Subdued impact from new guideline

The Government’s long-awaited policy measure on “shoebox” apartments was finally announced this week and it has made far less of an impact than earlier feared.

The new Urban Redevelopment Authority (URA) guideline, kicking in on Nov 4, seeks to cap the number of shoebox units for projects in suburban areas based on a formula that stipulates that the average size of homes will need to be at least 70 sq m.

This will help manage the proportion of shoebox apartments – defined as apartments measuring 50 sq m or less – within a development and hopefully lead to a better mixture of small and large units.

At present, there is a growing number of projects consisting predominantly of shoebox units – ranging from 50 per cent to as high as 80 per cent in some cases.

The number of shoebox homes is also expected to balloon over the next few years. The stock of completed shoebox units will increase more than four-fold from about 2,400 units at the end of last year to about 11,000 units by the end of 2015.

The substantial supply of shoeboxes has prompted concerns over the suitability of such units in suburban areas, where larger households and families typically reside and where demand is untested.

So far, the market reaction to the URA announcement has been pretty mixed. Some expect bids for small suburban en bloc sites to dip, presumably because developers will now have to sell fewer shoebox units that command a higher price on a per square foot basis.

Others expect the opposite, saying prices for shoeboxes may rise as such units become a rare commodity.

Both scenarios may not necessarily pan out. A developer cannot price his shoebox unit too far from the prices of the larger units in the same development as too great a disparity will give the impression that it is not giving value for money.

For en bloc sites, the new guidelines will lead to fewer units on the overall market, not just shoeboxes. This means less competition and presumably an easier environment to sell. If developers factor this into the equation, bid prices may not come down.

In any case, there are already fewer sites for sale than potential buyers. Look at the number of Government sites put up for sale every few weeks: All have found buyers. Developers who may have avoided small sites in the past few months may return, now that there is clarity over the rules.

What about the impact on developers as a whole?

For one, the new guideline does not apply to the Central Area, where land prices are highest and where units are harder to keep affordable. Outside the Central Area, land prices are more manageable.

Also, with the new formula, a developer can have all his suburban units at about 70 sq m and still appeal to singles and investors.

Maybe the marketing may take a little longer because of the slightly higher absolute price but a safe haven is still a safe haven. An inflation hedge is still an inflation hedge.

And the fewer units coming into the market will be good for developers because this will help spread out the pool of potential buyers. If a potential buyer wants to buy only one unit, is it not better for the industry as a whole to get him to buy a 70 sq m apartment rather than a 50 sq m unit?

But it is on the social front that the new guideline disappoints most. I am not sure if I got the message correctly, but after the National Day Rally, I thought getting couples who want children to have more than two was at the top of our national agenda.

How is an average unit size of 70 sq m going to help such families with three or more kids? The minimum for such families should be three bedrooms. And for the bedrooms to be of reasonable size, I feel the apartment should measure about 110 sq m.

To ensure that there are more apartments reaching this size, the average area in the formula should be raised to maybe 85 sq m. The impact on developers will be minimal: Fewer units in the pipeline means less competition and a better spread of the buying power.

Maybe the only party to suffer in a significant way would be the Government as developers may submit lower bids at site sales to factor in the difficulty of selling larger apartments. But even that conclusion may be wrong given that the market is awash with liquidity.

In any case, I don’t think receiving a little less for the land is too high a price to pay in return for a higher fertility rate.

By Colin Tan – Head of Research & Consultancy at Chesterton Suntec International

Source : Today – 7 Sep 2012

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