Over the last decade, the performance of the Singapore residential market has gained traction on the back of strong economic fundamentals and an influx of foreign investment. The stable political climate, business friendly environment and legal transparency coupled with low interest rate and a dearth of alternative investment product have contributed to directing liquidity into the Singapore property market with substantial local and foreign investment interest.

At the same time, the demographics of the local population have changed with many people marrying late and having fewer children. As a result, and according to the Singapore Statistics, the resident household size has decreased from 3.70 persons to 3.53.

This phenomenon of smaller household size and increased investor demand has encouraged developers to put out smaller residential units some of which are less than 50 sqm for a one bedroom unit. These “Shoeboxes”, as they are fondly called, have been on the rise in recent years with buyers taking a liking to the small capital outlay and relative price affordability. The stock of such tiny units spiked last year at 12.0% (3,938 units) of all non-landed residential units, increasing from the 1.7% (554 units) in 2007. These units are ideal for investors looking to rent to expatriates or young couples. With continual strong buying demand for suburban homes, there has been a growing prevalence of “Shoebox” units in areas outside of the Central area.

How have “Shoebox” units performed over the recent few years especially in the less tried-and-tested rental markets outside of the central area?

Average annual price appreciation (average price appreciation is calculated based on the change in prices of the same housing unit over time) of “Shoebox” units in areas outside of the Central area slowed from 25.0% to 16.0% in 2009 before recovering to above 20% during the years 2010 to 2H13 (see chart). The Central area on the other hand, with its higher capital commitment, saw prices of “Shoebox” units commanding an average gain of 15% per year during 2008 to 2009. However, capital appreciation strengthened thereafter to over 25% per year between 2010 to 2H13. This clearly reflects the stronger capital appreciation of “Shoebox” units within the Central area over those located outside.

With many “Shoebox” units being purchased as an investment property, we see that units in the Central are benefiting from the area’s strong leasing activity. The Central area takes up the majority (70% to 75%) of the total leasing contracts recorded island wide. The Central area is likely to retain its attractiveness in the leasing market given its proximity to a wide choice of cultural and recreational amenities.

However, completions of “Shoebox” units are expected to peak in the next few years. This might put a cap on price performance in the near term. Total stock of “Shoebox” units is expected to reach 11,000 units in 2015 and more than 70% of the units will be completed from 2012-2015. As a result, capital appreciation could be muted across the island and investors of “Shoebox” units in the outside Central area might face greater challenges especially when leasing these units in the open market.

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