Doing the sums on shoebox flat investments

Straits Times: Sun, Apr 01

'The tenant is quite used to it,' the property agent said airily, dismissing concerns that a shoebox apartment is going to be quite difficult for any reasonable-sized human to enjoy living in. I was at a showflat on the fringe of Paya Lebar recently, which showcased an apartment of around 450 sq ft. There were perhaps half a dozen others in the showflat as well and it did not seem crowded. Possibly this was because there was hardly any furniture. There were two small chairs and the kitchen sink, but no dining table, sofa, fridge, TV set or computer - surely features that a normal apartment should contain. In the bedroom, there was no bed either, but a carpet to represent where this narrow single bed clearly was going to be. Leading out from the bedroom was a balcony that ran along the living room as well. By the way, the washing point was on the balcony, so this means that the washing machine was going to be sited there. Many at the showroom seemed caught up by the excitement of owning a piece of private property for less than $600,000 and, for some moments, I was as well. A back of the envelope calculation goes like this. Assuming the price is $650,000. Assuming I already have a property loan, I will have to fork out $260,000 in cash and take out a 60 per cent loan of $390,000. Taken over say 25 years, this comes up to a $1,560 monthly repayment at an interest rate of 1.5 per cent. Assuming rent of say, $3,500 a month, this makes for a return of around $1,940 per month after paying off the loan or $23,280 per year. One way of looking at the return is the total rent divided by the total investment ($42,000 divided by $650,000), which makes for a yield of 6.5 per cent. Another way is to look at the rent after deducting the loan repayment divided by the actual cash outlay. This comes to a gross yield on the investment of about 8.9 per cent ($23,280 divided by $260,000 of capital). These returns are far more attractive than any fixed deposit currently. Throw in the promise of capital gains and it sounds like an even better deal. All well and good, but look at the assumptions behind this handsome return: Such a return assumes that interest rates will stay low and that there will not be periods when the apartment is vacant. All these are standard considerations when buying a property for investment but in particular, for a shoebox apartment, a very important factor is the tenant, and a tenant willing to pay $3,500 at that. My fear is that this tenant - slight of build, who hardly ever cooks, sleeps standing up perhaps, is seldom home and when he does come home, is out on the balcony - will turn out to be a pipe dream. After all, he is also supposed to be able to fork out $3,500 per month in rent, preferably be an upstanding professional who works in the central business district area, and most importantly, pays the rent on time. A tall order indeed. Better still if he never complains about faulty appliances and other minor problems. I exaggerate, I know, but this is the scenario that is often portrayed by many of the agents. How realistic is that scenario? Looking at the negatives first, there is a tremendous amount of supply coming up in Geylang, for example, in the next few years - close to 1,900 units all told and fairly small units too. This means that one is looking at potential tenants who are single or at best couples. Even a small family or friends hoping to share an apartment will find it near impossible to squeeze into the unit I viewed. Another factor is that the rental market needs to be supported by the Housing Board (HDB) rental market. If the HDB rents are still buoyant, at say $2,000 or $2,500 for a flat, then perhaps there may be a group of people willing to pay over and above this amount to live in a private property with facilities. On the macro front, Geylang is an area undergoing gentrification. It is a stone's throw from the upcoming Paya Lebar commercial hub. It has good transport links and it is just a few bus stops away, along Nicoll Highway, from Suntec City. Dakota MRT station is perhaps a 10-minute walk away. And good food at all hours of the day is easily available. In a few years, the Sports Hub will also be up. As more business activities fan out from the city centre to the suburbs, there will be a need for housing, making a compelling case for investing in this characterful area. Still, I cannot help but feel that the proof is in the pudding to see if a shoebox apartment is indeed liveable. The bulk of them have yet to be completed so we will have to wait and see. [e-mail] Source: The Straits Times