Are you buying shoebox apartments for investment?
A perspective on our belief that purchasing compact homes at sweet price points is a great investment proposition.
Fast Moving Consumer goods (FMCG) and residential real estate are two industries at different ends of the consumption spectrum. One sells a soap for 50 bucks and the other sells land or apartments for a sum of 50 lakh to 5 crores. In marketing parlance, ‘Low involvement’ versus ‘high involvement’ category. As a buyer you think a hundred times over when you invest in a home.
Despite being at the most challenging end of the consumption spectrum, real estate sector has successfully adapted the oldest trick in consumer goods trade. Keep price points constant by reducing volume of the pack. Ever wondered how you could always spot the favourite chips packet for the same 10 bucks in the kirana store? The same has been happening with our homes. Optically the 50 lakh or 1 crore price point sounds sweet but our homes have shrunk and how!
Let’s start this post with a brief summary that is explained by the rationale in the next few paragraphs.
It is a sub-optimal choice to buy ‘shoebox’ or small-sized apartments for investment, just because the overall price fits one’s pocket. These homes are often packaged by developers as ‘the best units for capital appreciation’ at attractive ticket size thresholds. Small apartment sizes at sweet overall price points work best for developers to sell huge volumes quickly with their marketing and sales machinery.
As a retail buyer, there is a high probability that one gets trapped with such investments due to high competing supply or limited end-user demand or both. Ultimately for the asset to make money, some family should desire to live in these apartments but shoebox units with low livability might actually find limited takers when you intend to rent or resell them years later.
Amenity-rich yet wardrobe space-poor
The reality of today’s home buyer is that we are compelled to enjoy 30 labelled amenities in a project but deprived of an additional 10 square feet to move around in the bedroom. The average sizes of apartments across most leading cities have been shrinking in the past decade. 10 years ago, a decent 2-bedroom apartment used to be of at least 800 square feet of useable carpet area. That threshold is down by 15-20% to almost 650 square feet now. This has a huge impact on actual livability.
What do we mean by livability in the context of home sizes? Is it quantifiable? Perhaps not! We are talking about the simple pleasures of day to day living, like the comfort of having a toy corner for our child, a nook to keep that musical instrument or a quiet corner to spread the yoga mat. We are not even talking about functional requirements like a work desk or some additional storage space we all crave for.
Unfortunately, home buyers, specifically NRIs, get myopic in their choices when they are marketed investment projects by reasonably reputed developers in promising suburbs, with a laundry list of amenities all available at a sweet price point of 40-60 lakh (in most tier-1 cities) or 1 Crore (in Greater Mumbai).
Buyers need to reflect how much time in a typical week a family spends time enjoying the amenities as against time spent living inside the home.
This argument of course does not apply to families for whom purchasing this unit for self-use is in itself an entry into the formal housing ladder and significantly improves their quality of life – the real affordable housing end-users.
An interesting study on Greater Mumbai by Liases Foras, an independent non-broking property research firm, in 2021 showed how 1 bed units contributed over 30% of sales in 2021 compared to mere 10% of total sales in 2012, despite the average sizes of 1 Beds falling by over 12% in this period. It is hard to believe this large shift in demand for 1 Bed units is mostly contributed by families seeking affordable using for end-use. Many investors and NRIs have bought into this pie hoping to park their funds in a secure hard asset and gain capital appreciation.
Image: Average carpet areas of different typologies in Greater Mumbai area. One can observe how the smaller typologies have shrunk to expand buyer universe to include investors.
Source: Liases Foras blog
Many unit plans in the new projects come with room sizes below a bare minimum of 10*10 square feet, which in itself is barely enough to fit a queen-sized bed and a wardrobe. The biggest problem with many buyers is that they have become resigned to the fact that this is the best their money can buy and fail to reject such unlivable plans, thus fueling the optimism for developers to continue to design and build more shoeboxes.
Image: A 2 bed unit designed to be below 600 Sq. Ft. so as to achieve an attractive price threshold of 1 Crore in Greater Mumbai area. Image source: Property portals.
It is a global trend to design compact apartments located within the CBDs. This largely serves the needs of immigrant and expat renter demographic, who do not mind paying a higher rent despite the compact-sized homes but do not prefer longer work commutes. The irony in Indian cities is how shoebox units are built even in large townships located at least an hour away from business districts.
Do developers make more money selling tiny apartments?
The irony behind shoebox units is that building more smaller units actually increases overall project costs for developers due to reduced construction efficiencies including lower floor area-to-plot (FSI) utilization, higher parking requirement, higher cost of construction due to fixed material costs like doors and windows.
However, developers still prefer designing these units to ensure faster sales volumes at launch, as the attractive entry price point of smaller units expands the buyer universe and the faster sales and cash flows enable higher capital turn around elevating the overall financial returns.
Buyers feed this frenzy by jumping on to sweet price points without thinking much on who would prefer to live in these apartments once ready. While developers are correct in their approach to ensure faster sales and profitability, as buyers we need to care for our livability and future resale-ability.
The first set of these compact or micro apartments sold by developers in the last few years have just entered the delivery/occupation cycle and the next 2-3 years should provide us a reality check of how these apartments fare on livability for families.
The ‘Land-starved city’ theory
Media articles typically talk about lack of land availability in our metro cities as key reason for having to live in smaller homes. The problem does not seem to be of land availability per se, but of poor urban planning, public transport and infrastructure creation that has fueled over-concentration of population in select clusters adding pressure on land availability for development.
The trend of smaller apartments that started in a dense island city like Mumbai has now percolated to cities like Pune, Bangalore, Chennai and Ahmedabad which fortunately do not have any urban area expansion constraints. Most of these cities already have satellite mini-towns like Pimpri in Pune, which has an established social infrastructure and is now getting perceived as part of the greater Pune metropolitan area.
If our city planning departments are independent, competent and make effective land-use and zoning plans along with providing for mass transit to new urban nodes being developed, we as buyers might have ample choices than to buy a tiny apartment in a far suburb after paying half a crore.
“Hey, global cities like Hong Kong and Tokyo follow the model of compact homes and high density. This is the way to prepare for high urbanization rates in India.”
It is irrefutable that shrinking home sizes are a global trend. Most cities like London, Hong Kong and Singapore have had shrinking private apartment sizes over the past decade.
India’s scenario might well be different. Indian cities barring the island city of Mumbai have enough and more land compared to geographically smaller states like Hong Kong and Japan. Even in a perceived high-density state like Hong Kong, there have been debates over why less than 5% of overall land space is being used for housing and allegations of large property developers hoarding land banks in the suburbs. Over 50% of Hong Kong’s population is estimated to live in subsidized public rental housing, an option unavailable in India.
London set a ‘minimum space standard’ way back in 2015 to recommend minimum internal area requirements for homes basis number of bedrooms and number of expected occupants.
Indian developers and city planners might do better than to take inspiration from Hong Kong and Tokyo, cities with average home prices estimated at 15-25 times the average annual income and home ownership rates below 50%.
The myth that millennials prefer compact apartments
Preference for small-sized units by millennials is another baseless argument floated in favor of building compact apartments. The fact remains that at existing price points, millennials are struggling to climb the home ownership ladder and are forced to buy compact homes to suit their down-payment or own equity threshold.
Home attainability for young families is a hot debate even in the developed world but the only difference is governments of some countries have extended a supporting hand through home purchase equity grants, beyond just the low-income group segments.
Of course, the affordable housing scheme in India with mortgage interest waivers has encouraged many first-time home owners to purchase their dream home but for young middle-income families who don’t fall under the affordable housing income thresholds, saving for their own equity contribution is still a tall ask.
Large developments and townships in suburbs: Smaller the apartments, larger the supply and lower the future price growth
As more land gets unlocked and many developers build similar large developments with fancier amenities, future potential resale buyers of your compact apartment will have more shiny new developments to choose from and even within your development, compete with a large supply of small homes that other ‘investors’ in your own project are looking to sell.
Image: An efficiently designed 350 Sq. Ft. 1 Bed unit in a large township project located in Bangalore suburbs. The question to ask oneself is which category of buyers will pay a price premium in the future when there would be thousands of such apartments that would be available in a 15-minute radius and also built by equally reputed developers with probably newer amenity concepts. Image source: Property portals.
The only exception could be if your large development is a well-designed mixed-use project with enough office and retail components so that the ‘Walk-to-Work’ proposition trades off with small home sizes.
Do watch out for projects marketed as ‘mixed-use’ by barely constructing one strata-sale office building and a handful of convenience retail stores. (Strata sale means that developer sells the building divided as small office spaces and hence you cannot expect large organizations/MNCs to lease space here and fuel rental demand).
What can a buyer do to ensure one is buying a livable home even for current ‘investment’ purposes?
It is best to stay away from homes measuring less than 900 Sq. Ft. for a 3-bed unit or lower than 600 Sq. Ft. for a 2-bed unit as livability is bound to be compromised. Irrespective of how efficiently the layout is designed, you are just feeding into the developer’s bait of an attractive overall price point.
Purchasing studios or compact 1-bed units makes sense if located near business districts or in self-sustaining mixed-use projects with significant office spaces but otherwise might not really offer any upside due to high supply impacting price upside.
Furniture layouts typically shown in brochures/layout plans by developers are designed to achieve optics of more moveable space than is actually available.
If you are buying an under-construction/off-plan unit, engage an interior designer/architect and ask them to overlay real-world furniture sizes on the apartment layout.
One can also carry a unit plan layout of the existing home so that there is an easy reference point in understanding the room dimensions.
If you are evaluating a lower than standard size, say a 600 square feet 2-bedroom or a 900 square feet 3-bedroom apartment, it is best to view a completed apartment of similar size in any project or city. Most of us buying these small-sized homes cannot not get the real spatial sense from just reading room dimensions in the floor plans.
We cannot live in a 50,000 Square feet clubhouse. We live in our home and use the amenities for recreation. It is prudent to remember this fact while evaluating options.
Please evaluate the property in your future buyer’s shoes 10 years hence. If you wouldn’t prefer living in these apartments, do not expect other families to buy them from you at a premium in the future. Remember that as retail buyers we do not have the marketing and sales machinery that developers have, so we are on our own to find a greater fool to resell the shoebox apartment.
Perfect analysis which makes one question the practicality of living in these shoebox homes.