Are suburban shoebox units becoming too pricey?

Unit prices are pushing up to SGD1,500–2,000 psf and sellers might be overestimating their investment appeal to buyers.

Shoebox units are the current rage among developers, flooding the outskirts with small-sized studio apartments, notes Maybank Kim Eng, but the fast-growing price bubble for the market could soon burst. The warning came as prices begin to inch closer to central locations while potential yields remain relatively lower, and oversupply looms by 2015.

Here's more from Maybank Kim Eng:

Minister for National Development Mr. Khaw Boon Wan recently noted in parliament that the number of completed shoebox units (defined here as units <51 sq m) in the market is expected to grow from about 2,500 to around 9,700 units by 2015, most of which will be in the suburbs.

The government’s vigilance in monitoring this segment serves as an indicator that additional regulations may be introduced when necessary. Indeed, the dynamics of new shoebox unit launches have changed again since the third round of cooling measures was implemented last year. Developments with many small-sized studio apartments are now springing up in the outskirts. Data reveal that 48% of new sales of shoebox units YTD have come from the North and North East Regions. Most units are from projects such as Parc Rosewood of Fragrance Group and The Hillier that comes from a consortium consisting of Far East, Fraser Centrepoint, and Sekisui House.

Shoebox units are typically bought for investment purposes, as they require a lesser capital outlay and offer expectations of relatively higher rental yields. We understand why Central Region units have higher price tags (with rental yields slightly exceeding those of larger-sized apartments at around 5%) due to their prime locations.

However, we are questioning the viability of suburban shoebox units that developers are rushing to price at SGD1,500–2,000 psf. First, rental yields in central locations may not be representative of the potential yields in the outskirts, simply based on geographical reasons. Second, the lack of transactions in completed units within the resale market may offer some insight into the level of difficulty in realising any capital gains on shoebox units. As the supply of completed units surge by 2015, the viability of the shoebox unit market in the suburbs will be seriously put to the test.