Ascendant Assets Pte Ltd 8 Temasek Boulevard Suntec Tower 3 #42‐01 Singapore 038988 Co. Reg. No. 200817668K
Are shoebox residential units profitable? Introduction 1. Shoebox units are not an entirely new housing concept in Singapore. One of the first projects that had small sized units was People’s Park Complex (completed in 1972) and the smallest unit there is about 38sq m (about 409sq ft). Unlike landed properties, there is currently no minimum size restriction for a shoebox unit. Although there is no official definition of how big (or small) shoebox units are, Mr Khaw Boon Wan, the Minister for National Development, in his blog, categorised shoebox units as apartments that were smaller than 500sq ft. Even though there were some calls for the Ministry of National Development to set a minimum size for shoebox units, Mr Khaw shared in his blog that he did not want to “second guess the market” and his ministry would continue to keep a close watch on the shoebox market instead. 2. Aim. The aim of this report is to determine if shoebox residential apartments are profitable for the retail investors/purchasers. 3. Scope of the report. This report will cover the following: a. Overview of shoebox market and the analysis of the increase in annual transaction volume. b. Trend analysis of shoebox transaction prices . c. Trend Analysis of shoebox unit prices (S$psf). d. Discussion – How profitable are shoebox units? e. Observations of General Trends within the Shoebox market 4. Data source and assumptions. To understand how shoebox market units are doing, caveats of private residential units that were smaller than 46sq m (approximately 495sq ft) were analysed. The caveats were extracted from the Urban Redevelopment Authority (URA) Realis system and a total of 3,780 caveats from 1998 to 2010 were used for this report. It is important to note that the number of bedrooms is not factored into the consideration of this report even though an excessively small 2 bedroom unit would have much less usable space per room as compared to a studio apartment of a similar size. There are also two fundamental assumptions with respect to the caveats extracted from URA: (1) the caveats are assumed to be accurate and (2) any data error or omission, arising from URA’s end, would not significantly impact the findings. Overview of the Shoebox Market 5. Exponential growth for shoebox unit transactions. With reference to Figure 1, it was observed that prior to 2005, the annual number of caveats lodged were less than 30. However, from 2005 onwards, there was an exponential growth in caveats for shoebox Ascendant Assets Pte Ltd. 2011. 1 units. Specifically, there was a noticeable jump in transactions in 2005 as the number doubled from 2004 and exceeded the 30 transactions mark for the first time. Since then, the number of shoebox transactions almost doubled every year. 2008 was the only exception and the muted demand could be attributed to the weak investor sentiments brought about by the 2008 Global Financial Crisis. The significant increase in caveats lodged was bought about by the launching of more shoebox developments in recent years (see Figure 2). Figure 1: No. of caveats lodged for units smaller than 46sq m (496sq ft) from 1998 to 2010 (Total 3,780) 1946
2000
1500
867
1000
500
6
29
15
16
15
5
28
54
1998
1999
2000
2001
2002
2003
2004
2005
325
337
2007
2008
137
0
2006
2009
2010
Source: Ascendant Assets Pte Ltd and URA Figure 2: No. of Developments launched that had units smaller than 46sq m 60
56
50
40
28
30
24
20
14
9
10
2
2
2
2
2
1998
1999
2001
2002
2004
4
0
2005
Source: Ascendant Assets Pte Ltd and URA 2006
2007
2008
2009
2010
Trend analysis of shoebox transaction prices 6. Perspective from the Primary Shoebox Market. Figure 1 shows the annual volume of caveats lodged, but to provide an even greater level of details, the total number of caveats (3,780) is further broken down according to transaction price range and type of sales (see Figure 3). From this figure, it can be seen that new sales (i.e. units sold by developers) have the largest range of prices from S$200,000 to more than S$1.6mil. Based on the price distribution, there are only 29 transactions with an asking price of S$1.2mil or more (about 0.77% of the total caveats lodged). Ascendant Assets Pte Ltd. 2011. 2 7. Perspective from the Secondary Shoebox Market. In the secondary shoebox market, the number of sub‐sale transactions 1 (484) is almost twice the amount of resale 2 transactions (226). In comparison, more sub‐sale units (23) were transacted for S$850,000 or more, while there was only one resale unit in that price range. In addition, there appears to be a price ceiling for completed shoebox units at the S$1million mark and the highest resale transaction price so far was S$970,000 for a unit at The Oxley in District 9. Figure 3: Price Distribution according to new sale, resale and sub‐sale Price Range S$200k or less S$200k to S$250k S$250k to S$300k S$300k to S$350k S$350k to S$400k S$400k to S$450k S$450k to S$500k S$500k to S$550k S$550k to S$600k S$600k to S$650k S$650k to S$700k S$700k to S$750k S$750k to S$800k S$800k to S$850k S$850k to S$900k S$900k to S$950k S$950k to S$1mil S$1mil to S$1.05mil S$1.05mil to S$1.10mil S$1.20mil to S$1.25mil S$1.25mil to S$1.30mil S$1.30mil to S$1.35mil S$1.34mil to S$1.40mil S$1.40mil to S$1.45mil S$1.45mil to S$1.50mil S$1.50mil to S$1.55mil S$1.55mil to S$1.6mil S$1.6mil or more Grand Total New Sale ‐ 14 8 78 191 345 526 531 425 264 152 131 130 73 55 42 38 20 18 1 2 1 6 1 6 3 4 5 3070 Sub‐sale ‐ 1 3 6 16 50 70 96 103 58 26 17 11 4 7 3 9 4 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 484 Resale 20 14 23 20 27 30 27 20 6 12 8 14 2 2 ‐ ‐ 1 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 226 Grand Total 20 29 34 104 234 425 623 647 534 334 186 162 143 79 62 45 48 24 18 1 2 1 6 1 6 3 4 5 3780 Source: Ascendant Assets Pte Ltd and URA 1
Sub‐sale is defined as the sale of a unit by one who has signed an agreement to purchase the unit from a developer or a subsequent purchaser before the issuance of the Certificate of Statutory Completion and the Subsidiary Strata Certificates of Title or the Certificates of Title for all the units in the development. 2
Resale is defined as the sale of a unit by a developer or subsequent purchaser after the issuance of the Certificate of Statutory Completion and the Subsidiary Strata Certificates of Title or the Certificates of Title for all the units in the development.
Ascendant Assets Pte Ltd. 2011. 3 Trend analysis of shoebox unit prices (S$psf) 8. Overview of unit prices (S$psf) from the Primary Shoebox Market. Unlike transaction prices, unit prices rationalise the figures with respect to the property size. From the unit price, we are able to determine how much 1sq ft of the shoebox apartment costs. From Figure 4, the unit price range for new launches ranged between S$500psf and more than S$3,300psf, while the average unit price is S$2,317psf. Similar to the previous analysis, there were limited deals at the higher end of the unit price spectrum. Based on the price distribution, only 26 transactions had a unit price of S$2,800psf or more (0.85% of 3070 new sale transactions). 9. Overview of unit prices from the Secondary Shoebox Market. The average unit price for a sub‐sale and resale unit price range was S$643psf and S$1637 respectively. In line with the previous analysis, apart from sub‐sale units having a wider price range than resale units, it was also noted that a price ceiling existed for resale unit prices at the S$2,000psf mark. Figure 4: Price Distribution according to new sale, resale ad sub‐sale Unit price ($psf) S$400 or less S$400 to S$500 S$500 to S$600 S$600 to S$700 S$700 to S$800 S$800 to S$900 S$900 to S$1000 S$1000 to S$1100 S$1100 to S$1200 S$1200 to S$1300 S$1300 to S$1400 S$1400 to S$1500 S$1500 to S$1600 S$1600 to S$1700 S$1700 to S$1800 S$1800 to S$1900 S$1900 to S$2000 S$2000 to S$2100 S$2100 to S$2200 S$2200 to S$2300 S$2300 to S$2400 S$2400 to S$2500 S$2500 to S$2600 S$2600 to S$2700 S$2700 to S$2800 S$2800 to S$2900 S$2900 to S$3000 Ascendant Assets Pte Ltd. 2011. New Sale ‐ ‐ 2 30 109 94 187 240 470 662 417 197 139 90 95 79 57 31 23 28 26 18 14 16 20 7 5 Sub‐sale ‐ ‐ 1 2 8 13 40 59 61 78 74 53 43 16 9 11 6 3 4 3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Resale 6 15 16 17 18 24 30 21 21 13 18 12 6 2 6 ‐ 1 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Grand Total 6 15 19 49 135 131 257 320 552 753 509 262 188 108 110 90 64 34 27 31 26 18 14 16 20 7 5 4 S$3000 to S$3100 S$3100 to S$3200 S$3200 to S$3300 S$3300 or more Grand Total 4 3 3 4 3070 ‐ ‐ ‐ ‐ 484 ‐ ‐ ‐ ‐ 226 4 3 3 4 3780 Source: Ascendant Assets Pte Ltd and URA Discussion – How profitable are shoebox units? 10. Although shoebox units have been available in the Singapore property market since 1970s, there had been no discernable long term trend due to the lack of sizable historically data. To get some sense of how the shoebox market is presently doing, a repeat sales approach is used to analyse the caveats lodged. Repeat sales approach identifies units that have changed hands more than once within the period of observation. By analysing the price of the later transaction against the earlier one (for the same unit), the profit (or loss) for that unit can be determined. By collectively analysing these repeat sales, some meaningful trends of profitable units can be derived. 11. Loss and Profit distribution. As at end 2010, 569 owners (about 15.1% of 3,780) had already cashed out by flipping or selling their units. Of those who cashed out, 25 (about 4.39%) sold their units for losses. The percentage of losses is largely in line with the general residential property trend. As a whole, the average loss sustained was about S$38,376, while the maximum loss incurred was S$154,465. In terms of profit, the average return was about S$106,426 while the maximum profit gained was $332,000. The profit and loss distribution is shown in Figure 5. Figure 5: Profit and Loss Distribution of Shoebox owners 50
45
40
35
30
25
20
15
10
5
$260k and $270k
Exceed $270k
$230k and $240k
$240k and $250k
$250k and $260k
$210k and $220k
$220k and $230k
$180k and $190k
$190k and $200k
$200k and $210k
$160k and $170k
$170k and $180k
$130k and $140k
$140k and $150k
$150k and $160k
$110k and $120k
$120k and $130k
$90k and $100k
$100k and $110k
$60k and $70k
$70k and $80k
$80k and $90k
$40k and $50k
$50k and $60k
$10k and $20k
$20k and $30k
$30k and $40k
Loss
$10k or less
0
Source: Ascendant Assets Pte Ltd and URA Ascendant Assets Pte Ltd. 2011. 5 12. Sub‐sale vs Resale transactions – which has more profitable transactions. Whenever retail investors/purchasers buy a unit from developer, they would be faced with a choice of either flipping it, when the development is still under construction, or selling it after the construction has been completed. From Figure 5, it can be concluded that shoebox units are generally quite profitable. However, it does not necessarily mean that all sellers will do equally well as the demand for sub‐sale units can be quite different from resale units. Based on the profitability analysis, it was found that there were significantly more profitable sub‐sale transactions than resale transactions. The percentages are shown in Figure 6. Figure 6: Comparing the type of profitable sales Year Total Sub‐sale 401 (73.7%) Resale 143 (26.3%) Grand Total 544 Source: Ascendant Assets Pte Ltd and URA 13. To understand how this varies from larger units, a similar repeat sales analysis was done for all caveats lodged between 2003 and 2008 3 for units larger than 500sq ft. Based on that period of observation, there were a total of 12,637 profitable transactions with the percentage of profitable sub‐sale and resale transactions at 57.74% and 42.26% respectively. From this comparison, it can be seen that there is a higher percentage of profitable sub‐sale transactions for shoebox units than that for larger units. Some might conclude that the significantly lower percentage of shoebox resale transactions may be due to shoebox unit owners being able to hold their apartments for the long‐term due to the lower price. However, if the resale price ceiling of S$1million and S$2,000psf are taken into consideration, it could instead be inferred that the upside potential of resale shoebox units is limited and it would likely be harder for owners of completed units to sell their properties for huge profits. 14. Profitable Shoebox Districts. Property prices are generally affected by location; as a result, not all districts are equally profitable. Based on Figure 7, the top 5 districts that have the highest percentage of profitable transactions are District 17 (i.e. Loyang, Changi), District 20 (i.e. Bishan, Ang Mo Kio), District 8 (i.e. Little India), District 1 (i.e. Raffles Place, Cecil, Marina, People's Park) and District 2 (i.e. Anson, Tanjong Pagar). Figure 7: Percentage of profitable transactions for the respective districts S/N 1 2 3 4 5 6 7 District D17 D20 D8 D1 D2 D3 D11 Transactions 25 91 322 132 21 144 165 Profitable transaction 13 33 92 32 5 32 35 Percentage 52.0% 36.3% 28.6% 24.2% 23.8% 22.2% 21.2% 3
To make the comparison more stringent, a smaller observation period (2003 to 2008) for larger units was used. Even though the observation period of only 5 years, there were already 12,637 profitable transactions that were larger than 500sq ft. Ascendant Assets Pte Ltd. 2011. 6 8 9 10 11 12 13 14 15 16 17 D22 D9 D10 D15 D5 D12 D16 D13 D14 D19 53 536 217 677 268 353 83 75 442 155 9 87 31 92 26 34 6 5 13 3 17.0% 16.2% 14.3% 13.6% 9.7% 9.6% 7.2% 6.7% 2.9% 1.9% (Note: districts that had less than 20 transactions were deemed as statistically insignificant and were omitted) Source: Ascendant Assets Pte Ltd and URA 15. It is interesting to note that even though District 15 (i.e. Katong, Joo Chiat, Amber Road) and District 9 (i.e. Orchard, River Valley) see the most transactions, they do not have high percentages of profitable deals. One possible reason is that investors in these locations are spoilt for choice in the primary market. As a result, owners who try to market their units for sale will potentially face stiffer competition from developers. Another possible reason for the distribution could be attributed to the profile of buyers these locations attract. For example, District 9 and 15 are considered to be fairly prime locations where affluent families stay. As a result, shoebox units in those locations are not in high demand as they are not able to meet the housing needs of buyers who would typically be interested in those locations. Hence, shoebox unit owners in these locations could face some difficulty in finding buyers. Observations of General Trends within the Shoebox market 16. Based on the data above, a summary of observations is as follows: a.
Not all types of sales see equal volume. In general, new sales see the most transaction volume followed by sub‐sale and resale transactions. Within the period of observation, there were 2 times as many sub‐sale caveats as resale caveats and about 6 times as many new sale caveats as sub‐sale caveats. This implies that most activity in the shoebox markets are developer generated. b. New Sale has the highest transaction and S$psf prices. It was observed that only shoebox units sold by developers (i.e. primary market) were able to attain peak transaction and S$psf prices. There are two possible reasons for this. First is the availability of progressive payment for new units sold by developers and second is the flexibility for investors to flip their units. As a development gets closer to completion, these 2 conditions become increasing irrelevant. Hence, it explains why completed units have significantly lower number of transactions as well as profitable deals as compared to sub‐sale units. Ascendant Assets Pte Ltd. 2011. 7 c. Transaction and S$psf price ceiling for resale and sub‐sale shoebox units. It was observed that a price ceiling existed for resale shoebox units as well as sub‐sale units. The price ceilings for resale units are S$1million and S$2,000psf, while the price ceilings for sub‐sale units are S$1.05million and S$2,300psf. There are two possible reasons behind the psychological price barriers. First, shoebox units generally appeal to a segment of buyers who have limited funds yet want to invest in the Singapore property market. Thus, as the asking prices of the shoebox units increase, this pool of potential buyers becomes smaller and smaller. Another reason is that buyers who have a budget of S$1million or more will have a wider variety of properties to choose from. As a result, many investors would not be inclined to pay more than S$1million or S$2,000psf for a completed shoebox unit, when they could get something with more usable space for the same price. d. Resale shoebox units tend to be more profitable at locations that have a demand for short‐term housing. As shown earlier, locations that have high shoebox transaction volume (e.g. Postal District 9 and 15) does not necessarily translate to more profitable deals. District 1, 2, 8 and 17 tend to attract people who are looking for short term housing due to the proximity to international business centres (i.e. CBD and Changi Business Park) or racial enclaves (i.e. Chinatown and Little India). From these findings, it can be inferred that owners who purchase units with demand for short‐term housing would likely be able to sell their units for profits as compared to those who buy units where no such demand exists. e. Owners of completed shoebox would likely face more difficulty in selling their units as compared to owners of units under construction. Based on anecdotal evidence, a typical investment strategy implemented by “specu‐
vestors” is to buy units with the intention to flip, failing which, some will proceed to secure tenants and sell their units when market conditions are suitable. As seen from the analysis of profitable units, there was a significantly higher percentage of money‐making sub‐sale deals as compared to completed deals. This conclusion is confirmed in Figure 8, when almost half of the profitable deals were flipped when the respective developments were still under construction. Figure 8: Comparing year of completion and the type of sales of profitable units Year Uncompleted Unknown 1972 1979 1980 1995 1997 1998 Ascendant Assets Pte Ltd. 2011. Sub‐sale 267 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Resale ‐ 2 18 2 1 10 1 25 Grand Total 267 2 18 2 1 10 1 25 8 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total ‐ ‐ 1 ‐ ‐ ‐ 19 39 41 34 401 (73.7%) 1 5 4 7 6 10 12 25 13 1 143 (26.3%) 1 5 5 7 6 10 31 64 54 35 544 Source: Ascendant Assets Pte Ltd and URA Conclusion 17. Properties are the investment vehicle of choice for many Singaporeans and Singaporean residents. Shoebox units are particularly attractive due to their generally lower cost. While some property experts cautioned that there is limited upside potential for shoebox units, this report shows that some of them can be profitable under certain circumstances. Specifically, owners who bought units for low S$psf with prices that were significantly below S$1million and flipped it before CSC was issued should have done well. Extrapolating the findings, profitable sub‐sale and resale shoebox units are expected to come down in 2011 due to the stricter lending and reselling conditions imposed by the last round of cooling measures introduced in Jan 2011. Nonetheless, an analysis of shoebox transaction figures for 2011 will have to be done in early 2012 to confirm this assessment. Ascendant Assets Pte Ltd 25 Oct 2011 Address: Tel: Email: 8 Temasek Boulevard Suntec Tower 3, #42‐01 Singapore 038988 +65 8382‐1422 [email protected] This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Ascendant Assets Pte Ltd takes no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Ascendant Assets Pte Ltd. Ascendant Assets Pte Ltd. 2011. 9