The Danger of Purchasing Small Units for Property Investment

Are smaller shoe-box units still considered good investments today?

After all, they remain the most affordable, and are still considerably easy to rent out. That is why these units are often the first to sell-out at new property launches.

Before you make any big decisions, here’s what you need to be aware of.

The Abundance of 1-Bedder Units

Once upon a time (think 15 years ago), there were only a handful of 1-bedroom or studio units. If you look at older developments, many of their smallest units are the 2-bedroom units.

So given the lack of supply, buyers of 1-bedroom units then enjoyed attractive rental yield and capital gains.

However it is quite easy to find a one-bedroom apartment these days at every corner of Singapore.

Using the central business district as an example, 1-bedroom units at The Sail @ Marina Bay and The Icon at Tanjong Pagar were the few developments with 1-bed units in the central business district in 2008.

Today, buyers and tenants are spoilt for choices!

There are:

• Marina One
• Marina Bay Residences
• V on Shenton
• One Shenton
• Robinson Suites
• Skysuites @ Anson and many more!

So with the spike in supply, 1-bedroom owners must expect stiffer competition.

What’s more, tenants/ investors can also look to other city fringe projects for one-bedroom units that are even more affordable!

Smaller Pool of Buyers & Tenants

Who goes for one-bedroom apartments?

Buyers of 1-bedroom/ studio units are often investors, who intend to lease out their units. So when these owners look to sell in future, their units are often picked up by another investor.

Yes, we do have individuals who purchase 1-bedroom/ studio units for their own occupancy, but this number remains small. After all, our culture is such that most of us will live with our parents.

So by the time we are ready to purchase our first property when we settle down, a 2-or-3-bedroom unit would be the natural choice to meet our families’ needs.

Tenants of 1-bedroom or studio apartments are usually singles or couples.

Interestingly, many of my clients who are singles will still opt for a 2-bedroom unit if they can afford it, be it to make space for a guest room or a study/ home office.

Again, I’m not saying it is not possible to rent or sell a one-bedroom/ studio unit, but rather you would have a smaller pool of buyers and tenants.

The Evolving Needs of Tenants Now

Now that work from home is the norm, most of us would hope to live in a bigger unit, as long as we can afford it. Couples who are working together at home will realize they need separate spaces/ spots to conduct virtual meetings.

During the COVID lock-down, many individuals have taken to cooking and baking and require more space in the kitchen.

So what used to work may no longer be viable today. This will in turn cut the pool of tenants/ buyers for such units.

Some may argue that tenants with limited budget will still opt for a smaller unit to save on rent. Yes, that’s right. Usually singles with limited funds will not be able to afford a pricier 2-3 bedroom unit.

To meet this need, we have seen many co-living arrangements set up.

Such units would appeal to singles who require a nicely set up one bedroom unit with a common space that they could share with other like-minded tenants. This, in my opinion, will affect landlords of 1-bedroom/ studio units.

Limited Capital Appreciation & Lower Rental Yield

For the very reasons indicated above, we are seeing limited capital growth for this segment of units. Don’t get me wrong – transaction levels are still healthy. But you may not be making as much as what investors used to make when you were to buy a one-bedroom/ studio apartment 15 years ago.

And with everything, there will always be exceptions, but this is my observation for
a number of developments in different parts of Singapore, where capital appreciation is weak and a number of units also see their owners losing money.

Interestingly, developments in more prime locations seem to be worse off than the ones in city fringes or the ones further from the central region.

With this in mind, the price you enter/ purchase a studio/ 1-bed unit is thus crucial.

One Shenton (District 1)

Recent rental yield has been very poor, in part due to fierce competition from newer developments nearby, and also due to lower demand in town.

Performance of 1-bed units here:

A 28th floor unit (581sqft) was first sold at $1,034,670 ($1780psf) in Feb 2007, flipped at $1,220,000 ($2099psf) in October the same year and transacted at a huge loss at $1,003,000 ($1726psf) in January 2021 when the property market is generally doing well.

A unit (538sqft) on the 10th floor was sold for $964,160 ($1792psf) in Feb 2007.

It then went on to transact at a neat $1,148,888 ($2135psf) in Jan 2012, before coming back down to $1,080,000 ($2007psf) in May 2016. 

A 20th floor (581sqft) has 4 transactions lodged.

First in Feb 2007 for $1,063,680 ($1830psf), and sold for a profit at $1,162,000 ($2000psf) in April 2010.

By 2016, prices have plunged to $1,080,000 ($1858psf) and its last transaction fell slightly to $1,010,000 ($1738psf). 

The initial rent when it obtained TOP status was very good. Owners then can get $4000 and more easily for a 1-bed unit.

But today, rents have fallen on average to $2800 – $3200 (still more than 3% yield, which is by all means reasonable). 

I would say most of the resale buyers have made or will make losses when they eventually sell. Many shared that they bought due to the attractive rental yield.

But many are now upset that they would make a loss if they were to sell today. 

Buyers who purchased directly from the developer have mostly profited if they didn’t hold on for too long.

Those who did would find little gains from their initial investment. But given the high rent over the years, it’s still not too shabby an investment. 

Altez (District 2) 

Performance of 1-bed units here: 

A 1-bed unit (754sqft) on the 40th floor was sold at a whopping $1,815,000 ($2410psf) in Jan 2013 but plummeted to $1,600,000 ($2122psf) in Dec 2019. 

A 32nd floor unit (754sqft) transacted at $1,646,660 ($2183psf) in March 2010, only to make a loss at $1,428,000 ($1893psf) in Sept 2020. 

The lower floor units, however, performed much better, and we see those who bought directly from the developers, mostly making gains.

Three units on the 14th floor all made profits.

A 603sqft unit originally bought at $1,045,940 ($1734psf) in March 2010 went for $1.3m ($2155psf) in Feb 2018

. Another 549sqft unit transacted at $932,710 ($1698psf) in March 2010 was sold at $1,130,000 ($2058psf) in Jan 2013.  

So ultimately, there is always a “cap” on what buyers are willing to pay for a one-bedroom or studio unit, especially when it’s a 99-year leasehold property.

Buying a high floor unit with a great view at a premium does not translate naturally into a higher resale price. So this brings us back to buying at the right price. 

OUE Twin Peak (District 9)

There were hardly any 1-bedroom units in this part of town, so rental demand has remained healthy. The common areas, facilities and unit’s fitting and design are top notch.

But I’ve always been wary of purchasing a 99-year project when the surrounding developments are mostly freehold developments, especially one with a super premium price tag. 

This is definitely one project for buyers who appreciate the finer things in life, so it could still work if it’s for own occupancy.

But if you’re looking for an investment property, I would steer clear at the launch and current price range.

There are not many transactions. But most have made losses. 

A 10th floor unit (549sqft) was first purchased at $1,406,000 ($2561psf) in Sept 2016, and incurred a considerable loss when it was sold in Nov 2020 at $1,220,000 ($2222psf).

If you think this is bad, another owner of a 25th floor unit has it worse.

That unit was bought in March 2013 at a whopping $1,975,00 ($3464psf) and 7 years later in Oct 2020 for $1,438,000 ($2522psf). Ouch! 

D’Leedon (District 10) 

With the first 3 examples, you may argue that it’s the location or development that is problematic. Not so much a smaller 1-bedroom or studio units. But here the difference would be pretty obvious. 

1-bed units performance

An 11th floor unit was purchased for $935,700 ($1473psf) in Dec 2010 and sold for a $133,200 profit this April for $1,058,000 ($1666psf).

Another 19th floor unit (635sqft)  transacted at $1,083,000 ($1705psf) in May 2011, and changed hands this February for $1,100,000 ($1732psf), gaining a mere $17,000.

A 6th floor unit (657sqft) was bought in Dec 2010 for $981,300 ($1495psf) and sold at $1,008,000 ($1534psf) in Feb 2021, with a profit of $26,700.

In Dec 2010, a 1-bed unit (635sqft) was bought for $984,200 ($1549psf) and sold in Oct 2020 for $1,015,000 ($1598psf) at a $30,800 profit. 

With the exception of the 11th floor unit most of the gains were pretty modest. But nonetheless, a profit is still a profit.

Yet spread across 10++ years, I would say it is really not a particularly attractive investment vehicle. 

Now let’s see how the other unit types perform: 

A 3-bed (1604sqft) on the 27th floor was first sold at $2,480,300 ($1546psf) in March 2013 and changed hands this March at $2,870,000 ($1789psf), a $389,700 profit.

A smaller 2-bed unit (1012sqft) transacted for $1,652,000 in Dec 2010 and sold for a $103,000 profit for $1,755,000 ($1734psf) in Feb 2021.

Another 2-bed (1055sqft) earned the owner a profit when it was sold in March 2021 for $1,550,000 ($1469psf), a $85,790 profit from the original $1,464,210 ($1387psf) in Jan 2013.

A 4-bed unit (1744sqft) was bought at $2,870,190 ($1645psf) in Oct 2014 and sold at $3,100,000 ($1777psf), a $229,810 profit. 

Commonwealth Towers (District 3)

Remember I said there will always be a cap for what most buyers are willing to pay for a 1-bed unit.

Commonwealth Tower is located conveniently near the MRT Station, and just a few stops away from the central business district.

Prices are extremely attractive for its location, so most units have remained profitable, and extremely easy to rent.

1-bed units performance

A 1-bed unit on the 11th floor (474sqft), bought at $753,700 ($1590psf) in May 2014, and was sold at $835,000 ($1761psf) in April this year for a $81,300 profit.

Another 26th floor (463sqft), purchased in April 2017 at $838,000 ($1809psf) gained $70,000 in about 4 years, when it was sold at $908,000 ($1961psf) in March 2021. 

Like D’Leedon, the slightly bigger units here have made much more money for their owners. 

A 13th floor 2-bed (904sqft) unit was bought at $1,388,300 ($1535psf) in Oct 2016 and sold in March 2021 for an impressive $1,665000 ($1841psf), a $276,700 gain for 5 years!

A 3-bed unit (1034sqft) was sold in Aug 2017 at $1,701,800 ($1647psf) and transacted in March 2021 for $1,880,000 ($1818psf), a $178,200 gain in barely 4 years. 

Not everyone can afford the bigger units that come with a much bigger quantum as well. 1-bed below $1m seems to be a safer bet in my opinion. Yes, when you commit to a unit in town, the gains can be much more significant, but at the same time, huge losses have also been seen in those developments. 

So after all these, I’m certainly not saying you CANNOT invest in a one-bedroom/ studio unit. But you should know the limitations of this unit type in terms of capital appreciation, as well as current trends and demands. 

Case Study 

Take for example –  I’ve an elderly client who bought a freehold studio unit at Telok Kurau, Parc Elegance in full cash, for $500++k in 2010, and rented it out for $1800 – $2000 monthly for the past 8 years.

Given that they did not take any loan (no interests), this was a means for them to get a good rental income. 

But they are aware that with a studio unit, they won’t be getting a huge capital appreciation when they eventually sell.

But to ensure price stability, we opted for a freehold development in a considerably good location in district 15, that is considerably near to the MRT Station (about 10 mins walk), bus stop and shops etc.

They plan to hold this for more than 10 years, so getting a freehold development is important. 

We toyed with the idea of getting a bigger unit then, instead of just a studio with all the limitations I discussed above, since they could well afford one. But they were also getting on in age, and thought it best to have more liquid cash around.

Good thing, if there were to sell today, they would be able to make at least $100k. Another option we were exploring before they committed to this development was Waterbank @ Dakota, which would command a higher investment.

But that was also one of the better developments where you see 1-bed/ studio units giving decent returns to their owners. 

As always, it’s about exploring all options before entering the market.

This is more important when it’s both an investment unit and one for own occupancy. With this, you won’t have any rental income.

If performance of the 1-bed unit in that particular development is poor like D’Leedon, then you end up losing money after considering the amount put in renovation, brokerage fees and overall maintenance. 

Conclusion

If we look at the big picture, we can see easily observe the moves the government makes to discourage purchasing property as an investment.

From measures like ABSD and increasing the Development Charges on developers if they build residential properties – we can easily come to our own conclusion regarding parking our excess monies inside properties.

That being said, opportunities still exist if you are planning to purchase a property for your own use or to house your family.

Families that bought 3-bedder units at developments like Commonwealth Towers are seeing nice paper gains.

With the various restrictions on multiple property ownership – you still have that 1 single opportunity to choose the right property where you can safely park your monies in.

And at the same time enjoy an opportunity for capital growth through property appreciation.

If you are looking to explore your options available in your family’s housing needs, I welcome you to contact me for a no-obligation discussion.