Last week, both The Sunday Times and Business Times carried stories on the rise in demand for bigger homes. I plan to address the market gap for spacious new homes within the $2.5-3.5M budget in a later post, but for today let’s discuss the perceived drop in demand for shoebox units, and the future of home affordability.

In his article “Bigger Homes Back in Demand” published in The Sunday Times on 4th October 2020, Invest Editor Tan Ooi Boon observed the following:

“The data shows a drop in the demand for so-called shoebox-size apartments – those under 506 sq ft in the second quarter. These units accounted for only 10 per cent of total new transactions, down from 14% in the first quarter, when most office workers were still on site.”

Let’s talk actual figures. There were 290 shoebox units transacted in the first quarter, and 193 transacted in the second quarter. Clearly, a fall in numbers transacted – but I disagree with his presumption that this is due to a drop in demand. If you’re a seasoned market observer, you should know that new sales numbers are closely correlated to numbers of units launched during any given period, particularly for in-demand unit types. As a realtor on the ground, working with home buyers and tenants on a daily basis, I know how strong demand is for compact but well-appointed homes. My assertion is that transaction numbers for shoebox units are more reflective of limited supply rather than reduced demand.

In 2012, URA had already introduced guidelines to moderate excessive development of shoebox units – the maximum number of dwelling units (DU) was derived by dividing the proposed gross floor area (GFA) by 70 square metres (~753 sq ft). Four areas, Telok Kurau, Kovan, Joo Chiat and Jalan Eunos, were subject to a more stringent requirement of 100 square metres (~1076 sq ft), to avoid stressing local infrastructure capacity concerns of these high-density residential areas. (I will discuss further tightening on these restrictions later in this post.)

As such, the number of shoebox units offered on the primary market has been steadily dwindling. For example, at one popular new launch project this year, The Woodleigh Residences, none of the 667 homes being built are “shoebox” units – the smallest unit size being 570 sq ft. There are 55 units of this layout (A1a) being built, of which only 3 remain available for purchase at time of writing.

So what accounts for the seemingly dramatic drop in demand for shoebox units? If you’ve been tracking the hot launches this year, you would probably be able to guess – The M. This Bugis project was launched in late February of this year, 138 of the 522 homes launched were below 506 sq ft. These units were sold out in a matter of days, with snaking queues outside the showflat despite the looming pandemic situation at that point in time – the 6 shoebox deals you see transacting at The M after Q1 2020 were in fact bounced-out units- these were very quickly snapped up upon being re-released onto the market.

The fact that there were 138 shoebox units launched and quickly sold (in 2 days!) is reflective of the limited supply and real consumer demand for such homes. The writers’ observations on the fall in shoebox transactions from 290 to 193 – the difference of 97 units between Q1 and Q2 is more than covered by The M’s performance in Q1!

And if we’re to look at Q2 shoebox demand levels – consider Forett @ Bukit Timah – 76 of the 633 homes here are under 500 sq ft, and 32 of these units (roughly 42%) have been sold within 2 months of launch – a rather strong showing considering the location is more suited to families who drive, rather than the typical shoebox dweller. The difference in reception for Forett versus The M shoebox units is illustrative of the combination of features that sit well with shoebox buyers – nobody heads out into the market looking for a tiny home! Demand for shoebox units is primarily a demonstration of demand for the most affordable homes in any given project and neighbourhood.

When we invest today, we need to project our expected returns against the landscape our property holdings will be competing against in 3-5, 10, 20 years time, not based on today’s flavour of the day but our own investment timeline. We should also be careful not to confuse demand and supply from very different market segments – the increase in demand for units larger than 1,200 sq ft post-circuit breaker had little correlation with the fall in transaction numbers for shoebox units, which was more a result of fewer shoebox units being offered up for sale rather than an indicator of falling demand.

What we see offered up on the primary sales market today is what was planned for prior to additional changes to URA’s earlier mentioned building guidelines. For building plans submitted after January 2019, a tighter set of guidelines (first announced in October 2018) will bring average unit sizes even higher. Number of dwelling units for a given plot of land will be calculated based on a Total GFA divided by 85 square metres, a 21% increase from the earlier 70 square metres. In addition, areas under the stricter 100 sq metre formula will increase from the previous 4 to a total of 9: Marine Parade, Joo Chiat-Mounbatten, Telok Kurau- Jalan Eunos, Balestier, Stevens-Chancery, Pasir Panjang, Kovan-How Sun, Shelford and Loyang.

What does this bode for the future? For each new shoebox unit built outside of the central region, a corresponding unit of at least 123 sq metres (1323 sq ft), or 153 sq metres (1647 sq ft) if falling within the nine areas identified as high-density, would need to be built. So whilst land bids in future will need to fall to accommodate increased building costs, more challenging sales climate and stricter anti-shoebox planning restrictions, affordability is not going to come down – instead, private home ownership rates will.

To illustrate, I’ve done up a table of all District 3 pipeline projects, as well as the shoebox units or smallest available units in the case of projects that will not be building any homes within 506 sq ft. This gives you an indication of entry prices for new homes in District 3 in the next few years. Note though, that the “Starting Price” indicated is for the lowest done deal from developer whilst “Last Done Price” would be the last recorded price for any shoebox sized unit within the project, or smallest unit size in the case of ARTRA & Riviera as of today. It’s telling to note that whilst shoebox units form just 9.4% of total pipeline, they form 12% of total sold units – and the 63 units left unsold are currently all listing above $1M.

How does one act upon such knowledge? It really depends on what your specific home and investment needs are, but I would advise those who are looking for a centrally-located new home with budgets capped at $850K-1.2M to intensify their search now, and consider the future impact that the URA building guidelines will have when currently available projects planned prior to its coming into effect are already showing a shift upwards in size and affordability.

I’d also advise you to do plenty of homework, not just on paper, but get a real feel of the situation on the ground by visting showflats, and talking to those involved in the market (not just those observing from behind a desk!)- as I hope you’ve come to see, not everything reported in the papers is completely accurate.

You’ll need to be fast and decisive, whilst refraining from being impulsive or allowing yourself to become pressured into a decision. Knowing the market well will help tremendously. Oftentimes data doesn’t convey the full strength of demand – to illustrate, the 36 shoebox units at Avenue South Residences were snapped up within the space of 2 days, on 6-7 September 2019 (These were in addition, much-lauded heritage units that will give future occupants the rare opportunity of living in homes reminiscent of Tiong Bahru walk-ups, yet with modern full-facilities and private lifts!) The 4 deals recorded after these two days were in fact withdrawal units, that were snapped up almost instantaneously upon being bounced out.

I would want to delve further into the demand for compact homes on the rental market, but I’ve already went on for longer than I’d planned! Let’s revisit that in another post! Till then, keep your story ideas and questions coming!