The Problems with Investing in Mickey Mouse Units
Definition of Mickey Mouse/ Shoebox Units
This term could be unique to Singapore for micro sized apartment that has really a small built-in area that could be just enough to function. You could have sizes like a studio unit with only 258 sqft (Suites at Guillemard) and have penthouses of up to 1,000sqft. At current, URA only approves units which are more than 300sqft according to a Business Times article cited in October 2009.
The trend could have started from February last year with the successful sale of Alexis at Alexandra.
Affordable Overall Price
Developers are smart these days when it comes to planning for sizes and the affordability of the units. With more units that could be built in a single development because of the small sizes, developers (eg. projects such as Siglap V) will price them in accordance to the affordability level of most mass market income group, starting prices could be even slightly lower than $500,000.
With such type of affordability price, banks are more willing to lend to you as the risk of defaulting a mortgage is much lower as compared to apartment quantum that goes over the $1,000,000 mark.
Size versus Capital Gain
Because of the size of the apartment, any increment in terms of per square foot (PSF) movement wouldn’t prove any much valuable unless it’s a big jump. It makes it less cost effective for an investment as with all the costs that is also factored in.
Assume that you would have bought an apartment of 300sqft at 1,300psf, any increment in 50psf would net you $15,000 and in which the high psf that you would have bought in from the developer would make it hard for it to even raise in price action. Factoring all costs involved including your conveyancing, stamp duty and bank loan penalty, it would be very tough to have even decent capital gain profit because of its size.
High per square foot (PSF)
The high psf cost that you have bought in as explained will also be a huge resistance for new buyers to buy from you via sub-sale or resale market for your capital gain. You will always have a very serious objection to buyers who are psf sensitive which most buyers are.
Unlikely Too Functional
It could be done with space saving modules for a 300sqft studio to function. But think of those projects which are approved prior before 2010 where URA has given free gross floor area (GFA) to developers to add planter boxes, bay windows. Minus those spaces off from the 300sqft, you REALLY will have very little space left for your living in. Extremely claustrophobic.
During hard times when the economy is facing bad times, your mickey mouse unit might have a better liquidity function. But having said that it’s a bad economy, you would have a hard time achieving a good target selling price. Vice versal, during good economy times, people would prefer space, your mickey mouse unit will drop in terms of preference because of the lack of functional space.
Let’s work backwards on how much a freehold $450,000 mickey mouse studio apartment (300sqft) you should be collecting based on average 4% gross yield rental.
Annual Value at 4%: $18,000
Rental Per Month: $1,500
To pay for $1,500 for a 300sqft apartment, working in terms of per square foot rental would be $5 psf. With such high psf, a question would be on whether people will be paying for the size of the apartment. Also for mickey mouse unit projects, facilities are definitely not the main focus, in which comfort and ergonomics are sacrificed for more apartment units, which could make it harder for you to rent the apartment out. (ps, this is gross. you need to factor in a few more things such as agent’s commission, and monthly maintenance for net)
Comparatively a $1,500 rental could get you a 3-rm HDB apartment (800sqft) in which the living functions are not sacrificed.
Speculative Element Killed Instantly With Seller’s Stamp Duty
An attraction to buying mickey mouse units would be the possible speculative element in which margin profit that could be made with very small investment quantum. With the introduction of Seller’s Stamp Duty (SSD) in February this year, this effectively kills speculative mood of property punters.
In terms of percentage, they would have to pay another extra 3% (averaging, with bank’s penalty and legal fees) and to the government should they be selling it within a year. Having said that, they would have already paid a buyer’s stamp duty prior purchase, which is another extra 3%.
So with at least -6% off your initial investment and a high psf bought-in price, it would be hard to achieve any gains within a year.
I would strong discourage people to start with investing in a too small unit which is heavily priced even when the total price (quantum) is affordable. No doubt there’s inflation protection in property investment, but with the price that you have paid for (citing future price has already been priced in by developers), it will take quite sometime before other bigger apartment catches up with your psf price that you have paid for.