Leasing out a shoebox flat

[Musicwhiz]

Flippers who think of booking a quickie profit are likely to get burnt badly, and I have no sympathy for people who take such undue risks...

Oct 3, 2010
property
Leasing out a shoebox flat
While Mickey Mouse flats may be relatively affordable, buyers should be aware that rents depend on location and proximity to amenities
By Joyce Teo

Buying a shoebox apartment for lease sounds like a very attractive proposition because such units are relatively more affordable. But investors should know what to expect because not everyone will want to rent such small units, experts said.

A record number of these small-format homes - also known as Mickey Mouse flats - have been sold in the first three quarters of the year, and at higher and higher prices.

The sale of 906 apartments of 500 sq ft and below in that period is 84 per cent higher than that in the same period last year, said CBRE Research, citing URA Realis. This has also exceeded the full-year sale of 722 units last year, it said.

Median prices of such homes have risen to $1,314 per sq ft (psf) so far this year, from $1,190 psf last year, and asking rents on a psf basis are comparable to those for prime developments in town.

'At first glance, investing in shoebox apartments might appear to be an attractive proposition due to the relative quantum affordability and rental yields,' said CBRE Research executive director Li Hiaw Ho.

However, the rents will depend on many factors, such as location, proximity to amenities, and demand and supply conditions, he said.

Currently, some owners of one-bedroom and studio units in projects such as Kembangan Suites in Kembangan, Parc Imperial in Pasir Panjang and Soho 188 in Race Course Road are asking for rents of $2,000 to $3,600 a month.

In July, a 431 sq ft one-bedroom unit in Urban Lofts in Rangoon Road was leased out at $2,400 a month, while a similar-sized one-bedroom unit at Mountbatten Lodge in Mountbatten Road went for $2,300 a month.

Based on current valuations, indicative gross rental yields for shoebox units are estimated at 3 per cent to 5 per cent, said CBRE Research.

'These figures, however, do not take into account the utility and condo management fees, insurance, mortgage interest payments, property taxes and maintenance charges - all of which will make the net yield considerably lower,' said Mr Li.

ECG Property chief executive Eric Cheng said most people buy shoebox units to lease out but they should be aware that any rental projection given at the launch may not pan out.

For instance, when a project in the Thomson area was launched a few years ago, the rentals were projected at $3,500 to $4,500 a month, but the transacted rents now are more like $1,800 to $2,600 a month, he said.

Cushman & Wakefield's senior manager of Asia-Pac research, Mr Ong Kah Seng, said a large supply of shoebox apartments is scheduled for completion, and rents may come under pressure as leasing competition intensifies.

Also, while tiny apartments seem suitable for single expatriate tenants, not all will want to pay so much for a small unit unless it is in a prime area, or conveniently located near an MRT station, experts said.

Said Mr Ong: 'Owners of shoebox apartments... can at best rely on junior expatriates, besides local professionals.'

But since junior expatriates are cost-sensitive, they may be open to HDB flats which are conveniently located and offer a larger space for nearly the same rent as that for a shoebox apartment, he said.

Yet, CBRE Research found that more people are paying higher prices for a shoebox unit during new launches.

Buyers picked up 383 new shoebox units which cost $600,000 and above in the first nine months of this year, compared with 133 last year and 121 in 2008.

Experts said the question is whether these units can support even higher rentals when they are completed.

The introduction of cooling measures by the Government in late August has also affected the 'flippers'. Extending the imposition period of the sellers' stamp duty of about 3 per cent from one to three years makes it less lucrative for speculators to flip a unit, experts said.

Previously, investors could make significant capital gains from shoebox units with just a small investment sum and a short holding period.

Of the shoebox units launched last year, 66 units were sold in the first eight months of the year for capital gains of $6,400 to $232,000, said CBRE Research.

But for projects launched this year, only four units were sold and gains were in the $9,400 to $101,000 range, it said.

The 'already high buy-in prices' during a new launch might make it hard for an investor to sell it later at higher prices unless it is in a prime location, said Mr Li.

In the next few months, about 10 projects with mainly small-format units are expected to be launched. Apart from one in River Valley Road, the rest are in suburban areas such as Geylang and Eunos, said CBRE.

joyceteo@sph.com.sg

[d.o.g.]

From the day these shoebox units entered the market I felt that they were clearly speculative with limited investment merit, because of:

1. Rental uncertainty

Rentals were completely unknown as no such units had been in the market before. Previously the smallest units were studios of about 500 sqft. 300-400 sqft was new ground and nobody knew what kind of rents could be obtained.

2. High per-square foot cost

Compared to larger units the psf cost was appreciably higher, which of course made them attractive to developers who could earn more. Who wouldn't want more profits?

But the higher the psf cost, the lower the return to the owner, since the tenant doesn't care what the landlord's cost is.

===

As the article points out, in one actual case, the rents achieved have been only half of pre-launch projections.

Property investing shares some basic fundamentals with investing in stocks:

1. Look for established operations, not something new and untested;
2. The higher your per-unit cost, the lower your return

Since there seems to be an upcoming glut in shoebox units, the most likely outcome in the next few years is a decline in both rents and capital values.

Those who bought shoebox units because they were "cheap" in the absolute dollar sense are akin to people who buy their shampoo and soap in the smallest packets because those are the cheapest. Likewise people who buy a $0.20 stock instead of a $2.00 stock because the former is "cheaper". This inability to think in terms of per-unit cost is a poor man's mentality.

Poor people buy small packets because they think they can't afford the big package. But because their per-unit costs are higher, in the long run their ability to build wealth is eroded and they stay poor.

If you want to get rich, don't just study the habits of the rich and imitate them. In the spirit of inversion, also study the habits of the poor and avoid them. Common habits of poor people include:

Work
==
poor work ethic (resulting in low performance & low wages)
failure to communicate (with colleagues, bosses)

Money
==
poor budgeting (no savings)
high-interest debt (credit lines/credit cards)
poor planning (no clear short/medium/long-term goals)
buying in small quantities (high per-unit cost)
impulse purchases (fancy toys/clothes that depreciate quickly)

Character
==
succumbing to peer pressure (car, condo, club etc)
naivete (assuming your bank/insurance/property agent is your friend)
failure to invest in self-education (poor decision-making)
attributing success to luck rather than hard work
procrastination (delaying important actions/decisions)

Follow all the actions described above and you are guaranteed to quickly go bust. Avoid them all, and you have a good chance of attaining at least a measure of prosperity.

[Musicwhiz]

If you want to get rich, don't just study the habits of the rich and imitate them. In the spirit of inversion, also study the habits of the poor and avoid them. Common habits of poor people include:

Work
==
poor work ethic (resulting in low performance & low wages)
failure to communicate (with colleagues, bosses)

Money
==
poor budgeting (no savings)
high-interest debt (credit lines/credit cards)
poor planning (no clear short/medium/long-term goals)
buying in small quantities (high per-unit cost)
impulse purchases (fancy toys/clothes that depreciate quickly)

Character
==
succumbing to peer pressure (car, condo, club etc)
naivete (assuming your bank/insurance/property agent is your friend)
failure to invest in self-education (poor decision-making)
attributing success to luck rather than hard work
procrastination (delaying important actions/decisions)

Follow all the actions described above and you are guaranteed to quickly go bust. Avoid them all, and you have a good chance of attaining at least a measure of prosperity.

Thanks d.o.g. for providing a very good summary of bad habits to AVOID if one wants a chance to get rich. A few of my comments:-

WORK

I think a good work ethic is important, but then again much also depends on your boss and colleagues. The amount of politics in organizations can be mind-boggling and even if one works hard and smart, he may get "killed" off by the politics. Hence, I guess one has to learn how to be street smart, in addition to being good with his work. To be honest, I've seen many not-so-competent people rise up to high ranks in an organization due to either favouritism, or else they are scholars (and hence naturally assumed to be "gifted"). Oh well.

MONEY

I guess the key thing about money is when anyone actually decides that it's enough....or can this even happen? The concepts of proper budgeting and cash flow monitoring will help to increase net worth slowly but surely, and investments will help one to build up a passive income stream. But when is it time to someone to hang up the towel and relax when it comes to wealth-building and money-chasing? I admit I have not reached that level yet, hence I still continue to practice what d.o.g. recommends. I pay myself first, do not spend on impulse, avoid high-interest debts and usually will buy in bulk (assuming I can carry it home!). But one thing I realize I cannot seem to do is to appropriately benchmark my net worth against my peers. This is because many of them can compare income/salary levels (and granted most of them are earning more than me); but none of them actually disclose their net worth or even their cash flow status at any point in time, which makes it hard to compare.

CHARACTER

I guess I should add another point in here too - which is avoiding scams! This is one of the key reasons why people seem to lose tons of money, greed and being afraid to lose out to their neighbours and relatives.

I am not sure too how many people in Singapore are guilty of "Keeping up with the Lims and Tans", but my impression is that there are many genuinely wealthy couples who can afford spanking new condos and continental cars. I might be wrong.....

[kazukirai]

Thanks d.o.g for pointing out so succintly certain character flaws to avoid. I must say that I am guilty of a couple of them. Not good but I am aware and trying to improve myself day by day.

WORK

The amount of politics in organizations can be mind-boggling and even if one works hard and smart, he may get "killed" off by the politics. Hence, I guess one has to learn how to be street smart, in addition to being good with his work. To be honest, I've seen many not-so-competent people rise up to high ranks in an organization due to either favouritism, or else they are scholars (and hence naturally assumed to be "gifted"). Oh well.

MONEY

But one thing I realize I cannot seem to do is to appropriately benchmark my net worth against my peers. This is because many of them can compare income/salary levels (and granted most of them are earning more than me); but none of them actually disclose their net worth or even their cash flow status at any point in time, which makes it hard to compare.

CHARACTER

I am not sure too how many people in Singapore are guilty of "Keeping up with the Lims and Tans", but my impression is that there are many genuinely wealthy couples who can afford spanking new condos and continental cars. I might be wrong.....

MW,

I think there'll always be that kind of organisation that you described. The question is how we react to it. Do we suck it up and resign ourselves to fate or do we try to do what's within our power and try to change things one bit at a time. Of course I think we also need to ask ourselves whether it's worth our time and effort. Otherwise, it may be better to look for a place more in line with your work ethic and values. That's what I believe but perhaps I'm too idealistic. After all, my life as a working adult is in its infancy.

For net worth of others, I can't find anything distributed by deciles but according to stats pulled from Singstat, in 2008, Households in SG have 553,220,500,000 SGD worth of financial assets (defined as Currency & Deposits, Shares & Securities, Life Insurance and CPF, link here. Click on link at the bottom of the page to get to the excel file) and given 1,119,600 resident households in SG (2009), that's an average of 494,123 SGD of financial assets per household (avg. 3.5 pax per HH). That's a starting point I think. Given that our income distribution here's very uneven and those stats include Life Insurance and CPF, I think you can have a ballpark figure at least.

Hope I'm on the right track.

[d.o.g.]

But one thing I realize I cannot seem to do is to appropriately benchmark my net worth against my peers. This is because many of them can compare income/salary levels (and granted most of them are earning more than me); but none of them actually disclose their net worth or even their cash flow status at any point in time, which makes it hard to compare.

Obvious statement: The net worth or income of your peers is not as important as YOUR net worth or income.

The key thing to monitor is that YOUR net worth is growing at the rate you need to meet your anticipated needs on schedule e.g. children's university education and your own retirement.

As far as a peer comparison is concerned, remember that income and net worth are 2 sides of the same coin. Income not spent will eventually accumulate and add to net worth. Net worth can be liquidated to create an income.

If you really want to do it, you can estimate any person's net worth given his income and lifestyle. We exclude unknowables like family inheritance and lottery winnings (losses?). We can deduce a person's maximum savings rate by first adding up his likely expenses:

home - given the address and approximate date of purchase, we can guess:
- how much he paid
- how much he pays each month; and
- what is left on the mortgage

car - given the model and licence plate, we can guess:
- when he bought and thus what he paid
- how much he pays each month on the loan
- how much he pays in fuel (office-home distance is known from addresses), road tax and ERP

family - given the number of kids and their ages, we guess:
- how much he spends on school, food and clothes for them

lifestyle - from the clothes worn, food eaten and holidays enjoyed, we guess:
- how much he spends on luxuries
- how much he spends on enrichment classes for the children

So we can estimate with some degree of (in)accuracy what any given person spends a month. They've told you their income already, so that gives you the net savings. As for the spouse, statistically most men in Singapore marry down in terms of qualifications and career. Unless you know the wife truly has equal or even higher earning power, as a guess the wife probably earns 75% of the husband's income, plus/minus.

Now we know the expenses, and we know the single or dual incomes. Take the difference. If it's positive by a large amount, the couple probably has a good net worth, as they will have been saving this money every month for at least the duration of their marriage. If it's negative by a large amount the couple is probably in debt and going deeper each month. Most likely it's about even which means the only net worth is the home equity plus a small reserve, maybe 3 months' salary.

So there you have it - most people's net worth is made up substantially of their home equity. Those who are obvious savers probably have another 10-50% in liquid assets (depending on time worked). Obvious spenders have negative liquid assets and are either going to go bust soon (1-2 years) or are living off another's largesse e.g. parental support via cash allowances, free housing etc.

Initially, when I started working, it also bothered me that I was earning less than my peers. But because I was frugal, and developed some skill in investing my savings, I think I was actually ahead in net worth terms. For sure I knew many of my peers spent the wage differential (and more) on a car. So their net savings were actually lower than mine. My investment returns were good, so that enabled me to build net worth faster too.

Once I entered the investment industry the income gap disappeared, and the net worth gap widened. Today I don't bother comparing, partly because I'm wiser and know that money is not everything, and partly because I know I'm ahead. As long as I don't make any major mistakes, the gap will only continue to grow. The thing that really matters, though, at least in the financial sense, is that I am on track for my financial goals.

[d.o.g.]

The amount of politics in organizations can be mind-boggling and even if one works hard and smart, he may get "killed" off by the politics. Hence, I guess one has to learn how to be street smart, in addition to being good with his work. To be honest, I've seen many not-so-competent people rise up to high ranks in an organization due to either favouritism, or else they are scholars (and hence naturally assumed to be "gifted"). Oh well.

Politics is a fact of life. It exists in all organisations, whether large or small. In a large organisation (government or MNC) you need it to climb the hierarchy. You see it even in social organisations like country clubs.

If you don't want politics but want to work in a big organisation, choose a job that has clear performance metrics e.g. sales. That way nobody can deny you your due - salespeople can often outearn their bosses. Whether scholar or farmer, if you're in sales, all that counts is the bottomline. That's why so many self-made men who didn't have a good education became salesmen (of cars, insurance etc) to get their millions.

A small company also has politics, but instead of people vs people it's everyone trying to be on good terms with the boss. It may be easier if you have a good rapport with the boss, but then you have to deal with colleagues' jealousy. If you don't have a good rapport with the boss, you should leave quickly!

If you work for yourself you can avoid these issues, but that involves a different set of tradeoffs. You'll give up the psychological crutch of a regular income, in exchange for (probably) higher income overall since you don't have to support a hierarchy above you. Cash flow management takes on added importance because it's easy to overspend in good times and then starve in bad times. Likewise time management - you don't have to work on any particular day, but if you don't put in the work, nobody will do it for you and you will starve.

I guess I should add another point in here too - which is avoiding scams! This is one of the key reasons why people seem to lose tons of money, greed and being afraid to lose out to their neighbours and relatives.

Yes, a healthy skepticism (cynicism?) would be good. The usual adage that "if it's too good to be true it probably is" applies. People continue to lose money to fraudsters because they want to believe that they too can get the secret sauce that made person X rich. It adds some spice to their lives.

It's so boring to admit that person X probably got rich the old-fashioned way - by working hard, saving hard, and investing conservatively. Much more exciting to believe that there's a secret, and for only $XXX they too can have it. So they pay for options trading seminars, magic stones, guaranteed returns on exotic investments, plots of land on the moon, and so on.

[b0rderc0llie]

Those who bought shoebox units because they were "cheap" in the absolute dollar sense are akin to people who buy their shampoo and soap in the smallest packets because those are the cheapest. Likewise people who buy a $0.20 stock instead of a $2.00 stock because the former is "cheaper". This inability to think in terms of per-unit cost is a poor man's mentality.

Well said! I view things in a relative value sort of way instead of absolute value, and I have problems relating with others who sees things in absolute value terms. Now, if I use your example when talking to them, it is easier for them to understand

[brattzz]

Someone i know brought a studio unit (1 bedroom) at Vacanza@East.
484 sqft, $566K, $1169 psf. 2nd floor, pool view..

Expecting rental income of $2.5 per month, or
Flipping before TOP in 2014, $650K

:O

[Musicwhiz]

I saw these 2 good articles in today's TODAY on shoebox units, so decided to attach them here. Looking at the sales volume for 2010, it's amazing how many units they managed to sell!