What happen when times are bad?
Will tenants settle for shoebox units if the economy is not doing well?
I owned one-bedroom units before. When the rental market is soft, tenants will say that they like the unit, but the 2-bedroom owner is willing to match the price. So for the same rent, they can have a spare room, just in case a friend or a relative wants to stay over.
If it is a tenants’ market, tenants all go for bigger units (which are equally affordable). Owners of shoebox units have no choice but to lower the rent. Some might have to consider leases signed on a month-by-month basis.
Even then, the return may not be able to cover fixed expenses like mortgage, maintenance fee and property tax.
What can owners do? If they don’t want to leave the units vacant, they can only keep ‘subsidizing’ the tenants — at least they get something to cover the mortgage.
For vacant units, some owners might not even be bothered to pay maintenance on time.
As the condo ages, it’s quite unlikely for the management office to up the maintenance fee. The result can be poor maintenance which further discourages tenants.
When I look back at the bad times, it’s the owners of shoebox units, walk-up apartments and small developments who have to slash prices to seek buyers.
When the market recovers, prices of decent size units recover faster than such units, even if they are at the same location.
Some personal thoughts
It seems that shoebox units are marketable in a bull market only. The 1st batch of these units appeared in 1995 when the property market was at its all time high. There are more such launches from last year.
Some developers bought small plots of land. Or maybe the land was bought at a higher price during the good times. A good way to optimize space and maximize profit is to build shoebox units. They have more units to sell and it’s also easier to move them.
Of course, to buyers the story becomes: Land is scarce and space near city is expensive. You buy the location and have to sacrifice the space.
One thing to keep in mind: Singapore is different from densely populated cities like Tokyo or Hong Kong. In Singapore, tenants have plenty of living choices other than shoebox units.
Personally, I think the trend of shoebox units is more a hype than reality, a speculation rather than value-for-money investment:
1) You buy high during a prosperous property market when such units are available.
2) When the economy is bad, you have to rent low to compete with bigger units.
3) When the economy is good, you can’t find tenants because they have budget to go for decent-sized units .
Shoebox units is an investment that buyers can never win.
Truth coming from a owner of MM unit…I believe that too…
Hey, you own an MM unit too?
I wonder whether there are readers who hold different views though.
Hi Property Soul,
I am very interested in property at a very age. Each time when the market corrects, I see the opportunity to jump but was fearful. I only jump in the last correction. I am not a believer of MM unit but in today’s market only MM unit could offer best rental yield.
I was thinking of adding one MM unit in my portfolio. However after reading your posts, it affirms my initial thinking.
When you mentioned your first property and UOB, immediately I know which property you are referring. I think we started about the same time. Only difference is you sign the cheque but I din.
I love your post, pls keep going. You will bring more readers with your no frills approach.
I wanted to buy properties shortly after I left college though I didn’t have the means then : )
You’re right to hold back the cheque. I should have waited for a while more to buy the first one …
We shouldn’t be afraid of missing the boat. The economic cycle is getting shorter and shorter. While you complain that prices keep going up, the next correction is around the corner.
When it’s time to shop again, let’s compare notes before our next purchase, ok?