Shoebox units remain popular with developers and buyers alike

THE latest move by the government to revise a guideline that caps residential units in projects outside the Central Area (CA) is laudable in its intent to curb excessive building of shoebox units and prevent new projects from posing a strain on local infrastructure.

The updated rules come at a time when the proportion of shoebox units in residential projects have already come off their 2011-2012 highs to more rational levels. But given that developers continue to build shoebox units to keep overall price quantums affordable, the guidelines remain relevant in that there is still a need to regulate unit sizes in some ways.

A new study by Knight Frank found that the proportion of shoebox units - defined as being smaller than 50 sqm - was 13.9 per cent in 2017, and 13.3 per cent this year for non-landed residential projects launched outside the Central Area. This is down from the high of 23.1 per cent in 2011 and 20.3 per cent in 2012. In 2013, it was 16 per cent.

INCHING UP IN THE EAST AND WEST REGIONS

It should, however, be noted that the drop in 2013 may not be a direct result of the guideline introduced by the Urban Redevelopment Authority (URA) in 2012 since many of these projects obtained provisional permission before the guideline kicked in from Nov 4, 2012.

Despite the 2012 guideline being in force, the proportion of shoebox units in non-landed projects outside the CA crept up to 17.8 per cent in 2015 and 18.7 per cent in 2016. Going by planning region, the proportion of shoebox units in non-landed projects continued to inch up in the East and West regions in some years even while the guideline was in place.

In the East region, the average proportion of units in non-landed projects launched outside the CA that were shoebox units rose from 18.4 per cent across seven projects in 2013 to a new high of 29.1 per cent in one project in 2016. This year, this proportion in the East region averaged 21.6 per cent across two projects. Similarly, the average proportion of units in non-landed projects being shoebox apartments was a significant 24 per cent in the West region last year due to one project.

At the same time, developers have downsized some unit types since 2014, with the steepest cuts seen for two-bedroom and three-bedroom units. For instance, the largest two-bedroom unit size in a new launch outside the CA in 2014 was 1,281 sq ft but that has come down to 904 sq ft this year. The largest three-bedroom unit size in a new launch outside the CA has also come down from 1,528 sq ft in 2014 to 1,292 sq ft this year. (Most projects launched by developers from 2014 onwards no longer have private enclosed spaces and private roof terraces due to a URA rule since Jan 12, 2013, that count these spaces as part of the bonus gross floor area).

Based on the shoebox numbers in the last few years, it is fair to conclude that the government's 2012 guideline on shoeboxes has had limited success regulating unit sizes in residential projects outside the CA.

The guideline essentially prescribed a formula for the maximum number of dwelling units for all new flats and condominium developments outside the CA, rather than impose a quota on the number of shoebox units or a minimum size.

The maximum number of homes in each project was derived by dividing the proposed building gross floor area (GFA) by 70 sqm. This applied to private non-landed residential developments whose provisional permission was granted from Nov 4, 2012, onwards.

Four areas - namely Telok Kurau, Kovan, Joo Chiat and Jalan Eunos - were subjected to a more stringent condition then, with the maximum number of homes in a project derived by dividing the proposed GFA by 100 sqm.

Such a calibrated approach to set the upper bound of housing units gave developers the flexibility to optimise their overall unit mix, allowing some smaller housing units to be built to meet diverse lifestyle choices.

But the flexibility also means that astute developers can fulfil the requirement without reducing the actual number of shoebox units. They do so by building more larger units to compensate for a large number of shoebox units in a project or by expanding the sizes of certain unit types.

As a result, the proportion of new non-landed units sold outside the CA that are smaller than 70 sqm in strata area continued to climb from 33 per cent in 2012 to 51 per cent in 2016. Sales caveats this year to end-October show that 53 per cent of the units sold in non-landed projects outside the CA were under 70 sqm in strata area.

This suggests that developers have been able to roll out and sell many small units in new projects despite the 2012 guideline. On balance, it should be noted that there have been no projects with shoebox units making up 50-80 per cent of all units since URA's guideline came into effect.

The highest proportion of shoebox units in a project affected by the 2012 guideline was at Guillemard Suites, where shoebox units made up 44 per cent of the total units. This project was launched in 2013 and its provisional permission was obtained in December 2012, after the URA guideline came into force.

Last month, URA announced a revision to the guideline by raising the average GFA parameter in the formula from 70 sqm to 85 sqm. This will apply to development applications for projects submitted to URA from Jan 17 next year. A more stringent condition of using 100 sqm in the formula will also be applied to more areas.

While this move is widely seen as a response to the stark increase in new units from the many collective sale sites sold over the past two years, the reality is that this revised guideline would not apply to any of these sites.

This is because the revised guideline only applies to development applications submitted to URA from Jan 17 next year. Most collective sale sites sold to developers would already have their development applications for new projects submitted to URA before then, and would thus not be subject to the new guideline.

For these sold collective sale sites, however, the maximum number of dwelling units is already capped by a pre-application feasibility study that developers need to undertake when seeking the approval of the Land Transport Authority (LTA). This is on top of an existing LTA requirement on Transport Impact Assessment for sites with at least 700 residential units.

All things considered, while developers have been blamed for the ramp-up of shoebox apartments in their quest for profit maximisation, it is clear that there is demand for these small units.

The total debt servicing ratio (TDSR) regime since June 2013 has clipped the capital outlay of aspiring homebuyers and investors. Shoebox units appeal to a substantial group of quantum-sensitive homebuyers, singles looking to live separately, and investors.

This is reflected in strong buying demand for shoebox units. In new non-landed projects outside the CA, shoebox units sold as a percentage of total sales continued to climb from 16 per cent in 2012 to as high as 22 per cent in 2016 and remains elevated at 19 per cent this year, based on caveats as of end-October.

It is assumed that developers are keen to build more shoebox units because they can sell these units more quickly and peg a higher per square foot (psf) price. But truth be told, there is a limit to how high these shoebox units can be priced without hurting their appeal to quantum-sensitive homebuyers. An exceedingly high psf pricing will also turn yield-seeking investors away.

FAITH IN SHOEBOX APARTMENTS PAYING OFF

The average transaction price (S$771,677) and median psf pricing (S$1,495 psf) of shoebox units this year are only slightly higher than what they were back in 2010 (S$727,846 average transacted prices and median psf pricing of S$1,473).

So far, a majority of investors who have put their faith in shoebox units have not been disappointed. Knight Frank's analysis of resale caveats of shoebox units found that 88.4 per cent of these resale transactions made a profit.

Resale transactions analysed (for which there were primary sales of the same units previously) show that owners who have sold their shoebox units enjoyed an average capital gain of 11.5 per cent or an annualised 2.4 per cent over their holding periods. These surpassed the 10.6 per cent average gain for resale transactions of all unit sizes or a 2.0 per cent annualised return for units from new projects launched since 2010.

Of course, the overall returns from these resale transactions, which mainly took place from 2014 onwards, were due in part to a government-engineered market correction spanning four years from mid-2013 to mid-2017.

Those who have held on to their shoebox units for rental income are also enjoying an estimated gross rental yield of 3.5 per cent, with the highest of 4 per cent being clocked for shoebox units in the North region.

Clearly, homebuyers' love affair with shoebox units is unlikely to fade off. The affordability issue under the TDSR regime, changes in lifestyle, a growing singles population and shrinking household sizes all mean that smaller units will retain their appeal to certain groups of buyers.

One observation is that the situation has gone from one of euphoria in 2011-2012 to one that is driven by demand. Meanwhile, developers will have to balance the need to provide liveable spaces for homebuyers on the one hand, while keeping the price quantum affordable on the other hand.

They will still likely roll out a considerable number of small units in new projects. This is especially so since the government tightened the screws this year with two more rounds of cooling measures. This includes higher buyer's stamp duty for homes worth more than S$1 million, higher additional buyer's stamp duties as well as tightened borrowing limits.

But developers with a brand reputation to uphold and who are in this market for the long haul will aptly hedge their risks, offering an optimal mix of unit types that address location-specific needs.