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8,700 shoebox units for resale from now to 2017

Demand still strong despite an overall slow-moving resale market

[SINGAPORE] At least 8,700 shoebox units are expected to hit the resale market between now and 2017, as the Seller's Stamp Duty (SSD) lock-in period approaches expiry. While this figure is more than double the current completed shoebox residential stock of 3,472 units, signs in the market suggest that demand for such resale units remains relatively resilient amid a slow-moving overall resale market.

This figure, revealed in the latest report from the Singapore Real Estate Exchange (SRX), is predicated on a first wave of at least 805 resale units - comprising units bought between Aug 30, 2010 and Jan 13, 2011 - and a second wave of at least 7,910 units entering the market from 2015 to 2017.

It also assumed that the first wave of units would be sold in the fourth year of acquisition, which attracts a 4 per cent SSD.

This is a reasonable assumption given that these units have, on average, achieved capital gains of around 30 per cent over the three-year SSD lock-in period, as shown by the SRX Property Index, which should overcome the SSD disincentive, noted SRX.

As a proportion of the total number of units transacted in the overall resale market, the proportion of shoebox units transacted in the resale market has been steadily increasing, from about 0.4 per cent in the first nine months of 2009 (of 10,019 units transacted), to about 2.5 per cent this year (of 5,550 units transacted).

While the proportion of resale shoebox units versus the overall resale market is increasing, this must be viewed in the context of an increasing supply of shoebox units entering the market, pointed out Ku Swee Yong, chief executive officer of Century 21 Singapore Holdings.

Indeed, part of the shoebox resale trend is attributable to the substantial number of new shoebox homes sold between 2009 and August 2010, which totalled some 2,239 units.

Looking at the investment viability of shoebox units, in the face of what some consultants have considered a potential oversupply situation, Alan Cheong, head of research at Savills Singapore posited that the picture was one of relative undersupply.

On the supply side, assuming that units sold in 2009 have since received their Temporary Occupation Permit (TOP), there are some 10,076 units that have been sold and will be ready for occupation between now and 2016.

Including 2013's annualised sales figures, some 10,674 units are expected to receive their TOP in coming years. This translates to an average of 2,668 shoebox units being completed annually, between 2014 and 2017.

On the demand side, while the number of non-citizens entering Singapore has averaged 71,500 per annum historically, this dropped to 60,200 last year.

Using 2012's figure as a guide - given the more stringent controls over the admission of foreign workers in the past year - and adopting an ultra-conservative assumption that only 30 per cent of them are employment pass (EP) holders with a family of three, the number of EP head of households comes to 6,020 persons.

Said Mr Cheong: "Anecdotally, we find that a significant number of the new EP holders are singles with constrained rental budgets, and some not even given any housing allowance. Hence, it is only logical to deduce that they will either rent HDB flats or shoeboxes."

Discounting this figure by another 50 per cent, the number of incoming singles is at least 3,010 per year.

"Some may argue that not all singles or couples who can afford to rent shoeboxes will take one," conceded Mr Cheong. "However, we can reduce the likelihood of these permutations because we can infer that with the tightened immigration policy, shoeboxes could be the preferred choice for this group of non-residents."

The reason, he explained, is that it is very likely that a foreigner who has been granted an EP would have a non-indigenous skillset, which then implies that they have a salary that is high enough to afford renting a shoebox rather than going for a HDB flat.

"With the URA limiting the average size of a unit in a residential development to 70 square metres, the supply of shoeboxes is expected to fall from these numbers we have seen in recent years. Therefore, although gross yield of shoeboxes has been falling over time, with this picture of relative undersupply, total returns (both rental and price appreciation) should still be well supported."