By Mr PropwiseNov 8, 2011

Mr. Propwise is the founder of the Singapore property blog www.propwise.sg, which aims to help people make better real estate...

Shoeboxapartments (aka "mickey mouse" apartments) have become increasingly popular inrecent years, with caveats lodged rising from fewer than 30 in 2004 to morethan 1,900 units in 2010. They are becoming a more prominent feature in ourprivate housing landscape - they made up just six percent of new private home sales in2008, but that figure has doubled to 12 percent in 2010.

While thereis no industry accepted standard definition of what constitutes a shoebox unit,Minister Khaw Boon Wan has categorised them on his blog as apartments that are smaller than 500 square feet.

The natural choice for budding investors?

Due totheir lower total costs (usually less than $1m per unit), they have become thevehicle of choice for budding investors who only have a moderate amount of cashto put to work, while promising decent potential rental yields of three to five percent. Forexample, a $500,000 unit (400 square feet at $1,250 per square foot) would onlyrequire $100,000 (if taking an 80 percent loan) to $200,000 (if taking a 60 percent loan) ofcash plus CPF to buy. And if you assume that you can rent it out at $1,500 permonth, then you're looking at a gross rental yield of 3.6 percent.

Based onthe calculations above, it sounds like shoebox units are potentially decentinvestments, and the thought of picking up a unit has indeed crossed my mind (andthat of other investors I know as well). But I've always held back because of the high per square foot prices,which instinctively tell me that I'm not getting a great deal.

Can shoebox units be good investments?

So it waswith great interest that I read a new report released by local propertyconsultancy firm Ascendant Assets. The report, which was recently covered byThe Straits Times and believed to be the first in-depth study of thisphenomenon, did a detailed analysis of 3,780 shoebox unit caveats lodged withthe URA from 1998 to 2010 to reveal the trends in the market and theprofitability of shoebox unit transactions.

One findingwas that based on the transactions of these units so far, sub-sales (before theCSC was received) and re-sales have generally been profitable, with an averageprofit of $106,426 and only 4.4 percent of owners selling at a loss. The maximum gainrecorded was $332,000.

However,there were a significantly higher percentage of profitable sub-sale dealscompared to re-sale deals. Could this be because it is easier to sell theseunits off plan as opposed to live as the buyers will then see how smallthese units actually are in reality?

I believethat this trend of the majority of sub-sale and re-sale transactions of shoeboxunits might not continue going forward given:

1. Propertyprices may not keep going up as they have in the past two years.

2. Thetotal number of completed units will increase from 1,100 to 3,800 by 2014,creating more supply in the market (and competition for buyers).

3. Theharsh Sellers Stamp Duty imposed by the government at the beginning of 2011makes it unprofitable to flip the unit as a sub-sale transaction, increasingthe risks of being stuck with a unit that might be difficult to rent or sellupon completion.

Perhaps thereal winners from the growing trend of shoebox units are the developers, whoare able to bump up their per square foot prices (and margins) by shrinking thesize of the units. Indeed the Ascendant Assets' report found that only shoeboxunits sold by developers were able to get top absolute and per square footprices.

So becareful if you're considering investing in such a unit!