Shoebox rents have fallen 13% since 2013 peak

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/ The Edge Property
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July 27, 2015 9:00 AM SGT
Shoebox rents have fallen 13% since 2013 peak
The median monthly rent for shoebox units of up to 500 sq ft island-wide has fallen by 13% from 3Q2013’s peak of $2,800 to $2,500 in 1Q2015. In Alexis, for example, where about half of its units were 550 sq ft or less, the median rent for shoebox units fell from $8.86 psf in 3Q2013 to $6.89 psf in 1Q2015. Rents for bigger units, on the other hand, were more resilient with the overall URA rental index for non-landed homes falling by just 5% over the same period.
Mass-market shoebox units led the decline. Tracking the same basket of properties, the average monthly rent of small-format homes in the mass-market dipped 17% ($412) from $2,436 in 3Q2013 to $2,024 in 1Q2015 (see Tables 1 & 2). In the city fringe, the average monthly rent of shoebox homes fell 15% ($400) from $2,670 to $2,270 over the same period. Rents for shoebox units in the high-end segment were more resilient, declining by 9% ($289) from $3,382 in 3Q2013 to $3,093 in 1Q2015. In particular, rents dove the most for micro-shoebox units of less than 400 sq ft.
HDB 3-room and 4-room flats pose as competition for tenants with similar budget to shoebox units, especially those located in the mass-market segment as they offer more space for a similar or lower rent albeit without condominium facilities. Monthly rents for 3-room flats islandwide averaged $1,969 in 1Q2015 while 4-room flats averaged $2,321 (see Table 3). Rents for 3-room and 4-room flats have been extremely resilient with a small decline of only 3% between 3Q2013 and 1Q2015. Shoebox units in the high-end segment are less vulnerable due to the absence of alternative budget accommodation in the area.
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For context, the URA rental index for non-landed homes fell 6% in the high-end segment, 2% in the city fringe and 5% in the mass-market between 3Q2013 and 1Q2015. The study defined high-end homes as those located in the Core Central Region. City fringe homes referred to projects in Rest of Central Region while mass-market homes were located in Outside Central Region.
Given that most shoebox units were purchased for investment purposes, the decline in shoebox rents is a double-whammy against rising interest rates. While shoebox prices have generally stayed resilient due to their affordability, they are starting to buckle under immense rental pressure. Tracking the same basket of properties, the average price of shoebox units inched up by around 0.5% from 2013 to 2014. However, prices began to fall by 1.6% in the high-end segment, and 1% in the city fringe and mass-market in 2015 to date.
Table 1: Shoebox rents less resilient compared to bigger units

Source: URA, The Edge Property

Table 2: Projects with high number of shoebox rental transactions by market segment

Source: URA, The Edge Property

Table 3: HDB flats pose as competition for shoebox units in the mass-market

Source: HDB, The Edge Property

Further downside expected
Knight Frank recently reported that the number small-sized residential units put on auction climbed 28.6% quarter-on-quarter to 27 units in 2Q2015. Notably, three of the four shoebox units were mortgagee sales. Sharon Lee, Director and Head of Auctions at Knight Frank said, “the re-emergence of shoebox units under mortgagee sales suggests early signs of a weakening proposition for shoebox units as a property investment option, in the face of rising completed stock of private homes and a slow leasing market.”
The vacancy rate of non-landed residential units has risen from 7% in 3Q2013 to 9.1% in 4Q2014 before moderating to 8.3% in 1Q2015. At its recent seminar, Real Estate Developers Association (REDAS) president Augustine Tan warned that the looming supply of more than 89,000 new private home completions from 2015 to 2019 is likely to bring vacancy to a record high, causing rentals and prices to slip further.
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The stock of shoebox units as of 1Q2015 is estimated at 1,154 in the CCR, 3,222 in the RCR and 1,986 in the OCR (Figure 1). It is projected to grow to 1,334 in the CCR, 4,010 in the RCR and 2,781 in the OCR by the end of this year and further to 1,467 in the CCR, 4,778 in the RCR and 3,796 in the OCR by the end of 2016. Stock estimated based on new sale caveats and assumption that units are ready three years from date of sale. This is a conservative estimate that does not include developers' unsold units.
While the number of rental contracts for shoeboxes has generally grown in tandem with the increase in stock over the past few years, with the rental contract to stock ratio averaging 18% in the CCR and 17% in the RCR and OCR from 2014 to 1Q2015, rental volume in the OCR already shows signs of lagging in 1Q2015 with the contract to stock ratio falling to 11% from 19% in 4Q2014 and 16% a year ago. This could be a harbinger of further challenges ahead for shoebox landlords.
Figure 1: Shoebox rental volume vs. stock*

Source: URA, The Edge Property

* Stock estimated based on new sale caveats and assumption that units are ready three years from date of sale. This is a conservative estimate that does not include developers' unsold units.

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This article appeared in The Edge Property Pullout of Issue 687 (July 27) of The Edge Singapore.