Shoebox flat yields under pressure

While “shoebox” flats have generally been attractive investments given their higher rental yields compared with other properties, analysts are warning that this may soon cease to be the case.

Typically defined as units with a maximum floor size of 50 sq m, they have delivered an average gross rental yield of about 4.58 per cent so far this year, well above the 3.68 per cent that non-shoebox apartments rake in, according to data provided by Singapore Real Estate Exchange (SRX).

“The main dwellers of shoebox units are singles, couples without kids, and foreigners,” said OrangeTee Head of Research and Consultancy Christine Li.

This group usually prefers to live in or around the central areas, where most of them work and socialise, and they are willing to sacrifice space in return for location.

However, a lot of the coming supply of shoebox units is concentrated outside the central area, with about 40 per cent of the 7,952 units currently under construction sprouting up in suburban locations. Analysts are less optimistic that demand in these areas will support similar rental yields.

“Shoebox units seem to offer decent returns, but finding a tenant who is willing to live in such apartments far away from the city is not easy,” Ms Li said.

The market has already seen rental yields in the rest of central region (RCR) and outside central region (OCR) soften this year.

Yields in RCR have fallen to 4.6 per cent this year from last year’s average of 4.91 per cent, while OCR’s yield has declined to 4.41 per cent from 5 per cent a year ago, SRX data shows.

“Typically, people buy shoeboxes in RCR and OCR to rent out at about S$3,200 to S$3,500 a unit, but now one unit is going for about S$2,500,” said Savills Singapore’s Senior Director of Research and Consultancy Alan Cheong.

In contrast, rental yields for shoebox apartments in central areas inched up to 4.6 per cent from last year’s 4.2 per cent, according to SRX.

But with the global economy being slow to recover, coupled with a strong local currency, more Singapore companies have put their expatriates on local contract terms, reducing their housing budget.

As a result, Mr Cheong expects rental demand to shift towards larger units with two or three bedrooms.

“Instead of renting one whole unit at S$2,500, two to three single expats can rent a two or three room unit together and share the cost,” he said, adding that rental yield for shoebox units could decline to as low as mid-3 per cent.

However, Ms Li noted that the Government’s decentralisation plan could encourage some demand in the suburban areas.

“When companies are cautious on hiring and inflow of foreign employees is slow, rental demand will weaken … but due to the decentralisation plan, regional centres such as Jurong are being transformed into a commercial hub in the western region. Rental demand will grow in tandem with the commercial development in the area,” she said.

Source : Today – 20 June 2013

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