Revised shoebox unit policy may spur buying frenzy: analyst

Buyers may rush to snap up such units, which they can sell at a higher price in the future.

Despite a limited land supply situation, Singapore has made a firm move against shoebox homes in a bid to reduce strain on local infrastructure and provide a more liveable environment for its residents who can enjoy greater freedom from the tight squeeze.

The number of shoebox units or apartments sized 500 sq ft or less are expected to decrease after the Urban Redevelopment Authority (URA) amended the formula that is used to calculate the maximum allowable number of dwelling units (DUs) for all new flats and condominium developments outside Central Area.

Under the revised rules, the maximum number of DUs which was previously derived by dividing the Gross Floor Area (GFA) by 70 sqm has been amended to 85 sqm effective January 17, 2019.

“Whilst URA will always look for innovative ways to maximise the limited land that is suitable for residential use in Singapore, its mandate is to ensure that dwelling units meet a certain standard so that residents can comfortably carry out their daily activities,” Hector Tan, head of marketing and communications at Huttons Real Estate Group told Singapore Business Review.

Paul Ho, chief mortgage consultant at icompareloan similarly lauded the push towards more liveable homes. “No matter how creative you use the space, you cannot have a bedroom that is convertible to a toilet that is convertible to a kitchen that is again convertible to a study, etc. Creative use of space is the devil in the disguise of maximising use of space.”

Also read: Singapore housing market fairly valued: UBS

In areas where new developments could level strain on local infrastructure like Marine Parade, Joo Chiat-Mountbatten, Telok Kurau-Jalan Eunos, Balestier, Stevens-Chancery, Pasir Panjang, Kovan-How Sun, Shelford and Loyang, the URA has set more stringent requirements by prescribing that the maximum number of dwelling units be calculated by dividing the GFA by 100 sqm.

Over time, the policy move encourages a better distribution of the growing population across different areas in the city state, explained Darius Cheung, CEO of property marketplace “By maintaining the low-density character of these precincts, the government is also inadvertently creating scarcity value for properties in the area, potentially making them easier to sell or rent out as individual units,” he added. 

If the shoe fits
Demand for shoebox units in Singapore's secondary markets has been steadily growing in the past twelve years, data from real estate agency Orange Tee & Tie Research Consultancy show. Shoebox condo resales as a proportion of total condo resales have expanded from 1.9% in the first three quarters of 2013 to 6.6% in Q1 to Q3 2018 largely in response to residents’ evolving property requirements.

“There is also a growing need for such homes as our demographic profile changes, such as having more singles, married couples with no children, unmarried elderly and rising affluence among graduates/young people who desire to live independently and with the comforts of private housing,” Christine Sun, head of research and consultancy at Orange Tee & Tie said.

In fact, the revised guidelines may potentially spur more shoebox buying as cautious buyers who have been lying in wait to see the full impact of July’s cooling measures may decide to purchase a small unit for themselves which they can sell for a higher price in the future, added Sun. “[S]hoebox units will continue to stay relevant to the market because some may still consider this class of property a good short to mid-tier investment asset,” she added.

Such apartments also play a role in keeping the city's banking sector stable, argued icompareloan’s Ho, as they offer more secure lending prospects for banks who grapple with less risk of buyer default situations. 

“With more and more smaller units being built and sold at ever higher prices, this serves to make the surrounding bigger units prices to hold up better. And with ever stronger land price (on a per square feet basis), banks are essentially printing money as any default of payments is immediately backed by very strong prices as banks will not lose money,” he explained.

Despite its industry merits, tighter regulation of shoebox units is a welcome development for homebuyers especially when liveability is considered.

Against increasing speculative activity in the real estate sector, Ho believes that Singapore could take regulatory action one step further and has been actively pushing for a clear-cut policy limit on housing size. “I want to see a minimum size that a condo unit that must be built, not a blended average minimum size. Too many smaller units will lead to huge over-supply and a degradation of Singapore's liveability,” he argued which will come at the benefit of homeowners and future generations.

With developers, however, it is a different story.

Although the move comes as a boost to Singapore's residents who have the luxury of choosing not to cram in tight spaces unlike their Hong Kong counterparts, the cap deals a heavy blow to embattled property developers whose margins are poised to come under even more intense pressure. Still reeling from higher ABSD rates announced in July, the  limitation on maximum units is poised to make en bloc deals more challenging in the near future, according to’s Cheung.

Also read: En bloc sales collapsed 90.71% to $353m in Q3

“They will drastically impact developers' future revenue for any given residential piece of land. This is especially the case whereby, post-cooling measures, developers will be wary about raising home prices to make up for the lost profit,” he said.

Overall net gearing ratio of home builders, which measures total debt over total shareholder’s equity, rose by 6 ppt to an average of 58.7% in Q2. Developers have also been bearing the brunt of higher Additional Buyers Stamp Duty (ABSD) as projects have witnessed weak take-up figures as anticipated selling prices weakened in response to souring sentiment. 

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