4 Reasons Why You Should Consider Investing in “Shoebox” Apartments

Posted by edison_foo on April 10, 2014
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Singapore is known around the world as both an island country and a sovereign city-state. Being only 710 square kilometers in size (area), one can understand why space is limited when it comes to parks, structures, schools, entertainment facilities, housing options and more. Not to mention, the cost of living in Singapore does not come cheap. It easily falls into the rankings of some of the most expensive countries to live in.

With all of this in mind, enter the rising popularity and prevalence of shoebox apartments. Why exactly are shoebox apartments so popular?

The social structure of today has changed undeniably in a significant fashion. People no longer stay or do much at home as compared to previous generations. Perhaps this has been brought about by the abundance of coffee shops, restaurants, food delivery services, and endless entertainment avenues to choose from.

These days, families are not nearly as big as they used to be and people don’t require as much space as they used to. There’s also no shortage of couples that are choosing to delay having children or even have made the deliberate decision not to have them at all.

But before anything else, what exactly is a shoebox apartment? First off, shoebox apartments are known for their low cost construction. They are also characterized by their limited space, rectilinear shape, and horizontal windows. The typical size of a shoebox apartment in today’s market is ranged from around 400-sqft to not more than 538-sqft.

Shoebox Apartment Floor Plan

Floor Plan of a 419-sqft one-bedroom apartment at RV Residences

Having said all of that, why should you consider investing in shoebox apartments? Here we provide you with several reasons. Without further ado, let’s get started. Here goes:

 1.    Investing in shoebox apartments offers attractive rental yield and returns.        

How so? It’s recently been reported that in Singapore, investors in shoebox apartments have been experiencing a noticeably unusual high rental yield and return.

The Singapore Real Estate Exchange or SRX reported that gross yields for shoebox apartments were averaging around 4.48% in 2013. Typically, non-landed residential properties return about 2.5 to 3.5% of the initial investment to investors. This means that the return for shoebox apartments is almost 28%, to as much as 79% higher than the overall non-landed residential properties in Singapore.

Shoebox Apartment Compare

An example of a service apartment’s daily rental rate, which is located outside city center

Let’s look at some facts from a logical perspective. As you can see above, it’s not cheap to rent a service apartment even for a day. A 1-bedroom serviced apartment located in the RCR (Rest of Central Region) is charging about $270 per night, which works out to be a staggering $8,100 a month. Whereas in today’s private residential market, a one-bedroom or studio unit is only renting from an average of $2,500 per month in the same region.

Upon close examination, this really isn’t surprising given the number of people in the burgeoning city-state who are on the lookout for a budget-friendly yet decent place to stay in. From expats to students to young professionals and even small families, shoebox apartments have proven to be the solution they are looking for and the answer to their housing needs.

2.    Low and affordable price to own a private property or asset in Singapore.

Just recently, Singapore was named the most expensive city to live in globally by Economist Intelligence Unit (EIU), topping 131 other nations. Without a doubt, the opportunity to pour money into a worthwhile asset won’t come around very often especially in a country as expensive as Singapore. With the dawning of shoebox apartments, this has changed the landscape for prospective investors who are hesitating to purchase property because of the hefty price tag that often comes with it.

Additionally, it’s important to note that at present it is very difficult to obtain a mortgage loan for significant amounts due to the Total Debt Servicing Ratio (TDSR) by the Monetary Authority of Singapore (MAS). This is where affordability comes into serious consideration when an investor is unable to obtain strong financial support from financial institutes.

Shoebox Apartment Price Trend

Shoebox apartments showing strong resilience in price despite economic uncertainty since 2007

Perhaps this is the reason why the numbers in sales of shoebox apartments have gone through the roof in Singapore as of late and have displayed strong resilience in pricing, despite the global economic crisis since 2007.  With attractive price tags from an average $600,000 to $700,000 (with some being located very close to the city center), investors seem to understand that this offer is limited and that now is the best time to invest in such.

3.    Shortage of supply in future

The supply of shoebox apartments is likely to be limited in the future due to guidelines issued by the government with regard to restricting the number of shoebox apartments outside the Central area. Since the ruling was implemented on September 2012, according to SRX, we’ve witnessed a drastic drop of almost 50% in sales volume for new shoebox apartments in 2013.

Shoebox Apartment Volume

A drop in sales volume for shoebox apartments: From 3,480 units in 2012, to only 1,795 units in 2013

We live in a world where the economy is constantly being shaken and you don’t want the opportunity to make a good investment pass you by because such opportunities don’t come around very often. Again, shoebox apartments have risen in popularity as of late both in reputation and in actual sales.

That said, with the limited supply of shoebox apartments, you can see your opportunity to own a private property or asset in Singapore at an affordable price, fade away as time goes by. Which also means, you will be “forced” to buy a bigger unit and thus putting more initial capital into your investment. The fact is that a lot first-time investors whom I’ve met for the past few years, started to put their first step forward in growing their wealth by investing in shoebox apartments. Because they understand simple demographics of Singapore and the fact that we have limited land resources.

So if you want to get in on the action and take a step towards a better and more financially secure future, investing in a shoebox apartment is something that you should seriously consider.

 4.    Increasing demand from singles and foreign expats coming into Singapore

More than ever, there is an increase in demand from singles and foreign expats for affordable and practical housing options. This is where shoebox apartments come in.

Shoebox Apartment Demand

News articles from Straits Times

The number of singles living in Singapore is on the rise and due to the requirements of the law, many of them as considered ineligible for purchasing public housing unless they are 35 years old and above. According to the Population Trends 2013 by the Department of Statistics of Singapore, the number of singles rose from 30% to 32% from 2002 to 2012, mainly the age group of 25 to 29 years old. And over the same period, there has been an increase of divorced  or separated from 2.2% to 3.4%.

Shoebox Apartment Singles

Population Trend 2013: Increase in the number of singles breakdown

Additionally, because Singapore offers a salary that is competitive with other developed countries, it has also attracted a large number of foreign expats seeking success. They are usually holder of an Employment Pass (EP). According to SRX, these are usually singles coming in with limited rental budget and some were not even given any housing allowance. And the fact is that they are mostly singles living alone during their time in Singapore. Thus, a 1-bedroom shoebox apartment is probably more than enough to meet their housing needs. Moreover with a tighter immigration policy in place, It’s less likely that these foreign expats will bring along their family.

Final Thoughts

For the last couple of years, many analysts or experts had their doubts on this particular segment of the market. Their concerns were mainly on rental demand (whether the unit can be rented out) and the size (who wants to live in it?). As stated among my reasons for investing in shoebox apartments, there are numbers, facts and statistics to prove that the property market for shoebox apartments is still going strong, and will grow even further than expected. In fact, prices of shoebox apartments in areas such as Geylang, Farrer Park and Balestier have appreciated as much as 2.5 times within a short span of 5 years or less. Some of the current new freehold launches ongoing are namely Neem Tree, Forte Suites, Guillemard Suites and 8 Farrer Suites.

I do understand that a lot of investors out there are always concern about whether or not their property can be rented out. This is where risk management comes into play. This is exceptionally important, especially in today’s market where we are still filled with uncertainties. A shoebox apartment is renting at an average market rate of $2,500 per month, and assuming your monthly mortgage is $2,000. If market is bad and in order to get a tenant, you decrease your asking rental to $1,500 per month. This will mean that you got to top up an additional $1,000 every month. Just ask yourself, are you comfortable with putting $1,000 every month into your asset?

In my opinion, there’s no property that can’t be rented out. It’s just a matter of the asking price. And if you have to pay the difference, you have to make sure that you have the financial power to do so. This is what we usually call “holding power“.

As mentioned in this article, the number of singles living alone, and foreign expats has been on the rise. These people have housing needs which can’t be bought through public housing schemes as there are rules and criteria that need to be met. In Singapore, public housing refers to Housing Development Board or HDB flats, which are usually larger in size (mainly those which are constructed in the 80s and 90s). Renting a HDB flat is still possible for this group of people, however the Singapore government seems to oppose to the idea of using public housing for investment purposes. Thus, they have announced the following restriction on 16 January 2014 :

Non-Citizen (NC)^ Subletting Quota

Subletting of a flat to one or more non-Malaysian NCs is subject to the NC Subletting Quota. The NC subletting quota is set at 8% and 11% at the neighbourhood and block level respectively. It applies to subtenants who are Singapore Permanent Residents and foreigners, but not to Malaysians. The NC subletting quota also does not apply to the subletting of bedrooms.

When the NC Subletting Quota in a neighbourhood and/or block is reached, flat owners there cannot apply to sublet their flat to any non-Malaysian NCs. They can only sublet their flat to Singaporeans and Malaysians.

With the restriction, foreign expats will find it harder to rent a HDB flat. And also, if a foreign expat is coming into Singapore as a single, does he/she really need a lot of space?

Investing in shoebox apartments can be quite a challenge and there’s definitely certain risk involved. However, like what Amercian businessman, Robert Kiyosaki (author of Rich Dad Poor Dad) said, “Control over risk is an unfair advantage the rich achieve through knowledge and education” . You don’t just buy any shoebox apartments. In my opinion, there are certain areas which you should not even consider. Go back to the fundamentals of real estate investment. As long as you are aware of the current rental market (the demand and average rental rate) and what is the correct entry price, you will be able to manage your risk properly and make the most of your opportunities in today’s property market.

4 Reasons Why You Should Consider Investing in “Shoebox” Apartments
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