City&Country: Cover Story-- Small apartments on the rise

The fact is, apartments in the city are shrinking in size. Anyone involved in or monitoring the Klang Valley property market would notice the growing number of launches of apartments smaller than 700 sq ft, commercial-titled SoHos (small office, home office) and other variants of the product, which can be used as a residence.
Such products are common in cities such as Singapore and Hong Kong due to the scarcity of land. In Malaysia, while land supply is dwindling in the city centre, there is still ample land to develop in the fringes of the city.
As pointed out by real estate agents and consultants City & Country spoke to, Malaysians tend to favour landed residential properties over apartments. However, Previndran Singhe, CEO of Zerin Properties Sdn Bhd, believes the surge in small apartments and SoHos is a result of escalating real estate prices. Such units, he says, serves as an avenue to allow people to own real estate.
DTZ Nawawi Tie Leung executive director Eddy Wong concurs. “It is a trend reflective of higher land prices and material cost, which translate into higher selling prices. About two to three years ago, an apartment in Petaling Jaya was RM300 to RM350 psf. Today, it is going for RM600 to RM700 psf and prices are even higher in the city centre.”
Looking at the global historic trend, Eddy says he is not surprised this is also happening in Malaysia. Despite them being called shoebox apartments by some, he believes their size in the Klang Valley is generous compared with those in Hong Kong where the median is 500 sq ft.
“In Hong Kong, half the apartments are smaller than 500 sq ft — those are really shoebox apartments. Malaysians are used to larger spaces but I would consider an apartment that is around 600 sq ft to be comfortable for one or two people. If it’s just one person, even a single-bedroom apartment of 400 to 500 sq ft can be considered quite comfortable. It depends on how the developer plans the space,” says Eddy.
Previndran agrees that space planning is important. “Developers need to focus on good and efficient designs. It’s not about how big the space is but what you can fit into it.”
According to Adrian Wang, managing director of CBD Properties Sdn Bhd, the building of small apartments is in line with the government’s aim to improve home-ownership figures.
“If you look at the price per sq ft, it’s not much different or even higher than that of an apartment that is bigger than 1,000 sq ft. But in terms of absolute value, it’s low. A 400 sq ft apartment selling at RM1,000 psf comes up to only RM400,000. Compare that with prices in the market, it’s more affordable.”

Success factors
Apart from affordability, the success of such a product comes down to several key factors, comments James Wong, managing director of VPC Alliance (Malaysia) Sdn Bhd. 
He notes that good marketing strategies, strategic locations, changing lifestyles, innovative concepts and design, the increasing number of young professionals entering the home market and comparative ease in leasing the units  are crucial to the success of a development. 
One success story is Verve Suites in Mont’Kiara, Kuala Lumpur, by Bukit Kiara Properties Sdn Bhd, which was launched in 2006, says James. 
Its appeal can be attributed to its innovative living concepts; the fully furnished units with superior designs and ultra-modern furnishings, which make it easier for owners to rent them out; the adjoining retail centre; its location in Mont’Kiara; and the brand-building exercise. 
“Verve Suites is relatively easy to rent out and most of the tenants are expatriates. Over 80% of the units in Phase 1 and 2 are occupied,” says James.
He puts the current rent for Verve Suites at RM4.10 psf, which is a gross rental yield of 7.6%.
CBD’s Wang believes that in a way, Verve Suites made small apartments popular. 
“Mont’Kiara has traditionally been a more family-oriented market with large three to four-bedroom apartments. Even the two-bedroom units are about 1,200 sq ft and above. Verve Suites was something new to Mont’Kiara and in the early days, the developer struggled a bit because of the price. The units were selling at RM600 psf while larger units were going for RM400 psf. But eventually people realised the value of the concept and it has done very well,” says Wang.
Location is key, whether it is in the city centre, popular high-end enclaves like Mont’Kiara or established townships in Petaling Jaya, he adds.
As small units cater mostly for young professionals and expatriates, areas with a large concentration of companies, especially those that hire a large number of staff such as call centres, will also be ideal. 
Wang cites Cyberjaya as an example. Due to the number of international call centres set up by companies like HSBC Bank and DHL, and universities like Cyberjaya University College of Medical Sciences and Limkokwing University of Creative Technology, demand for small units has been strong in the township. 
“Most of the call centre employees can’t afford to rent a large apartment or house. Their best option is small apartments. As for students, those from overseas usually can afford to pay high rents, so the average small apartment rent of RM2.80 psf in Cyberjaya works for them,” says Wang.
With changing lifestyles that focus on the idea of live, work and play, small apartments in integrated developments and established townships have an advantage. 
PJ8, an integrated serviced apartment and office development in Jalan Barat, PJ, is a good example, says Wang. It is surrounded by corporate office buildings such as Menara Axis and Plaza Crystal, offers plenty of amenities within a walking distance and is very accessible. It comprises one-bedroom units ranging from 560 to 670 sq ft as well as larger units of over 1,000 sq ft. 
“When PJ8 was launched in 2005, its apartments were the highest-priced in Petaling Jaya, going for RM350 to RM400 psf. Today, thanks to high demand, prices have shot up to more than RM525 psf and rents are RM4 to RM4.50 psf,” says Wang. 
Even in Kuala Lumpur City Centre (KLCC), demand for small apartments is strong, says DTZ’s Eddy.
“There has been a fair bit of negative publicity surrounding the oversupply [situation] in the KLCC market but if you were to go to the ground, you would find that rents and sub-sale demand for small one and two-bedroom apartments are strong. It’s the large units of over 1,200 sq ft that are facing slower demand,” he says. 
Eddy believes the global financial crisis has contributed to the demand as housing budgets for expatriates are considerably lower now than before the crisis. 
“Expatriates can’t afford large units anymore. Small apartments like those in Marc Residences are ideal for those with offices in KLCC,” he says.  
According to VPC’s James, Marc Residences is being rented out for about RM6.30 psf, giving it a gross rental yield of 10.8%. The development was launched at around RM700 psf and is now selling for above RM1,000 psf. 
Compared with Singapore, small apartments in the Klang Valley generate higher yields, says James. 
Apartments that are between 366 and 571 sq ft in Singapore city are selling for S$2,000 to S$3,000 psf, and being rented out for S$7 to S$8 psf, which amounts to a yield of 3% to 3.5%. In the suburbs, small units are selling for S$1,000 to S$1,700 psf with rents of S$4 to S$5 psf, giving them a similar yield of 3% to 3.5%. 
The buyers are both investors and owner-occupiers, depending on location. 
“Generally, in places like KLCC and Mont’ Kiara, including the foreigners, there are more investors than owner-occupiers. Whereas areas such as Petaling Jaya lean towards owner-occupiers,” says James.

SoHos and other variants of the product
Whatever they are called — SoHos and most recently, SoHus (small office, home unit) — there is no doubt that small units are growing in numbers. 
“They are almost the same kind of product. It comes down to marketing, hence the different names. SoHos in Malaysia are often marketed as a residential product but buyers must know that SoHos come under a commercial title, which comes with a higher price,” says a real estate agent who declines to be named. 
The agent, who has marketed several SoHo projects, says there are issues that buyers and tenants should be aware of when buying such products.  
“Security is a big concern as a SoHo can be used as a residence or an office, which makes it harder to control the people that come in and out of the building. In one case, those residing in the building couldn’t access their units from the car park after midnight because like most offices, the doors were locked. And the lights in certain parts of the development were turned off,” says the agent. 
“There are other issues as well, such as in one case where an office tenant complained about the strong smell of curry coming from the unit next door. We have encountered a few developers with these kinds of problems but the good news is, developers are learning and taking steps to avoid them.” 
VPC’s James acknowledges that some properties are being ambiguously marketed as both residential and commercial. As a general guideline, here is how he defines a SoHo:
1.     A new breed of urban living
2.     Home-based office
3.     Complete with business and lifestyle facilities under one roof (integrated development)
4.     Comes under a commercial title
5.     Comes with one or two rooms normally with a built-up of 400 to 800 sq ft
6.     Developers need to apply for a developer licence and advertising permit from the Housing and Local Government Ministry. The development is governed by the Housing Development (Control and Licensing) Act.
Here is how James defines other variants of small units such as a SoVo or SoFo:
1.     Small versatile office suite
2.     Comes under a commercial title
3.     Depending on the project concept, developers might not need to apply for a developer licence and advertising permit from the Housing and Local Government Ministry. If the development is meant for only office or commercial use, it is not governed by the Housing Development (Control and Licensing) Act.   
According to James, the Urban Redevelopment Authority (URA) in Singapore does not recognise SoHo as a planning term. Developments marketed as SoHo are approved either as office or residential but not for both uses.  “Residential homeowners or tenants who want to conduct selected small-scale businesses from homes can make use of the existing Home Office Scheme in which stipulated conditions and performance criteria should be met,” says James.
SoHos are usually part of an integrated development where residents live, work and play, says James, who expects to see more of these developments as developers target young professionals.
“Young adults prefer to live above lifestyle outlets for easy access to food and entertainment. There is a trend for more self-contained developments, where residents can live upstairs and go to the gym, the movies or shopping downstairs. With the mass rapid transit, there will also be more transit-oriented developments with high-rise apartments, SoHos, SoVos, SoFos, serviced suites and retail spaces clustered around the stations,” says James.
CBD’s Wang believes SoHos will work well in the city and create a more business-friendly environment.
“Foreigners can rent a SoHo and work there instead of renting a hotel and an office. Small businesses like legal or consultancy firms can rent a SoHo instead of a shopoffice and pay RM2,000 a month for space they don’t need. It’s also a lifestyle thing as most SoHos these days have facilities such as a gym and swimming pool. People in big cities like Hong Kong or Tokyo know the usefulness of SoHos — we have to wait and see how it works in Kuala Lumpur.”
There have been concerns about oversupply with the increasing number of small apartments and SoHos in the market.
Zerin’s Previndran believes that while oversupply can be an issue in the long run if developers continue to launch such products, the situation can be offset by the Economic Transformation Programme (ETP).
“I think there will be a slight oversupply in the market even though [small apartments and SoHos] are selling and tenanting well now. However, with the ETP kicking in, it’s likely that we will see more multinational companies and expatriates coming into the country and that will create demand. That said, if the current situation persists, I think rents will be flat for a few years.” 
James notes that some potential buyers are likely to maintain a cautious approach due to the current economic uncertainties and Bank Negara Malaysia’s stricter guidelines on lending. However, he says, the RM300,000 to RM600,000 property market is still brisk. 
“Although there is generally an oversupply of condominiums in Kuala Lumpur, the long-term prospects of the small-size segment will still be good. When developers launch their condominiums, the smaller apartments are the most popular. Young Malaysians entering the housing market are increasing every year. Small apartments to cater for young professionals, young married couples and yuppies appear to be the right strategy for developers to adopt.”  
DTZ’s Eddy says while it may look like there is an influx of small units of below 700 sq ft into the market, in the larger scheme of things, the current supply of several thousand units in the Klang Valley is not an unmanageable figure. 
“There are more young people looking for homes, families are getting smaller and property prices are increasing.  You don’t really need a three or four-bedroom apartment or to even afford one. For developers, space planning and concepts are very important. Developments like Verve Suites have a powerful concept — well-designed and sold fully furnished. With proper design, even a 450 sq ft unit would not feel cramped.”
For CBD’s Wang, the demand for small apartments is sustainable because of one key consideration — affordability. 
“A lot of young people can’t afford to buy landed properties or large apartments. And there are more and more people venturing into property investment, some will lock into these bite-size investments as a start and it’s a way for them to hedge their money against inflation.”

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 906, April 16-22, 2012