The Big Read: Despite downsides, heartlanders continue their love affair with shoebox units

SINGAPORE: For six months, Ms Hanna Sim was trying in vain to rent out her 1-bedroom apartment at private condominium Kingsford Hillview Peak. Her tenant search ended after her property agent lowered the monthly asking rent from an initial S$2,000 to S$1,750.

With a lower rental income, the 30-year-old is making a loss out of her 52 sq m shoebox apartment in Hillview. To break even, she would need a tenant who would be willing to pay a monthly rent of about S$2,200.

Ms Grace Seow, who had owned a shoebox unit at Parc Rosewood in Woodlands, sold her apartment at the same price she paid for it, albeit without factoring added costs such as renovation or maintenance.

“It took me quite a while to sell it, and I managed to break even at the price that I bought,” the 29-year-old insurance agent said.

Ms Seow and Ms Sim are among a growing number of people here who are finding out the hard way that warnings by experts and the Government about buying shoebox units in the heartlands are true: There is low resale demand for such units given their location, and they are too small to raise a family in.

Even so, shoebox units in new projects in the heartlands continue to sell like hot cakes — often thanks to good marketing and persuasive property agents. These units at some of the recent launches were the most popular among buyers, developers said.

Shoebox apartments are generally defined by the industry as being 50 sq m or smaller, which is slightly four times the size of a car parking lot (11.52 sq m). The smallest shoebox unit ever sold in Singapore was 24 sq m — the size of two and a half carpark lots — at Suites @ Guillemard, according to Squarefoot Research.

While shoebox units used to be concentrated in the central region and city fringes of the island, such apartments have mushroomed in the heartlands, known as the Outside Central Region (OCR).

Responding to queries, the Urban Redevelopment Authority (URA) said that as of the first quarter of this year, there were about 28,000 completed shoebox units in Singapore in total, an 11-fold increase in just six years.

The figure makes up 8.7 per cent of the 323,000 non-landed private housing units completed on the island. Out of the total number of completed shoebox units, 85 per cent are located outside the central area — a complete reversal of the distribution of such units in 2012, when 80 per cent of shoebox units were located in the central area.

Concerns over an oversupply of shoebox units, particularly in the suburban areas, were first raised in Parliament in 2012. Then National Development Minister Khaw Boon Wan told the House that there were 2,500 such apartments, comprising about 1 per cent of the total private housing stock then.

Back then, the URA also observed shrinking dwelling unit sizes in new private housing projects, and the strain posed on the local infrastructure by the large concentration of such developments, which were much higher than what was originally planned for.

Mr Khaw also noted that property data at the time suggested most of the people who invested in shoebox units were mostly Singaporeans with Housing and Development Board (HDB) addresses.

He told Parliament: “Obviously, they do not plan to stay (in these shoebox units) because they would not be able to fit into these 50 sq m for a family of several members.”

“It looks like they are investors, parking their funds there and expecting to be able to rent out because they must have seen shoebox units in the Central Region being able to be tenanted out relatively easily with reasonable yield.”

Six years after Mr Khaw raised the red flag over shoebox units, they continue to proliferate.

On Oct 17, the URA announced new guidelines — taking effect three months later — to reduce the maximum number of units allowed in new private housing projects in the heartlands. This effectively deters developers from building an excessive number of shoebox units.

Several new areas — including Marine Parade, Balestier and Loyang — will also be subject to more stringent requirements due to the severe strain which the “cumulative effect of new developments” could pose on local infrastructure.

READ: URA guidelines change for new condos: All you need to know

The new guidelines are a tightening of the ones first unveiled by the URA in 2012 to “moderate the excessive development of shoebox units”.

Data from two other property brokerage firms — Cushman and Wakefield and ZACD Group — showed that across the island, the average size of shoebox units had increased slightly from around 41.5 sq m in 2014 to 43.1 sq m in the first half of the year.

However, research from property consultancy CBRE showed that the median size of private homes in new projects in the heartlands especially has been shrinking since the second quarter of 2017. 

In fact, as of the third quarter of this year, the median size of homes in OCR is the lowest among the three regions at just 57 sq m — compared to 82 sq m and 65 sq m in the city area and the city fringes, respectively. 

Analysts attribute this to the fact that in the heartlands, developers need to keep the prices of condominium units relatively low in order to target the mass market. As a result, smaller units are built to maintain profit margins.

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BUYERS’ PROFILES

While shoebox units are usually targeted at investors and singles, other common profiles of their buyers include expatriates, the elderly and couples without children.

Mr Goh Boon Hong is one of them. The 48-year-old engineer currently lives in a 49 sq m shoebox apartment at Urban Vista condominium with his wife. He bought the unit in Tanah Merah in 2013, and moved in when the development was ready in 2016.

“This unit (size) is sufficient for couples, although it may be cramped for (owners) with kids,” he said.

Likewise, Mr Goh Zong Wei, 32, used to call a 49 sq m shoebox apartment in Mountbatten home for two years, until his wife got pregnant.

The apartment is definitely not suitable for a family since it has only one bedroom and one study, the banker said.

Another owner of a 44 sq m condo unit at Parc Centros — who only wanted to be known as Nicholas — also changed his mind about living in a shoebox unit after plans to settle down came to the fore.

The 28-year-old, who had been living with his parents in a HDB flat, bought his property in late 2017 with the intention of living there alone.

However, he now intends to sell his Punggol shoebox unit in two years.

While Nicholas is happy with his purchase, he recognises that living in a tiny apartment “would be difficult for two people”, and intends to buy an HDB flat in the future with his partner.

Because of its relatively lower quantum, or overall price, in the private market, shoebox apartments also cater to the needs of an unlikely group of buyers: Those who are not able to purchase HDB flats through its Build-To-Order exercise or the resale market.

Despite being Singapore citizens, public housing regulations and loan restrictions meant that Ms Sim and her husband could only get a lower-priced property in the private housing market. While initially intending to live in the apartment, an overseas relocation for her husband meant that she had to rent out her unit. She said:

If circumstances had been different, we would have gone for a bigger place.

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For Mr Nandhakumar Palani, a Singapore permanent resident (PR) who is from India, he was unable to buy an HDB resale flat as his wife had not attained her PR status when they were house-hunting four years ago.

Confined to the private housing market, the 38-year old executive in the oil and gas industry said that a shoebox unit was within his budget as “bigger units (are) expensive”.

“If we had gotten PR before buying this house, we would never come here. We would be buying HDB,” said his wife, Ms Bharathi Govindasamy.

When they bought their 40sqm shoebox unit at Parc Rosewood, the couple had only one son. But the three-person household has become a four-person family with the arrival of another son, in addition to Ms Bharati’s mother, who is currently in town for a visit.

While Mr Nandhakumar said they are managing the use of the tiny space comfortably, the growth in family size has definitely made a difference. The family of four is now cramped in the only bedroom while Ms Bharati’s mother sleeps in the living room.

“(In) future, better go for HDB, big space,” Mr Nandhakumar said.

For Malaysian businesswoman Cheah Bee Choo, buying a shoebox unit was born out of necessity as her children were studying in Singapore.

“My husband and I are not PRs and we cannot buy HDBs, so we don’t have a choice, and we have to pay stamp duties too for this unit,” the 43-year-old said.

Ms Cheah added: “There are four kids staying on their own here, and I will visit them occasionally, so there are currently five in this unit now. To accommodate them, we have to use double-decker beds.”

While there is no data on the category of foreign buyers, analysts believe that they tend to be the exception rather than the norm.

Property consultancy ZACD Group executive director Nicholas Mak said he does not think this segment of buyers form a huge percentage.

“To say that a lot of PRs have to wait for three years before they can buy an HDB flat and therefore have to buy shoebox units, I don’t think that is the primary source of demand,” he added.

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WHAT DRIVES THE DEMAND

Despite the earlier warnings that shoebox apartments in heartland areas may not yield attractive rentals, the appetite for these units remains strong, with analysts noting that tiny apartments at new launches tend to be snapped up the fastest compared with bigger-sized units.

Data from OrangeTee showed that while sales of heartland shoebox units made up only 6 per cent of non-landed private housing sales in the first three-quarters of 2008, they now comprised 49 per cent for the same period this year.

At one of property developer Oxley Holdings’ recently launched developments in Hougang, Riverfront Residences, nearly 200 of the 281 one-bedroom units measuring 43sqm had been sold. “It is one of the hot-selling types,” an Oxley spokesperson said.

Over at Potong Pasir, one- and two-bedroom apartments at The Tre Ver, another recently launched project, were the most popular units, said a spokesperson for property developer UOL.

At Oxley’s Kent Ridge Hill Residences — which has not been launched — the smaller units, measuring between 44 sq m and 54 sq m, account for 125 out of 548 units.

“Now, 474 sq ft+ (44 sq m+) units are more comfortable and just nice,” the Oxley spokesperson added.

Analysts attributed the high demand to factors such as the low-interest rate environment, relatively affordable price quantum for shoebox apartments, and the lack of data for shoebox units to allow buyers to make an informed decision.

Mr Ku Swee Yong, chief executive of International Property Advisor, said: “Demand is still high because that’s all (this group of buyers) can afford.”

He added: “And that’s the segment that (property agents) are going after. In any new (property) launches, (shoebox units) are the low-hanging fruits. You sell those first in order to achieve a high dollar per square foot benchmark.”

“(Such a benchmark) sets a valuation for your other larger size units, which is actually very topsy-turvy because that’s how market crashes are created. He said:

You overvalue yourself by having 10 per cent of all your units as microsize units in order to set a high dollar per square foot transaction price, and the rest (of the bigger units) can be supported by valuers.

Agreeing that the lower quantum is one of the factors driving demand, Mr Desmond Sim, CBRE head of research for Singapore and Southeast Asia, said that for some people, the “yearn for social escalation” drives them to forego a bigger-sized HDB apartment for a private shoebox unit.

This is further aided by the ability to utilise Central Provident Fund monies to pay for property for Singaporean buyers, added Mr Sim, as the lower amount of cash needed for downpayment helps to increase the affordability of homes for Singaporeans.

Another factor is the “artificially compressed interest rate environment” since the 2008 Global Financial Crisis, which has made capital so cheap and led to a boom in residential markets around the world, said Mr Sim.

“A low interest rate environment is not a norm. Interest rates are going up,” he added.

The lack of available data for shoebox apartments, such as rental yield and vacancy rates, also means that buyers are unable to make informed decisions, Mr Ku said.

“There’s nobody actually trying to do a matching of what was the expected rental at the point of launch versus what is actually realised. Secondly, nobody tracks what is the vacancy period from the day (a buyer) collect the keys to the first tenant moving in,” he added.

The URA and several other property brokerage firms approached could not provide data on rental yield for shoebox units in suburban districts.

“It’s not easy to find available data, so people thought everything is rosy. Especially if their main sources are property agents,” Mr Mak said.

Mr Sim added: “All you need to do is go down to a showflat … They (agents) will tell you here got international schools and all that. Some people are driven thinking that ‘maybe I still have a chance because got international school, chance to have rental.”

Investor psyche is also another reason, said Mr Sim, noting that Asians will always prefer to place their money in real estate, as it is deemed to be not as volatile as other investment options such as equities or even bonds, which are more sentiment-driven.

COMPETING WITH HDB FLATS

The demand for shoebox apartments in the heartlands has remained unabated, even as analysts continue to assert that the investment or resale potential of such units is not guaranteed.

Hence, the URA latest guidelines to curb the excessive development of shoebox units are seen by some as a step in the right direction, by curbing the supply side of the equation.

Mr Ang Wei Neng, an MP for Jurong GRC, said the URA latest guidelines could have been implemented earlier. But he added: “Late is better than never”.

The MP, who looks after the Jurong Central Ward, said that in the past few years, during his Meet-the-People Sessions, he had seen quite a few cases of residents — mainly young couples — who were having difficulty selling their shoebox apartments.

“I had a young married couple who came to see me. They have a newborn and the shoebox apartment they bought before having children is too small for them,” Mr Ang added.

Mr Ku of International Property Advisor said that shoebox units in the heartlands tend to fare poorly in the market due to the higher proportion of HDB units, which are also competing for tenants.

“In the central parts of Singapore such as Newton or Tanjong Pagar, the competition from HDB flats is very thin. And so it makes sense to (rent out your shoebox units there),” Mr Ku said.

Agreeing, Mr Sim of CBRE warned that it would be a “dire mistake” for buyers to think they are able to rent out their shoebox apartments, especially in the heartlands.

In addition, with a greater number of foreigners not on “expat packages” anymore, they would rather opt for a bigger-sized HDB apartment in the heartlands to host a visitor, said Mr Sim.

The low interest rate environment also attracted many “fringe players” to invest in shoebox apartments, said Mr Ku. Some of these investors had even pooled their monies to invest in a shoebox unit.

“These are investors who got together on a very tight budget basis, bought it (the unit) and they later couldn’t keep up with their mortgage payments because the rental wasn’t there,” said Mr Ku.

If interest rates go up, it will hit even more people who are in that category.

Mr Mak also said that rising interest rates will impact investors more than those who bought the apartments to live in them. While rising interest rates will affect all unit types, the fact that shoebox units tend to depend more on investment demand than bigger units, Mr Mak said demand for these smaller units may be hit more with rates going up.

Mr Sim said if people continue to buy shoebox units in heartland areas only to find out that the rental demand is not there, the number of vacant units will start to go up. And with rising interest rates compounding the problem, people might choose not to service their mortgage and put their apartments up for sale, leading to an influx of tiny units in the resale market.

In 2014 and 2015, real estate consultancy Colliers International saw a surge in mortgagee listings after their previous owners defaulted on their housing loans.

Ms Tricia Song, head of research for Singapore, Colliers International, said: “(The surge) coincided with the peak sales in 2011 to 2012, assuming a three- to four-year construction cycle, and as the overall property market started to (feel the impact of) the cooling measures.”

To date, 35 per cent of the total shoebox apartment auction listings in Singapore from 2008 to Sep 30 this year are mortgagee listings.

However, several owners remained upbeat about selling their shoebox apartments in the future.

Some analysts noted that due to demographic shifts, shoebox units cater to an emerging segment — a growing number of people who are staying single, couples who do not want to have children, and an increasing number of elderly folks.

Mr Henry Kwek, MP for Nee Soon GRC, said that while shoebox apartments can be part of Singapore’s diverse housing solutions, he urged the Government to reserve more of such small apartments for the elderly. He said:

There is one major area of need for small apartments — for retirement housing with assisted living options — but with more areas dedicated for general community use.

In 2014, all 281 units at The Hillford, which were then marketed as a retirement resort, were snapped up on its first day of sales due to overwhelming demand not only from senior citizens, but also investors shopping for shoebox apartments.

OrangeTee’s head of research and consultancy Christine Sun said shoebox units in the heartlands serve the needs of singles and young couples who may not be able to afford those in the Central Region due to their higher purchase price.

Beyond these demographic shifts, Ms Sim also believes that the location of her condominium is another plus point, even though she recognises that the pool of interested buyers in tiny units would be smaller.

Noting that Hillview is known for its peaceful environment, the homemaker added: “There is a close neighbourhood feel, more privacy. It’s an upmarket kind of feel with condos around.”

For Nicholas, Parc Centros’ location just beside Punggol MRT station is another reason why he is not too concerned about the possibility of having problems selling facing his unit in the future.

Mr Nandhakumar, however, does not share such optimism. He said he had been worried about the resale value of his one-bedroom unit for the last few months as prices had gone down.

He bought his unit in Woodlands four years ago for S$550,000 in the resale market, but the market value for his flat is now about S$520,000.

Information on the resale potential of shoebox units in the heartlands is, however, not clear.

According to data from the National University of Singapore’s Real Estate Department, sales volume of new shoebox units has for several years eclipsed resales, until this year when the number of resales so far has outstripped the number of new sales.

However, property broker ERA’s key executive officer Eugene Lim said that there are limited buyers in the resale market looking for shoebox units as these buyers tend to be families “buying for their own stay” and the need for a bigger space is “more important”.

FEWER SHOEBOXES, HIGHER PRICES?

Despite the less than rosy scenario, several owners remained pretty upbeat about selling their shoebox properties in the future — thanks in part to the URA’s revised guidelines.

Some owners said with property sizes in future private developments getting bigger, small units less than 50 sqm would become rarer, which may drive up demand for such units.

And while its current developments are no bigger, Oxley Holdings said that it had ceased building 36 sq m units for recent projects, with its spokesperson citing the negative connotations associated with “shoebox units”.

Mr Goh Boon Hong, who owns the 49 sq m shoebox apartment at Urban Vista, said that the latest guidelines by URA are a blessing in disguise.

“In fact, there may be more demand (for shoebox apartments) in the future. I foresee that it will be easier to sell (my unit) because there will be less of such shoebox units in the market,” he added.

Nicholas, the shoebox unit owner in Punggol, added:  “If something is much rarer than normal, I may have control over the price.”

Ms Sun from OrangeTee said that the new guidelines may even “revive” demand for shoebox units.

Besides the fact that these tiny units will be short in supply in the future, the new units to be launched then would be higher priced as they are being redeveloped from land acquired at high prices through the recent collective sales boom, she added.

Others, like Mr Mak, felt that it may not significantly increase the demand for shoebox units in the near-term at least, as there will still be a constant supply of tiny apartments from a few large-scale developments that are currently in the midst of the planning process. These developments are sitting on large sites and could still be bound by the previous guidelines, where the average size of an apartment had to be 70 sq m.

While there may be differing views on how the revised guidelines may impact the future demand and supply of shoebox units, analysts and homeowners agreed on one thing: The new rules are positive in ensuring that the built environment people live in remains healthy.

“People put heart and soul and a lot of money into buying property. (The Government) just want to make sure that affordability is kept in check, and the quality of the built environment also needs to be kept in check,” said Mr Sim.

“At the end of the day, we won’t face something that is, in the words of Liew Mun Leong (former chief executive officer of CapitaLand), ‘inhumane’ to live in,” he added.