March to 29 per cent in April through June, DTZ said.

In absolute terms, transactions of shoebox units costing under $1 million more than doubled from 310 units in the first quarter to 738 in the second quarter.

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