Why Shoebox Apartment Units Are Poised To Be Risky Investments

By on December 16, 2012

The “property millionaire investor” theory that property gurus sell seminars around is simple.

Collect a rental income of $4000. Use that to pay off the housing loan installment of $3000. Make a $1000 profit and own the property.

Isn’t it a revolutionary breakthrough idea to have someone else pay for your property?

You can then sell off the property years later to make at least 50% capital gains. In an ideal world all you effectively have to do is buy a house and rent it out.

And in an ideal world, Apple will give us free upgrades to every new versions of the iPhone, and under garments are self-cleansing.

So before you go around proclaiming to the world that you are poised to make a huge profit from property investments, you might also want to take note that 101 assumptions go along with that ideal theory.

Here are just a few :

  1. You do not experience ANY vacancies
  2. 2) Housing loan rates remain low and thus your monthly installments remain comfortably low
  3. 3) You are able to easily get tenants willing to pay market price
  4. 4) No need for expenses on furnishing, refurnishing and repairs
  5. 5) Property value appreciates
  6. 6) You can find a buyer willing to pay your price in future
  7. 7) Agent fees are insignificant
  8. 8) Low stamp duties
  9. 9) Low property tax
  10. 10) Government policy changes favor you

If you are in fact looking at a $1000 profit from a $4000 rental income, this also means that just 1 month of vacancy can take you back 3 months worth of rental gains.

And if you do run into difficulties getting tenants, a desperation for them may force your hand to accept a low rental.

This one issue alone can totally derail your property investment retirement plan.

Seeing a number of showflats in new launches myself, I find it appalling that some of the “rooms” being showcased in showflats appear no bigger than a HDB storeroom.

But this is the way it is these days isn’t it?

Mary got her shoebox for a present

Mary got her shoebox for a present

Developers are pumping out smaller apartments while charging higher price per square feet (psf).

It seems that as long as they keep the final price in the affordable range, people are buying like a Bodyshop warehouse sale.

It has to be reminded that the key to good rental yields is a low psf price. This is a number that a property investor can never ignore.

How much do you think you can yield for a $1200psf apartment in Punggol?

Properties with the highest rental yields tend to be in niche areas with low psf.

I’ve just casually texted a property agent friend on what’s the average rental psf for properties in Punggol area. And his answer is $2.50psf. This is loosely translated to a 0.20% rental yield.

If a tenant has in fact set his mind on renting an apartment in Punggol, wouldn’t it be better value to get 2 times the space at the same price in one of the HDBs just a stone throw away?

Contrary to what I’m saying, I’ve actually seen reports saying shoebox units have the highest yields.

If you have noticed, there is a new launch almost every week. And small units make up a significant number in these launches. By the time these properties T.O.P, how many small units will there be in the market?

I consider anything below 650sf as a small unit. Generally, anything below 500sf is considered a shoebox unit. Confinement rooms at less than 400sf is a “Mickey Mouse” apartment because someone is obviously trying to be funny.

URA defines shoebox units as those of size 50 sqm or smaller.

Reports estimate about 3800 completed shoebox units by 2014. That is about 35 blocks of HDB units. And that is without counting units between 500sf to 650sf.

Unless you have yet to visit any showflats, you will know as well as I do that these make up a huge chunk of units in new launches.

Shoebox investors might argue that they will get everything back and more when the property is sold in future.

If you are one who plans to exploit rising prices and sell off the property in 5 years to make capital gains, here are just a few things to take note.

  • 1) HDB is building 25,000 new apartments by 2014. Yes 25,000!
  • 2) HDB suggesting that another 25,000 will be planned this year
  • 3) 5 years is just about time these HDB flats can be put on the resale market
  • 4) HDB has raised income ceiling of buyers
  • 5) HDB has relaxed criteria for upgraders
  • 6) There is an estimated 30,000 units of condos to be completed by 2014
  • 7) In less than 5 years, big name DBSS like Peak@TPY, Central@AMK, etc, will be joining the resale property party

Looks like someone’s happy with an “exclusive” VVVIP discount

So who are the people who are going to buy small resale shoebox units at inflated prices when you intend to sell it in the open market in future?

Developers are rushing to sell off their stock before the impending mega supply hits.

That’s why you are seeing new launch discounts at 15%+2%+3%+2%, and on top of that, +1% valentines day discount! Postal code discount, 1st property discount, CNY discount, early bird discount, road show discount, VVVVVIP discount, etc…

It’s a whirlwind of a salad being prepared in the kitchen. And amidst all these that is happening, a residential site tender in Bishan was just awarded for over $505m.

In a previous round of government intervention, something I feel is very important that did not gain much attention was this that was reported in the Straits Times.

This effectively means that by the time newly approved projects T.O.P, it will already be fighting for attention with thousands of completed property.

If these new units are unsold nearer to the deadline, what is most likely to happen?

Price war!

Why buy a resale shoebox apartment at market price when there is a prospect of a price war for unsold apartments?

In view of this mega supply burst, demographics, government policies, etc, banks and property publications have started to predict that Singapore property prices will plunge.

The alarming thing is that property prices continue to climb amid all these fact and figures.

A recent report earlier in the year also mentioned that some banks are halting loans to shoebox apartments with immediate effect. Is it because the banks predict that such apartments will be difficult to sell even if they foreclose it?

So if you are buying these properties purely for occupation. You can just turn your back on all these information.

But if you are buying them purely for investment, I suggest that you think hard over it. Even the government has come out to say that they are not comfortable with all the activity regarding showbox units going on.

They have also implemented policies to curb a flooding of shoebox apartments. Need I remind you that we are operating in a highly regulated property environment?

I suspect that the key reason why money is put into small apartments for investment is due to affordability. And placing that money on a bet that you can get rent to pay for installments, while making capital gains.

Financial freedom gurus have long championed this concept of investment. They do that to sell rewritten books and thousand dollar seminars. It’s not impossible to make money from shoebox apartments. Just not easy. And a lot depends on factors out of our control.

Real stories of quick property windfalls from “flipping” are a thing of the past. We have already missed the boat if we just bought a ticket now. The “property millionaire investor” theory only goes full circle if you can sell the property at your desired price (assuming property value appreciates).

So if you are one who is looking to buy shoebox apartment units purely for investment, you better have a good well thought out plan to make a profit out of it.

This article was first published on 5th March 2012 in the widest circulated private newsletter on Singapore properties managed by www.housingloansingapore.com. Your can sign up for it by visiting their website.



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