Building boom set to extend past 2010 as Govt delays projects

Industry welcomes move that will ease strain on resources such as manpower

SINGAPORE’S construction boom now looks assured to keep rolling until 2010 and beyond, major industry players said yesterday.

They were welcoming a government move to postpone some public sector building projects in order to ease the squeeze on resources such as labour and materials.

On Tuesday, the Building and Construction Authority (BCA) announced the rescheduling of public projects worth at least $2 billion to 2010 and beyond.

Mr Desmond Hill, the president of the Singapore Contractors Association, which represents local contractors, said yesterday that it ‘makes sense that construction demand should be spread out’.

‘The uptake of projects has been too fast, and we’re facing a manpower shortage. This move ensures that our construction boom can be extended past 2010,’ he said.

Mr Andrew Khng, a director of Tiong Seng Contractors, added: ‘Contractors’ books are quite filled. With this move, ongoing projects will not have to fight tooth and nail with projects coming onstream for resources. People will be more relaxed.’

The complete list of projects to be postponed has yet to be finalised.

But they will range in value from about $10 million to $400 million each, BCA told The Straits Times yesterday.

Projects affected include the National Addiction Management Centre, the Communicable Disease Centre and an extension of the Changi Prison Complex.

Extensions for both the Asian Civilisations Museum and the Peranakan Museum, worth some $67 million, will also be rescheduled, BCA said.

This will help cut overall demand for extra manpower in the next two years by a sizeable 20 to 40 per cent.

Annual construction demand, in the doldrums for the last three years, is expected to hit $19 billion to $22 billion from this year to 2009.

Besides manpower, the industry is facing a resources crunch too, as it scrambles to meet deadlines. The prices of raw materials such as steel bars and cement have risen by more than 20 per cent over the last year, and construction equipment is in short supply.

This is due partly to a global rise in building activity, especially in markets such as China and India.

But prices of raw materials are expected to stabilise in the next year or so, when demand eases, said Mr Ong Pang Aik, the chairman of construction group Lian Beng Group.

Mr Hill also called for a review of the industry’s dependency ratio of local to foreign workers, recently changed to one local worker to every five foreign workers.

With the buoyant economy fuelling high pay packages in some sectors, the building industry is facing difficulties finding local workers, said Mr Hill. ‘Perhaps a 1:6 or 1:8 ratio could be allowed.’

BCA has said that most resources for the next two years will be channelled to major projects such as the two integrated resorts and infrastructure projects, and to meet social housing needs.

Singapore Chinese Chamber of Commerce & Industry president Chua Thian Poh said that the Government’s move will ‘go a long way towards alleviating the critical resource shortage fuelled by the boom in the industry’.

Real Estate Developers Association of Singapore executive director Chia Hock Ji said yesterday that the move was ‘helpful as the situation is quite tight’. He added that most firms would welcome more foreign workers.

Ultimately, any ease in demand that will help bring down prices would be a relief for the industry, said Mr Hill.

 

Source: The Straits Times 15 Nov 07

$6m boost for HDB shops to draw crowds

About 1,500 retailers at 14 suburban centres will get help to upgrade common areas and hold promotional events

SUBURBAN shoppers may soon get to relax in a trendy beer garden in Tampines or watch bird-singing competitions in Serangoon North.

These new attractions are not bound for spiffy heartland malls, but humbler HDB estates, where retailers are in line for a $6 million makeover to attract more shoppers in the first exercise of its kind.

About 1,500 small shops at 14 suburban centres – many struggling to compete with more vibrant rivals – will benefit from this facelift under a pilot scheme, the HDB said yesterday.

The areas were selected from 19 applications and unveiled by Minister of State for National Development Grace Fu. They include blocks in Marine Parade, Bedok, Toa Payoh, Serangoon North, Tampines and Changi Village.

Some proposals for improvements include an amphitheatre for Jurong West and a modern glass roof over a Teck Whye pedestrian mall.

This sprucing up is part of the new Revitalisation of Shops (ROS) scheme, first mooted in Parliament in March to help older HDB shops compete with malls.

One estate that has already been transformed with help from the HDB is Sunset Way, which benefited from another HDB programme called the Restructuring Programme for Shops (RPS). This scheme gives payouts to shops that are better off closing down or regrouping.

In Sunset Way, once-struggling businesses selling vegetables, fruit and the like have been replaced by shops and alfresco eateries offering Thai and Japanese cuisine, and even a steakhouse.

As a result, the area has been revitalised and is packing in the crowds.

‘When we looked at the performance of the shops in HDB estates, we realised that some of the shops have been affected by either changes in the way that we shop or changes in social demographic factors,’ Ms Fu said at a media briefing. ‘There is a need to renew and rejuvenate our shop centres.’

Under the new ROS scheme, the HDB and town councils will help foot the bill to upgrade common areas, such as by adding block awnings. They will subsidise half the cost for shop owners, or up to $10,000 per shop, and the full cost for shop tenants, or up to $20,000 per shop.

The HDB will also help pay for promotional activities to draw crowds to the shops.

For example, in pet-shop hub Serangoon North, retailers have plans for bird-singing competitions and fish exhibitions.

One shop owner, Mr Benjamin Wee, managing director of Petmart in Serangoon North, said: ‘If you look at an area like Ang Mo Kio, there are so many shoppers and it’s doing so well. We hope to be like that.’

The promotions will take effect within six months to a year, while construction and upgrading will take at least a year. In a year’s time, the HDB will review the pilot scheme.

It has also continued its RPS scheme. So far, two batches of tenants, or 219 shops, have been cleared to build void decks or common facilities such as senior citizens’ centres. The third and last batch of 74 tenants was selected yesterday, marking the end of the $12.5 million programme.

The HDB will also spend up to $4 million to lower electrical upgrading charges for shops.

‘I hope you will appreciate that HDB is really going out of its way,’ Ms Fu told reporters. ‘If you are looking at HDB as a private-sector commercial space owner, it would not have to do this.’

 

Source: The Straits Times 15 Nov 07

CDL’s profit up 32%, aided by sales of luxury homes

CITY Developments (CDL) executive chairman Kwek Leng Beng believes that Singapore’s property market is likely to remain healthy and that there is still room for sustained growth.

‘Continued capital appreciation over the next few years is likely, and the prospects for the property sector continue to be good,’ said Mr Kwek yesterday.

Shareholders would have beamed at his optimistic outlook, but some were left scratching their heads wondering when the company, flush with cash, would utilise its outstanding Section 44 tax credits.

CDL is among several big companies that still have unused tax credits, which expire on Dec 31.

On Tuesday, Hong Leong Finance announced a special dividend to partially utilise its outstanding credits. And Singapore Computer Systems has announced an interim dividend of three cents and a special dividend of one cent per share – the first time the company has given a dividend in two years.

Still, tax credits aside, investors cheered a strong performance by South-east Asia’s second-largest developer, which released its third-quarter results yesterday.

Net profit for the three months ended Sept 30 rose 32 per cent to $169.5 million, compared with $128.3 million in the corresponding period a year ago.

Aided by strong luxury-home sales in Singapore, revenue shot up 19.7 per cent to $796 million last year.

Earnings per share for the quarter rose from 14.1 cents to 18.6 cents, while net asset value per share rose to $5.51 as at Sept 30 from $5.21 as at Dec 31 last year.

While Mr Kwek acknowledges that the withdrawal of the deferred payment scheme for property purchases has had an initial ‘knee-jerk’ impact on market sentiment, he expects confidence and buying interest to return.

‘The high-end property market, having reached record highs, is likely to see a more judicious growth,’ he said.

Singapore’s position as a growth hub in the Asia-Pacific will augur well for the property market, he added.

The group’s total land bank stands at 4.48 million sq ft, with a gross floor area of 9.12 million sq ft.

 

Source: The Straits Times 15 Nov 07

SC Global Q3 net up more than 4-fold at $4.3m

PRIME residential developer SC Global Developments’ net profit more than quadrupled to $4.3 million for the third quarter ended Sept 30, from $931,000 for the previous corresponding period. Revenue rose 4 per cent to $30 million.

The group said that Q3 revenue comprised mainly the recognition of sales of the remaining units at The Tomlinson and sale of units at The Boulevard Residence and The Lincoln Modern.

Share of profits from the group’s associated company in Australia, AVJennings Limited, came to $2.5 million, against a loss of $600,000 for Q3 2006.

For the first nine months, SC Global’s net profit doubled to $20.6 million as revenue edged up 4 per cent to $117.9 million.

Q3 earnings per share (EPS) rose to 2.28 cents from 0.75. EPS for the first nine months rose to 12.46 cents from 8.48.

The group said that its recent projects, The Marq on Paterson Hill and Hilltops have received approval to offer the deferred payment scheme which will continue to be available.

With the recent acquisition of sites at Ardmore Park and Sentosa Cove in the third quarter, the group says that it will aim to deliver high quality residential developments in prime locations.

SC Global shares remained unchanged at $2.50 yesterday.

 

Source: Business Times 14 Nov 07

Property boom expected to continue

Robust economy, jobs growth, strong housing demand and en bloc sales proceeds are key drivers

THE bullish sentiment in Singapore’s residential market continued into 2007 from where it left off in 2006. In the first nine months of this year, the market recorded a total of 29,331 sales transactions worth some $52 billion. This represents a year-on-year increase of 89 and 116 per cent respectively.

The demand for high-end residential housing has been growing at a feverish pace over the past two years and although the stock market plunge may have affected investor sentiment, new benchmark prices continued to make headlines over the past two quarters. Rising fast to support the high-end residential sector are the mid-tier and mass market segments, which have picked up significantly since early 2007 with record prices set at several project launches. Strong economic outlook, coupled with higher salaries and bigger bonuses and rapid jobs growth have brought new impetus for investors, home owners and speculators to upgrade and/or to purchase.

Comparing average prices with those at the end of 2006, the average price for homes in the super luxury market segment (luxury developments which crossed the $2,500 psf mark in Q4/2006) jumped 42 per cent to $3,700, while the high-end market segment (luxury developments in Districts 1, 4, 9, 10 & 11) rose by 36 per cent to $2,076 per sq ft. The average prices for both mid-tier and mass market developments have also risen by more than 50 per cent, albeit from a lower base, to $1,250 per sq ft and $700 per sq ft respectively.

One major market driver is en bloc sales, which have been very active since early 2005. However, with the prolonged US sub-prime credit woes, hikes in development charge rates and the tightening of en bloc sales legislation, the en bloc sizzle has taken a breather from the end of the third quarter of this year.

This has been a phenomenal year for en bloc sales. Since January, some 95 en bloc sales with a total value of $11.3 billion were transacted, compared to 65 transactions totalling $7.5 billion for the whole of 2006. The displaced tenants and owner-occupiers from these properties have contributed to the overall increase in rentals and capital values of homes in the mid-tier, mass and public market segments.

Notwithstanding the stock market shock in the third quarter, the buying momentum is expected to resume between next month and early 2008 given the wave of purchases from displaced en bloc-owners who are expected to collect their money and buy a replacement home around this time. This time round, the mid-tier and mass market segments will lead the way with a strong growth, lending solid fundamentals to prices in the high-end and luxury sectors.

For next year, the residential market in Singapore is expected to remain strong with all segments looking set to continue growing supported by robust domestic economy, jobs growth, wage growth in both the public and private sectors, strong housing demand from expatriates relocating to Singapore and reinvestment of proceeds from en bloc sales.

The general market consensus is that supply will tighten due to a short- term supply crunch in 2008, as the expected demolitions from en bloc sales outstrip the completion of new projects. The tightness in supply will be exacerbated by the need to fill job vacancies which stood at close to 40,000 by mid-2007 with unemployment standing at 1.7 per cent in September 2007.

An estimated 10,000 units from en bloc sales are also expected to be demolished in 2008 while TOPs from new projects are expected to re-supply only 8,000 units. (This is largely due to the few construction starts back in 2003 and 2004 when economic confidence was low, which resulted in low completion numbers in 2007 and 2008.)

Furthermore, there is also the potential risk for a slower pace of construction of residential properties arising from the strong competition for resources in the construction sector. This is largely due to the fact that several of these mega projects are also scheduled for completion within the next three to four years. Some of these mega projects include the two integrated resorts, BFC, petrochemicals plants in Jurong Island, public infrastructure such as the Circle Line and Circle Line Extension, common services tunnel in Marina Bay, sports hub at Kallang, and Gardens by The Bay.

On the demand side, there are several significant events that could spur investments into Singapore. The first is next September’s Formula 1 night race, which will bring international attention to Singapore starting from February, when the F1 season begins.

The weakening US dollar, strengthening Sing dollar, reduced confidence in US markets and political uncertainties as several key regional countries will be holding their general elections soon, could encourage more high-net-worth individuals (HNWIs) from around the region to park some of their wealth here.

The strong Singapore property market has also caught the eye of fund managers from Europe, the Middle East and Japan who have been investing in Asian real estate; and Singapore will benefit from that allocation in 2008 and beyond.

The high-end market is expected to remain steady with average prices likely to rise by another 15 to 20 per cent to hit an average of $3,000 per sq ft. With such strong demand, it would not be to far-fetched to expect some units in super luxury residential projects to cross the $6,000 per sq ft mark.

Developers will continue to raise prices for luxury high-end apartments with superior product quality, such as more spacious surrounding, and designer fixtures and fittings. At the same time, the replacement cost of land, whether from en bloc sales or government land sales, will continue to go up.

Meanwhile, Singapore’s status as a global financial centre, tax-friendly environment, strong currency and liquidity in the local market will keep attracting investment interest from the fast-growing private banking sector which, in turn, are attracting HNWIs to the region as well as expatriates entering Singapore’s job market.

While the high-end market takes a slower growth next year over an increased baseline, the mid-tier and mass markets will surge in 2008 due to strong demand and spill-over effects from the high-end market. Twelve months ago, we proclaimed that 2007 will be the year of resurgence for the mass market. We were spot on. We now know that the resurgence is backed by solid fundamentals and we expect this sector to soar in 2008.

Assuming two-thirds of home owners, who sold their properties en bloc in the first nine months of 2007, will buy replacement homes, we could expect to see some 4,300 buyers with a budget of approximately $7.5 billion looking for homes in the first half of 2008.

Soaring high-end prices and supply crunch in prime districts have forced some buyers to turn their attention to midtier projects. In addition, public and private sector wage rise backed by robust domestic economy, tighter job market will also drive up demands from HDB upgraders or families exceeding the HDB income ceiling, particularly in the mass market segment.

Strong demand could also push mid-tier prices up by another 20 to 40 per cent to between $1,500 and $2,000 per sq ft for the whole of 2008. Areas that will benefit from the rise in the mid-tier market include Balestier, Bukit Timah, Novena, Thomson and Upper East Coast. As many of the mass market areas are still relatively undervalued, it is expected that prices will grow strongly, up by between 30 and 50 per cent from a low base, with average prices reaching around $1,000 per sq ft. Areas likely to see the most significant price gains include Upper Paya Lebar, Hougang, Ang Mo Kio, Upper Thomson to Mandai, Clementi, West Coast, Jurong East, Upper Bukit Timah and Bedok.

There are several projects in the high-end and super luxury markets to keep an eye on in 2008, such as the Ritz-Carlton Residences at Cairnhill, Hilltops at Cairnhill, Paterson Suites at Paterson Road, and The Marina Collection and The Quayside Isle in Sentosa Cove. We would also be monitoring The Cascadia and Floridian at Bukit Timah, and the development by CDL in Thomson Road for signals of strength in the mid-tier market. For the mass market segment, it will be the developments at Simon Road and Bedok Reservoir and Park Natura at Bukit Batok. In the landed property sector, international attention-grabbers in Sentosa Cove could be launched in 2008.

The rental market is also expected to strengthen. Based on robust demand and limited supply being completed, coupled with the withdrawal of properties in the prime districts through en bloc sales, rentals are likely to hit new highs.

Rents in prime districts will increase by 20 to 30 per cent next year, to an average of $6 to $8 per sq ft per month.

The trend of existing tenants in prime districts moving out to fringe or suburban areas will continue, and this will support the annual 50 to 80 per cent growth of the suburban rental markets, at average rents of $4 to $5 per sq ft per month.

Though the property market continues to exhibit strong performance, there are several factors which could affect the residential sales market. Factors such as prolonged uncertainties in the global equity markets, further property measures imposed by the government to cool the market, rising oil prices and high inflation rate could possibly dampen investors’ sentiment and confidence. Increased operating costs due to rising residential and office rents have also sparked concerns about the erosion of Singapore’s attractiveness for MNCs.

The Singapore government targets a long-term economic growth of 4 to 6 per cent per annum. We have been making basic changes to diversify our economy, through the IRs (conventions/exhibitions, Universal Studios theme parks), through investments in R&D and intellectual property, through continued liberalisation of funds management, private banking and insurance industries. This re-positioning of Singapore as a vibrant, global city will continue to support the residential market.

Singapore is undergoing a structural upwards re-rating of the property market. Barring unexpected shocks, property prices will continue to rise for at least three years, and if the IRs deliver their performance, another five to seven years. And even if there were a downturn in the property sector beyond 2012, the authors believe that bottom prices then will still be higher than the prices of 2007.

Given the factors outlined above, what might be the opportunity cost of doubting the continued growth in this market and staying on the sidelines and waiting for it to drop?

Ku Swee Yong is director of marketing and business development; and Zeng Zhen assistant manager, research & consultancy, Savills Singapore

 

Source: Business Times 14 Nov 07

Overstretched S’pore pushes back projects worth $2b

Move to ease pressure on construction resources

(SINGAPORE) The government said yesterday that it would postpone several public projects – at a time when the building boom is stretching Singapore’s construction resources to the limit.

The government’s cut-back could reduce the demand for additional construction manpower in the next two years by 20-40 per cent. The authorities will further relax policies on the employment of foreign manpower and help expand construction capacity.

The government’s move to push back projects worth at least $2 billion comes as construction costs escalate and contractors are in short supply.

Developers told BT that most contractors are fully booked for the next 12 months.

Construction costs have also gone up by as much as 40 per cent over the last year on the back of rising raw material prices and wage increases brought on by tight labour supply.

‘The investment and property boom is leading to a construction squeeze,’ said Citigroup economist Chua Hak Bin.

‘The property boom is moreover not confined to just one segment, but is across the board – commercial, residential, infrastructure and the integrated resorts (IRs).’

Annual construction demand is expected to hit $19-$22 billion in 2007, and is likely to be sustained at this high level in 2008 and 2009, said industry regulator Building and Construction Authority (BCA).

The sharp increase in construction demand in Singapore also coincides with a global surge in construction activity – especially in China, India and the Middle East.

For developers here, this adds up to a shortage of contractors and rising costs. ‘Contractors are booked 12, 15 months ahead,’ said the chief executive of a Singaporean developer. ‘And it’s not just the main contractors; the main contractors are saying that sub-contractors are hard to find as well.’

‘I think most contractors already have big orderbooks, so supply is tight,’ said Cheang Kok Kheong, development and property general manager for Frasers Centrepoint (FCL). ‘There are many big projects for them, such as the IRs and the Gardens by the Bay.’

FCL is not feeling the pinch as it has the support of contractors it has worked with for many years, Mr Cheang said. But others, he added, might not be as lucky. ‘If you don’t have that many projects and you are new in the market, then there will be difficulties getting contractors,’ he said. FCL’s construction costs have gone up by 20-30 per cent over the last year. Other developers report cost increases of up to 40 per cent.

Several big projects have already been hit. Genting International recently upped its budget for its Sentosa IR to $5.75 billion – from an original $5.2 billion. The company said that $275 million of the $550 million budget increase is due to rising construction costs.

And in August this year, Marina Bay Sands said that its cost could escalate to $5.2 billion, from $5.05 billion originally.

On the flip side, things are starting to look very bright for construction companies, as the sector is coming off a decade of sub-zero growth rates.

Kim Eng analyst Wilson Liew estimates that some contractors are now able to command a higher pre-tax margin of about 15 per cent, as compared to 5 per cent in the past. ‘This margin is expected to improve even further as established contractors hold greater bargaining power amidst an increased number of contracts,’ he said.

But this could soon change. Right now, BCA is working with developers and builders to expand the capacity of both local and foreign firms in Singapore. It is also exploring attracting new foreign contractors – especially those in the top-tier and specialist trades – to come to Singapore, it said.

The government will also monitor the manpower situation closely and will further adjust its manpower policies if necessary, BCA said.

For now, various government agencies have identified a list of public projects in the pipeline for 2008 and 2009 that could be rescheduled to 2010 and beyond.

The projects being deferred include the Health Ministry’s National Addiction Management Centre, and Cluster C of the Changi Prison Complex.

Public sector projects that are ‘essential’ – such as those required for Singapore’s economic growth or needed to meet key social needs such as public housing – would not be affected, BCA said.

‘The bulk of the construction activities and resources in 2008 and 2009 are expected to be concentrated on mega projects such as the IRs, Marina Business Financial Centre, Downtown MRT Line and petrochemical plants,’ said BCA. ‘Once these have been completed, more construction resources and capacity will be available for other new projects beyond 2009.’

 

Source: Business Times 14 Nov 07

Modest bidding for CBD office site as caution sinks in

Top offer of $779.42 psf ppr half of next- door site’s recent bid

(SINGAPORE) The new-found caution surrounding the Singapore office market is now spilling over to the Central Business District.

Reflecting this, a site at Marina View diagonally behind One Shenton yesterday attracted a top bid from Macquarie Global Property Advisors (MGPA) of $779.42 psf per plot ratio – only about half of the group’s winning bid in September for the site next door.

Knight Frank managing director Tan Tiong Cheng acknowledged that office investors have turned cautious. ‘The outcome of the sub-prime episode may have an impact on demand for office space in Singapore, while the government has expressly stated recently it will boost supply of office land in the next few years to alleviate the current shortage,’ he said.

Another reason for the lower bid for the latest site – Marina View Land Parcel B – is that it has a minimum hotel component of at least 25 per cent of the site’s maximum gross floor area, property consultants said. ‘Hotel land values are a lot lower than office values,’ said Mr Tan.

‘The latest tender outcome is also a knee jerk-reaction to what has been happening lately in the US – the sub-prime crisis being worse than initially thought and big banks being affected. Banks are prime users of office space.’

The only other bid at yesterday’s tender came from units of CapitaLand, at $898 million or $734.52 psf ppr.

BT understands that CapitaLand was to team up with Thai tycoon Charoen Sirivadhanabhakdi’s privately held vehicle Pacific Coast Assets, had its bid been successful.

By most counts, the top bid at yesterday’s tender by MGPA unit MGP Kimi of $952.89 million or $779 psf ppr was lower than had been predicted.

CB Richard Ellis executive director Li Hiaw Ho had expected Marina View Land Parcel B to fetch about $1,200 to $1,300 psf ppr, lower than the $1,409 psf ppr that an MGPA unit paid in September for the next door Marina View Land Parcel A, considering the minimum hotel component for the latest plot. ‘There is a chance that the state’s reserve price may not have been met and that the latest site may not be awarded,’ Mr Li suggests.

However, other property consultants argued that the plot will be awarded.

Mr Tan said his firm, Knight Frank, predicted in late July projected that the site would attract bids of $1.1 billion to $1.3 billion, or $900-1,060 psf ppr. ‘Taking the mid point of $1.2 billion, the top bid was about 20 per cent lower than our projection. To me that is within range, and I would expect the site to be awarded,’ Mr Tan said. ‘The price is still substantially higher than other sites sold in the Marina Bay area in recent years.’

Jones Lang LaSalle’s Asia Capital Markets head Stuart Crow said: ‘The price seems fair going by recent land bids and taking into account the hotel component for this site.’

MGPA’s top bid at yesterday’s tender also ‘reinforces the foreign investor interest in the Singapore property market fundamentals’, he added. ‘In my view, the site will be awarded.’

Mr Crow estimates that MGPA’s bid price for Parcel B yesterday reflects a break-even cost of about $2,200 to $2,300 psf for the office component of a potential development on the site. As for the hotel component, market watchers estimate the break-even cost could be about $700,000 to $800,000 per room.

Marina View Land Parcel B has a site area of about 0.9 hectare and can be developed into a maximum gross floor area (GFA) of about 1.22 million sq ft, of which at least 60 per cent must be for offices and at least another 25 per cent for hotel use.

 

Source: Business Times 14 Nov 07

Interest-only loans: the pros and cons

They make sense to short-term investors and individuals who are high income earners and in high tax brackets, says BEN FOK

 CONSUMERS are constantly bombarded with offers of loans, overdrafts, credit cards and instalment plans that promise instant gratification.

We cannot avoid debt entirely, especially when it comes to acquiring the big ticket items, and not all debt is bad. But those who borrow must be prudent and know that they can make the repayments.

 Even high net worth individuals (HNWI) go to financial institutions for loans, which might seem strange since they are presumably cash-rich. But there are situations where it is worthwhile for the HNWI to borrow instead of paying with their own cash.

Some financial institutions offer interest-only loans targeted at the HNWIs. With such loans, you only repay the interest, not the principal, so the loan balance remains unchanged. Most interest-only loans offered by financial institutions are associated with the purchase of property.

Interest-only loans make sense to individuals who are high income earners and in high tax brackets.

The benefit comes from being able to save on tax on rental income. That’s because the interest portion of loan instalments for rental properties is tax deductible.

This package also works well for short-term investors. By repaying only the interest, investors fork out less cash each month, until they sell the property. As a result, they may be able to invest in two properties instead of one.

 

But interest-only loans are not for the long term, because at the end of the loan period, the payment is raised to the fully amortising level. If you’re still in your home at the end of the interest-only period, you’ll have to start paying off the principal. The payments will be considerably larger because they’ll be amortised over a shorter period. For example, if your interest-only option lasts for five years and you have a 30-year loan, your principal payments will be calculated on a 25-year term.

 Drawbacks of interest-only mortgages:

• You could experience payment shock. As mentioned earlier, your monthly payment will go up – sometimes by 30 per cent or more – when you start paying off the principal. And if the end of your interest-only period coincides with an upward adjustment in your mortgage rate, you could face an even sharper hike in monthly payments.

• You’re more vulnerable if your home value declines. Many borrowers with interest-only loans assume home price appreciation will help them build equity in their homes. In recent years, that’s been a good bet. But rising interest rates could deflate real estate values in some high-cost areas. It’s best to get a reputable financial institution to run the numbers for you and spell out the worst-case scenarios.

Equity provides a cushion against falling home values. Without it, you could find yourself owing more on your mortgage than your home is worth. If you sell, the proceeds won’t cover your loan balance, which means you’ll have to come up with money from another source. One way to avoid this problem is to make a good-sized downpayment on your mortgage.

 Advantages of interest-only mortgages:

• You have more flexibility. Some interest-only borrowers can afford a larger mortgage payment but their priority is to beef up their retirement nestegg or build up their emergency funds. Once they’ve accomplished those goals, they often decide to increase their mortgage payments.

Increasing your monthly payments will build equity and lessen payment shock when you’re required to start paying off the principal. If you’re interested in this option, make sure your loan doesn’t contain pre-payment penalties.

Interest-only mortgages are complicated, so make sure you understand the pitfalls before you sign anything.

And don’t rely on the financial institutions to figure out how much you can afford to borrow. A lender may not take into account all of your future expenses, such as child’s university fees or support of an elderly parent.

What worries me is Singaporeans taking two or more mortgages in a rising market. As property prices rise, the dollar amount also rises in line with higher selling prices. Affordability becomes an issue.

You’re in the best position to know what your financial obligations are, so get a mortgage you can afford. How much should one borrow? There are two ratios that financial advisers commonly use:

• Debt to asset ratio which is total debt/total assets. This ratio should be 50 per cent or less;

• Debt servicing ratio which is total monthly loan repayment/monthly take-home pay. This ratio should be 35 per cent or less.

After all, wealth equals assets less debt. It is built up over the years by accumulating assets and paying down debt, especially mortgage debt. When you pay down the balance of your mortgage, you are increasing your wealth by reducing debt. But an interest-only mortgage does not increase wealth in that way.

Of course, you may be increasing your wealth by accumulating assets instead. If that’s your plan and you have determined that it is more effective in building wealth during the interest-only period than paying down mortgage debt, fine. But paying down mortgage debt is the most effective way to build wealth, especially in today’s financial environment.

Four dangers related to borrowing too much:

• It can become a habit;

• It takes away money from other important needs;

• Your credit rating will be damaged if you don’t pay the bills;

• It can lead to high interest payments that are harder to make.

Three situations where it’s better to avoid borrowing:

• Paying your everyday expenses;

• Covering optional spending;

• Borrowing when you know you can’t afford the payments

It’s not a good idea to borrow a lot thinking that you will just pay the minimum back each month. It may take a long time to get out of debt and you’ll end up paying a lot of interest. Also, if you have one late payment, your credit rating may suffer and you’ll be charged penalties.

At the end of the day, paying down a loan is the best option, because once it’s paid it remains paid.

Ben Fok is CEO, Grandtag Financial Consultancy (Singapore) Pte Lt. He can be reached at ben.fok@grandtag.com  Source: Business Times 14 Nov 07 

Ho Bee posts 297% jump in Q3 earnings

Revenue up 137.9% due mainly to a 149% rise in development properties’ sale

HO Bee Investment, the dominant residential developer at Sentosa Cove, yesterday posted net earnings of $39.27 million for the third quarter ended Sept 30, up 297 per cent from $9.89 million a year earlier.

The jump was on a 137.9 per cent increase in revenue to $129.6 million, due mainly to a 149 per cent rise in the sale of development properties.

The main contributor to revenue was progressive recognition of sales of residential projects such as Coral Island, which obtained a Temporary Occupation Permit in August, Orange Grove Residences, The Coast and Paradise Island.

For the first nine months of this year, Ho Bee’s net profit leaped 391.8 per cent year on year to a record $233.4 million, benefiting not only from a 133.8 per cent increase in revenue to $535.4 million but also a $71 million gain in fair-value changes on investment properties.

Chairman and CEO Chua Thian Poh said the group’s revenue and earnings for the rest of the year and the next few years will be buttressed by the progressive recognition of income from successful residential projects that have been launched.

In its results statement, Ho Bee said that the recent withdrawal of the Deferred Payment Scheme by the authorities will have an initial impact on prices and demand.

‘The group does not anticipate its upcoming residential projects in the Core Central Region, which includes Sentosa Cove, to be adversely affected as underlying demand from both local and foreign buyers is expected to remain relatively strong,’ it said.

Mr Chua said that despite good sales, ‘we continue to be prudent in the way we conduct ourbusiness, always bearing in mind that we have to ensure long-term sustainable growth for

shareholders’.

Ho Bee’s Q3 earnings per share jumped to 5.33 cents from 1.34 cents in the year-ago period. Net asset value per share was 102.8 cents at Sept 30, up from 67.9 cents as at Dec 31, 2006. On the stock market yesterday, Ho Bee shares ended one cent higher at $1.78  Source: Business Times 14 Nov 07

Separate deals, but court rules it’s en bloc deal

UOL unit says 53 separate contracts signed; at stake is $286,200 in stamp duty

(SINGAPORE) En bloc sale or 53 separate contracts entered into by individual owners of the apartments to sell? That was the $286,000 question that emerged in the High Court in what can be described as a test case for property developers to get savings on stamp duty.

United Overseas Land subsidiary UOL Development Novena (UOLD) claimed that its purchase of 53 properties at Minbu Road for $61 million was not an en bloc sale but 53 separate contracts which it entered into with the individual owners.

At stake was $286,200 in stamp duty savings if it was found to have bought the 53 properties separately.

This is because under the Stamp Duties Act, stamp duty is charged at one per cent on the first $180,000 of purchase price, two per cent on the next $180,000 and three per cent on the balance of the purchase price that exceeds $360,000.

The way this works out is that stamp duty can be calculated simply by taking three per cent of the purchase price minus $5,400 – that being the sum of one per cent on $180,000 and two per cent on the next $180,000.

So if there was only one contract arising from an en bloc sale, the $5,400 could only be subtracted once.

But if there were 53 contracts, then $5,400 can be subtracted 53 times, resulting in savings of $286,200 for the property developer.

However, the High Court ruled last month that UOLD bought the 53 properties in an en bloc sale. The court said that the owners of the Minbu properties intended to sell their properties on the basis of an en bloc sale.

The invitation to tender issued by the owners said that they ‘collectively’ invite offers to buy their property on an ‘en bloc’ basis.

The court also found that there is no evidence that UOLD’s offer to buy the Minbu properties for $61 million was made on the basis that separate contracts were to be entered for each property.

And even though the owners sent 53 separate letters of acceptances to UOLD according to the developer’s request, the court found that the owners did not ‘give any thought’ to converting the en bloc sale to 53 separate contracts.

Justice Tan Lee Meng said that the case raises an interesting question as to how stamp duty is assessed on properties bought through en bloc sales.

However, he found that the plan for 53 separate contracts was mooted ‘for the sole purpose of lessening the stamp duty payable on the en bloc sale’.

BT understands from UOLD’s lawyers that the developer has not filed an appeal yet. It has until tomorrow to do so.

UOLD was represented by Tan Kay Kheng and Teo Lay Khoon from WongPartnership. Source: Business Times 14 Nov 07

Essential homework before taking loan

KEVIN LAM discusses five key areas that your home loan banker would be looking very closely at

THIS has been a special year for the property market. Not since the early 1990s has there been such euphoria about the property market – long queues at property launches, stories of someone we know making fast money by ‘flipping’ new property purchases in a matter of weeks, even days. Many people who have yet to join the party have been wondering if they should also jump on to the property bandwagon.

With the latest government measures to discontinue the deferred payment scheme, some measure of stability should return to the market such that even as prices continue to go up given our transformation into a global city, it would rise in a more measured manner.

For those who need to think very carefully about the finer details of taking out a loan with a bank to finance what would be one of the biggest financial commitments, you may want to consider some finer details as part of your overall decision-making process.

What should I consider about buying a house and financing it?

In Singapore, we have seen two boom-and-bust cycles of property price peaks and troughs in the past 17 years. While many people may think that we are currently in the midst of a boom, many others remain cautious and conservative about making a property financing commitment, and rightly so. The first and most important thing potential home owners should be looking at when they consider buying a house and taking up a mortgage to finance it is this – are you over-stretching yourself? To answer this, you have to look at five key areas that your banker would probably be also looking very closely at:

2. Quantum of financing: Since July 2005, the Monetary Authority of Singapore (MAS) has liberalised the quantum of financing for housing loans, up to 90 per cent loan-to-value (LTV). This means that as a home buyer, the minimum that one needs to raise is 10 per cent of the value of the property and the cash component can be a minimum 5 per cent with the balance of 5 per cent made up from the Central Provident Fund (CPF).

Typically, because the capital and credit cost associated with granting these higher quantum loans are higher, these loans come with higher interest rates when compared to 80 per cent LTV loans. In this market, a comfortable level for financing for banks would generally be at 80 per cent quantum of financing. This means that home buyers must have a minimum of 5 per cent cash and 15 per cent CPF lump-sum from their CPF Ordinary Account. For a $1 million property, this works out to $50,000 in cash and $150,000 in CPF OA monies, or if one prefers, this amount could be paid in cash.

With more cash upfront, this is generally viewed more favourably by the banker, that is, if you could use more than the minimum 5 per cent cash. For example, if there are two borrowers looking for 90 per cent financing, both of equal standing, the one who can put up the entire 10 per cent in cash downpayment, would be better positioned from a bank’s credit standpoint than the other who uses 5 per cent cash and 5 per cent CPF monies. More cash upfront shows more commitment from the potential customer, and this would generally put your financing request in a better light. Likewise, if a potential customer has the ability to fork out up to 30 per cent or more, cash or CPF down payment, and request only 70 per cent financing, he or she can be more confident of your request for financing.

3. Employment profile: The potential customer’s employment status is also one of the most important considerations to review when taking out a housing loan. He or she should consider the stability of his/her employment, regardless of whether the potential customer is a working employee or selfemployed.

Typically two years of qualified income coming from the same employer or same source of business should be a good indication of the borrower’s employment profile. On the other hand, if a borrower changes jobs frequently, even with higher income, it may be viewed by banks as being less secure and stable in employment.

4. Income and your CPF reserve: In home financing, one of the key commitments is to ensure that monthly housing loans instalments remain uninterrupted and consistent.

As a good rule-of-thumb, if housing loan instalments are kept to below 40 per cent of a person’s monthly income, the borrower would be better positioned in his/her monthly servicing ability. This is especially so if the borrower’s monthly CPF OA contribution is able to fund a good part of the housing loan instalment.

It would also be a prudent measure to have a reserve of at least six to 12 months of monthly instalments in the CPF OA. This provides more cushion should there be a change in a borrower’s employment status, and he/she needs time to find another job. This means that when one uses CPF for the initial downpayment, it is important to be conservative and keep a reserve, rather than using up all of one’s CPF for downpayment. As one goes through the sums for mortgage financing, one will realise that income, CPF resources, employment profile, and the quantum of financing are all interrelated.

Any home buyer should sit down and work out the numbers to ask the question: ‘Am I overstretching myself financially?’

5. Interest rate, monthly instalment and rental yields: One of the key considerations in taking a housing loan is interest rate. However, borrowers almost always ask the wrong question with regards to interest rate. ‘How low is your interest versus other banks?’ is the typical question.

Consider this alternative thinking; instead of asking how low a bank’s interest rates are, borrowers should seriously consider the exact opposite: ‘How high can interest rates be, while I can still afford the housing loan payment? Look at the accompanying table and consider various scenarios, such as a higher interest rate (note that the SGD mortgage interest rate is one of the lowest in the region) and whether a borrower can continue to service the loan, even if interest rate would double. Not possible?

Those of us who can remember the 1990s recall that housing loan rates were once at 8 per cent. These difficult economic periods when interest went up were often accompanied by periods where people found the stability of their income at risk. So, under such circumstances, if you were to lose your job, do you have sufficient reserves to last – and for how long?

This is where the difference of taking a fixed or a floating rate should be reviewed. Floating rates, while lower, do not have the stability of fixed rate loans. So a borrower may want to consider taking a two-in-one loan where a borrower can combine both fixed and floating rate loans in one mortgaged property. For example, the UOB two-in-one loan.

With rising rental yields, many are also thinking of buying a property as an investment which they intend to rent out to cover mortgage payments. Here. the question to ask would be: ‘Would I still be all right if rental should fall by half?’ Rents go up quickly due to shortage of housing, especially for foreigners with good housing budgets, but they can drop as quickly if there is a downturn.

In the current climate, these may seem faraway possibilities, but whether you are buying for your own stay, or for investment – consider the various scenarios and do your sums carefully.

Your credit performance: One of the other lesser known issues one should consider before taking up a housing loan is credit performance. In Singapore, all your credit performance in terms of number of loans applied for, whether for housing, cars, credit cards or other loans is stored in the Credit Bureau.

When you apply for a loan, you would have signed a consent for your bank to obtain a copy of your credit performance.

Some borrowers have been caught in a situation where they committed to a property by paying the option money, only to find that when they apply for a loan, their application is either turned down, or their request for financing reduced. This could be due the credit history, showing a habitual lateness for other loans. These information are transparent across banks, and a borrower would be advised to get a home financing in-principle approval before committing to a property. One of the ways to ensure that one is not ‘caught’ by credit performance is to ensure that payment is prompt in the borrower’s other loan repayments.

Many people think that housing loans are commodity products, but that cannot be further from the truth. In a very competitive market like Singapore where rates are so low, banks have learnt to compete not by price competition, but through value-added features.

All said, it is key for every potential home buyer to do some homework. Ask yourself if you have the resources both now and in the future to service the mortgage for the amount of loan you intend to take to buy that property. As daunting an exercise as this may be, it is one exercise that we must spend time pondering. At the end of the day, there is no free lunch.

Kevin Lam is head, loans division, United Overseas Bank

Time to redraw your retirement plan

Longer life expectancy and erosion of traditional pension schemes signal that retirees may outlive their assets, says KURT REIMAN

RETIREMENTS are becoming ever longer and more costly. Pensioners need to save enough to fund a comfortable life and to ensure they can leave assets to the next generation.

Retirement, in its current form, will soon be a thing of the past as demographic, financial and lifestyle factors lay siege to the traditional models. Pension plans, both public and private, face a squeeze from fewer people working and more people retiring. Meanwhile, medical and healthcare spending are rising, putting government finances under additional strain.

Yet most people expect to lead active and healthy lives during retirement, with some hoping to combine relaxation with a job, part-time or otherwise. Together, these trends are reshaping our thinking about careers and how to pay for what comes afterwards. Retirement, in short, is evolving into something completely new.

Traditionally – and particularly in places other than Singapore – retirees have relied primarily on government and corporate pension plans and think of their personal savings as an extra resource for additional or unforeseen expenditure. But the health of state-run pension programmes is under scrutiny, forcing individuals to take more responsibility for their well-being in old age. Against this background, living too long and spending too much have emerged as major risk factors. The latter hazard is accentuated by the ever more active lifestyle of senior citizens.

If enterprising and adventurous pensioners want to enjoy their third age to the full, however, they need to ensure that their assets will stay the course.

Will I outlive my assets?

According to the United Nations, people born today in developed countries can expect to live 75.6 years on average, up from 66.1 years for those born in the 1950s. Moreover, today’s 60-year-olds can expect to live even longer than these statistics suggest, having survived the high risk periods of infancy and early youth. Indeed, they might well live another twenty years on average, and this life expectancy continues to lengthen.

Longer lives and the erosion of traditional pension schemes add to the danger that retirees will simply outlive their assets. So does the fact that life expectancy estimates have often erred on the low side in the past: that is, people have tended to live far longer than the statisticians have predicted.

All this increases the uncertainty surrounding the key question – how long they will live – that individuals need in planning for retirement. Nor do life expectancy forecasts account for the important differences stemming from gender, status, occupation, educational attainment, and country of residence.

If they rely on average life expectancy statistics, five people out of 10 run the risk of living longer than their assets will last. To mitigate that risk while they are still earning and saving money, investors would be best advised to calculate their retirement horizon conservatively (that is, by assuming a rather high life expectancy).

At the same time, they should factor in any relevant variables such as their physical condition and family medical history. A realistic perspective on one’s personal life expectancy can go a long way to mitigating longevity risk.

Once they have accumulated the assets which will pay for their retirement, investors can also reduce that risk by purchasing an annuity, which comprises a series of payments of set size and frequency during the life of the holder.

Although annuities are not risk-free – they are, for example, exposed to the hazards of inflation or the failure of the providing institution – they do ensure a constant nominal income stream regardless of how long the holder lives.

Demand for such instruments is on the increase as pension schemes become less generous. However, the amount of money that should be invested in an annuity remains a highly personal choice and it should always be borne in mind that committing assets to an annuity can reduce the amount of a portfolio that can be passed on to the next generation.

Will I overspend my assets?

The danger that one might live beyond one’s means, also known as liability risk, is another increasingly relevant factor in retirement planning. It is linked to the fact that people are living longer and arises partly from the trend towards increased individual responsibility for healthcare. Additional factors include the growing taste for more ambitious lifestyle goals, such as frequent travel and staying young and fit.

There are numerous ways to reduce liability risk. One can continue to work longer or relocate to a country with a lower cost of living (see Figure 2). This also helps to reduce the chance that you will live longer than your assets last. Each extra year of spending that is funded from employment income represents an additional year that retirement withdrawals can be postponed and investments can continue to grow.

Another option is to limit the uncertainty related to future costs by purchasing elderly and long-term healthcare insurance. Without this insurance, individuals may need to plan for worst-case scenarios for healthcare liabilities, or face the prospect that healthcare costs will erode assets that would otherwise be passed on to the next generation. Individuals can also pay down debt before they retire in order to increase their net worth.

Mandatory v discretionary

needs When it comes to reckoning up the total income a retiree will need, expenses should be classified into mandatory and discretionary. Mandatory expenses are those related to basic daily needs, including housing (mortgages, taxes, and maintenance fees), food, and medical care. Discretionary expenses are everything else, accounting for the remainder of the total income requirement.

To estimate how much income you might need, consider the things that you really cannot do without and the things you might be able to sacrifice or scale down. An apartment, for example, might be more convenient and cheaper than maintaining a house, and holidays at home might be less costly than travelling. Downsizing your lifestyle might be an option if you fear that your assets might melt away too soon. A solid estimate of your mandatory needs also helps you to determine the amount of assets that should be invested in an annuity, if any.

Figure 3 shows a hypothetical income and expense framework during retirement. Mandatory expenses are met with pension and annuity income, while discretionary needs are funded by assets allocated first to an absolute return portfolio. Other discretionary income sources could also include rental income, royalty payments, or  other alternative income streams. Assets above and beyond these mandates are contained in a growth portfolio, which can be allocated in line with investors’ longer-term goals.

When there is a high probability or desire to leave a bequest, assets can be allocated with the beneficiaries’ time horizon in mind. Consider also that bequest motives require prudent estate planning; holding rapidly appreciating assets can significantly increase estate tax liability.

Review regularly

No estimate or forecast can be safely relied upon unless it is regularly reviewed in the light of changing economic, financial, regulatory, demographic, and personal circumstances. Without such a review, even the most finely tuned income scheme may quickly lose its relevance. It is important to keep track of realized investment returns, as well as expenditure, and to adjust spending habits and lifestyle as necessary. Retirees should, therefore, review their retirement plans regularly and discuss their plans with their client advisers.

Kurt Reiman is head of thematic research at UBS Wealth Management Research. He can be contacted at kurt.reiman@ubs.com

Source: Business Times 14 Nov 07

Tactical asset allocation models cut risks

ARJUNA MAHENDRAN examines the use of total return strategies as a way of riding out turbulent stock markets

THE stock market boom that started back in 2003 is expected to continue in the medium term. However, an analysis of longer-term market cycles shows that equity investors must brace themselves for more volatility in the short term.

Historically, bull markets have been spread over several decades. Examples of this are the sustained boom that followed the US Civil War and lasted until the beginning of the 20th century, the period after World War II to the end of the 1960s, as well as the phase from the beginning of the 1980s until the Internet bubble burst in 2000. These boom phases were all driven by fundamental innovations such as the railway, electricity, automobiles, aviation, and modern telecommunications.

By contrast, bear markets – when equity prices tumble as they did in 2000-2003 – tend to last two to three years, and result in cumulative losses of between 40 per cent and 80 per cent. They historically turn into a new bull phase with relatively small and mild corrections in the first four to six years, the most recent of these periods probably being from 2003 to mid-2007. The second phase of a longlasting bull market usually sees a correction of 15-20 per cent before the boom continues.

The current economic and societal changes clearly indicate the continuation of the bull market. New technologies (digital communication, nanotechnology), the rapid industrialisation of emerging markets such as China, and demographic changes (urbanisation in Asia, ageing populations in many industrialised countries) provide favourable conditions for growth. However, concerns about dwindling energy resources, geopolitical tensions and environmental problems mean that it will not all be smooth sailing.

Investment strategies must, therefore, also factor in potential crises. In the current environment, the question is whether investors should adopt a passive strategy. Too much short-term switching in a portfolio will eat into returns, but a purely passive strategy when prices are falling could also lead to (book) losses of between 40 per cent and 80 per cent over several years.

Between 1926 and 2006, it sometimes took more than 20 years to earn a higher annualised return on Swiss equities than on Swiss bonds. The figures for the US tell a similar story. In the long run, equity investors are the most successful, but at the same time are exposed to considerable fluctuations in value. Investors with a strong stomach and the courage to buy in weak market phases can achieve handsome returns.

But the loss risk that comes from buying near the end of a boom phase should not be underestimated. The markets are prone to exaggeration: One of the best-known examples is the equity and property bubble in Japan at the end of the 1980s when the Imperial Palace in Tokyo was estimated to be worth as much as the whole of California. Or the technology and Internet bubble in 2000 which saw breathtaking leaps in the market capitalisation of companies that often did not turn a profit and in some cases did not even report any turnover.

Our analyses show that simple indicators such as seasonality (sell in May and go away), momentum, central bank monetary policy, and interest-rate structures on the capital markets can be a useful source of investment tips. A combination of these factors has led to higher returns with a lower downside risk.

These results suggest that sophisticated tactical asset allocation models can offer attractive returns while at the same time substantially reducing the loss risk, otherwise known as total return strategies.

Total return, or absolute return, strategies have two objectives: to achieve a minimum return, often equal to the money market return plus 2-3 per cent; and at the same time to minimise the loss risk. Most of these strategies aim to generate a positive return over a 12-month period.

Total return strategies draw on a dynamic investment approach and diversification to reach their objectives. Demand for these strategies tends to increase when the markets become volatile. Relative return strategies, by contrast, track their performance against a benchmark. This approach means that fund managers can beat the benchmark despite making net losses for their clients, for example, if the fund loses 12 per cent but the benchmark index falls 20 per cent.

The situation is reversed if the total return strategy achieves 10 per cent while the equity market gains 20 per cent in a given year. Investors must be aware that it is not only the returns that vary; the risks are also different.

In practice, total return and relative return strategies are not mutually exclusive. Many clients want active risk monitoring for part of their investments, but at the same time are mindful of the returns achieved in relation to traditional investment forms such as equities and bonds.

Arjuna Mahendran is chief economist and strategist, Asia-Pacific, Credit Suisse Private Banking

 

Source: Business Times 14 Nov 07

Putting Asian markets in perspective

While valuations are no longer cheap, it is not difficult to find stable growth companies with good cash flows and yields, says TAN LYNN DAH

THIS has been a bountiful year for Asian equity markets, with Asian bourses scaling new peaks and regional economies enjoying prodigious growth.

As one of the fastest growing regions in the world, Asia’s growth is underpinned by a confluence of supportive factors such as favourable demographics, structural reforms and moderate inflation. The region is stronger fundamentally and is more resilient, with most Asian countries having less foreign debt and vast current account surpluses to cushion against market turmoil.

The impact of the sub-prime mortgage woes has been limited in Asia because of ample cash in the regions’ banking systems.

As we enter the last lap of the year, the million dollar question on investors’ minds will be: Are there any more investment opportunities for investors in Asia, especially the Greater China region, where China and Hong Kong indices have rocketed?

With long-term fundamentals firmly in place, we believe that the Asia miracle will continue into 2008, offering more investment opportunities. Several drivers such as strengthening Asian currencies, earnings upgrades, increasing flow of private equity into the region and infrastructure investments are impetus for another year of robust growth and are expected to buoy the sustainable performance of Asian markets in 2008. Exceptional performance in the twin engines of China and India is also propelling growth in the region.

Though Asian valuations are no longer cheap, we feel that it is not too difficult to find stable growth companies with good cash flows and yields. In view of current market volatility, we are more focused than ever on companies with strong operating cash flows that are well positioned for less-thanfavourable economic conditions. We like defensive growth stocks with very predictable cash flows.

Within the Greater China region, we have been adding to Chunghwa Telecom (Taiwan), whose yield including specials is nearly 10 per cent, and 13 per cent of its balance sheet is in net cash. Another stock which we have been adding to is Singapore Telecommunications, which has 50 per cent of earnings from emerging markets and 50 per cent from Singapore and Australia, generating 10 per cent sustainable growth in earnings-per-share. The free cash flow yield is 5-6 per cent . These stocks provide both sustainable growth as well as steady dividend streams.

For the past few months, we have seen the negative effects of the sub-prime mortgage woes on established financial institutions like Northern Rock, Merrill Lynch, UBS and Citigroup. We feel that banks with global exposures are most vulnerable in a downturn and we have trimmed our holdings in financial stocks such as Standard Chartered and HSBC.

We think that asset plays will perform better than banks in Asia. Though property prices have run up quite a lot, we remain sanguine on asset reflation in Asia. We think that Asian asset prices will remain on an uptrend in the medium to long term and this is stimulative for Asian property prices.

In the Greater China region, property transactions have picked up considerably in Hong Kong, where real interest are on the decline (in tandem with US interest rates due to the HK dollar currency peg) as inflation increases. This is very positive for Hong Kong property prices. In view of this, we have added to stocks like Cheung Kong Holdings.

Another stock that we like is Jardine Matheson. The company has controlling stakes in a number of businesses, the largest of which is Hong Kong Land, which owns commercial real estate. The company trades at an attractive discount to its assets and has recently embarked on share buybacks.

We have also added to Singapore property plays like Fraser & Neave and CapitaCommercial Trust. The outlook for Asian demand looks promising, and we believe that domestic consumption should remain resilient. China is likely to be a main driver of growth in Asia, with its voracious consumption appetite. Increasingly, we are seeing intra-country travels by the Chinese to Hong Kong and Taiwan, and bourgeois Chinese have been very generous with their spending during such trips.

This synergy between the Greater China region spells investment opportunities. In view of this, we are positive on consumer stocks like Li & Fung (HK), Shinsegae (South Korea) and President Chain Store (Taiwan) for their track record and defensive growth nature.

Being industry leaders with strong management, these Asian consumer companies have the potential for further growth in 2008. For example, Shinsegae, a South Korean department store, has created a successful private label that is allowing it to enjoy attractive profit margins as one of the earliest operators of the discount store concept in Korea. The company has also ventured into the Chinese market successfully, tapping on Chinese consumption demand.

Taiwan has been a laggard this year compared to its thriving neighbours of China and Hong Kong.

Going into 2008, we believe that Taiwan’s economy will pick up after the presidential election in March. Both candidates, Frank Hsieh from the Democratic Progressive Party and Ma Ying-jeou from the Kuomintang, emphasise reconciliation and peaceful co-existence with China, which bodes well for Taiwan.

With the election as a backdrop, we believe that Taiwanese stocks will perform well in 2008. Attractive valuations have led us to buy some technology stocks like TSMC, given its stable growth and very strong cash generation ability. It also has a yield of 5 per cent . As the largest silicon foundry in the world, we believe that TSMC holds significant price potential and is undervalued vis-à-vis its Western peers. Also, TSMC stands to gain from burgeoning IT demand from emerging economies like China and India.

Infrastructure investment is likely to be a key driver of growth in Asia. With infrastructure development in the blueprint of most Asian governments, key beneficiaries are likely to be the engineering, construction and utilities sectors.

The Chinese make up 21 per cent of the world’s population, consume 46 per cent of the world’s iron ore and 25 per cent of the world’s aluminium. These figures are expected to grow exponentially with rapid expansion of China’s economy in the next decade, making China the main driver of the resources and energy sector.

With this in mind, we are invested in Hopewell Highway Infrastructure, where yield is 5 per cent and growth will remain in the low teens while the currency is appreciating. Listed in Hong Kong with strategic operations in China, Hopewell builds and operates strategic expressway infrastructure in the Guangdong Province. The company is also developing a new expressway, tunnel and bridge infrastructure projects, particularly in the thriving economy of the Pearl River Delta region.

Another company that is benefiting from increased infrastructure spending is China Resources Power, also incorporated in Hong Kong. Capacity growth is very strong as the company engages in the investment, development, operation, and management of power plants in China.

Though the Asia of today is more resilient and the region’s economy somewhat decoupled from the US, a faltering US economy could still adversely impact Asia’s growth. With such euphoric sentiment and bullish market run-up in 2007, it is inevitable that Asian markets get jittery on negative news. We view such short term pull-backs as healthy.

With strong liquidity conditions and positive market sentiment in Asia, we believe the region still has potential upside and is better placed to cope with adverse external developments.

Tan Lynn Dah is First State Investments’s marketing research manager

MONEY MATTERS – Never react to market chatter

Investors tempted to flee the US stock market, given the bad news coming out of America, might do well to reconsider

THERE has been no dearth of sensational headlines relating to the financial world in the media over the past few weeks. Oil prices are fast approaching US$100 per barrel. Financial institutions are taking accounting charges for sub-prime write-downs. CEOs have stepped down. The US Federal Reserve has lowered interest rates to ease credit in a slowing economy. Unemployment rates are down and inflation is an on-going worry. Minerals and metals, especially gold, are trading at new highs. The US dollar is sliding fast. Global stock markets have been very volatile.

How should a Singapore investor respond to all of these issues? Let’s examine the fundamentals of the US economy, and the US stock market and assess how macro economics affect the value of the US dollar and investor behaviour.

The US economy

Our prime minister was recently asked about the possibility of a recession in the US. He said ‘perhaps’. But will a recession in the US affect Singapore? He replied ‘most definitely’.

The total decoupling of the US economy from the rest of the world has not materialised and global economies are intertwined in terms of economic cycles.

The arguments for the outlook of the US economy go something like this. The probability of a full-blown recession is less than 50 per cent, based on broad consensus. US home prices will probably decline further and we have not seen the end of the sub-prime mortgage mess.

Containing inflationary pressures in the US will be a continuing challenge for the Fed as it lowers interest rates to avoid a hard landing. Lower interest rates translate into lower exchange rates for the US dollar. This anticipated decline in the US dollar will make American exports more competitive and improve the earnings of some US companies.

The US trade deficit will improve in the near term and may check the fall of the dollar.

If the US real economy maintains such a course, the Asian story will go on. This means that Singapore investors should strike a balance by staying invested in global securities for diversification and risk management of their investment portfolios.

There is no reason to dump US securities within a diversified portfolio based on concerns about the possible slow growth of the US economy in the near term.

The US stock market

The valuation of US shares will be of interest to investors. The forward price earnings (PE) ratio of the S&P 500 is now at 15.7 times compared to the pre-bubble 60 times in 2000. In fact, we should turn our attention to exposure in emerging market equities.

Equities in China, India and other emerging markets have appreciated at a much faster clip than those of the developed markets in the last two years due to strong GDP growth. The sensible course of action for an investor is to rebalance a portfolio that has a heavy allocation in emerging markets to a more broadly diversified one because the likelihood of repeat performances in the near term is hard to predict.

Human behaviour is such that not only is the exposure to emerging markets, including Asian stocks, preserved but there may be a tendency to chase performance with fresh capital infusion into Singapore and Asian shares just because there is negative news from some American companies.

Going back to US shares, on average, 25-50 per cent of sales and earnings of US-listed companies come from abroad. This is good news for the global investor.

One can argue that the weak US dollar will contribute to higher earnings for American companies with positive impact from foreign currency translation in the financials. So whether the US economy goes into a recession or not in the near term, some large-cap US equities will continue to deliver growth from sales to the rest of the world in the long term.

Nestle is an example of a global player whose country of listing is not relevant when compared to the company’s sources of revenues.

Even if the US stock market experiences volatility in the near term, there is no case to avoid quality shares listed in the American stock exchanges for a long-term investor.

The US dollar

The Monetary Authority of Singapore has decided to accelerate the appreciation of the Sing dollar versus a managed basket of currencies. This policy is aimed at tackling inflation in our domestic economy. The outcome is a manifestation of the weakening US dollar.

The point is, the Sing dollar is not the only currency that is strengthening. Our currency is moving in tandem with the euro, yen and other regional currencies (see Chart C). But there is no escaping the US dollar for a global investor. How else can you buy into Berkshire Hathaway and Microsoft or Coke and Pepsi?

Procter & Gamble (P&G) owns Pringles, Braun, Gillette, Tampax, Max Factor and Duracell. The only way you can be a shareholder of the company that owns these global brands is to buy P&G shares denominated in US dollars. A global equity portfolio will include companies like P&G.

Whether the direct shares, private equity or unit trusts are denominated in the US dollar, Sing dollar or Australian dollar, it makes little difference in the long term as long as the underlying securities represent profitable companies around the world. It does not make sense to own only shares in companies with strong currencies compared to the US dollar.

Conclusion

Timing the market is next to impossible. Adopting the correct time horizon for specific investment objectives is, however, essential.

Staying invested in the market for the long term is the only way to achieve long-term goals such as retirement funding. The more frequently investors evaluate their returns, the more likely they are to make inappropriate shortterm decisions because myopic loss-aversion causes such investors to treat the long-term as a series of short-terms.

Leading behavioural finance researcher Hersch Shefrin explains this framing concept in his book Beyond Greed and Fear.

So should we be concerned about the US dollar or something far more important?

Going back to basics: review your goals, decide how much is enough in S$ medium- to long-term returns, get the asset allocation right, insist on quality underlying securities without undue concern about the currency of denomination and assess if overall risks for total investment assets are appropriate to your investment time horizon.

Old-fashioned dollar cost averaging will cover market and currency fluctuations in the medium and long term.

Never react to market chatter. Stay invested. Once the framework is in place, allow the strategy a chance to work.

Roy A Varghese is Director, Financial Planning Practice, at ipac Singapore. The views expressed are his own. He can be reached at roy.varghese@ipac.com.sg

 

Source: Business Times 14 Nov 07

JLL sees Asia as safe haven amid sub-prime debris

Region could benefit as investors reallocate funds from US, Europe

(LONDON) Asia provides a ’safe haven’ for property investors as returns decline on US and European assets because of sub-prime mortgage losses, said commercial real estate broker Jones Lang LaSalle.

‘The region could be a beneficiary of the fallout as investors reallocate funds from the US and Europe towards Asia-Pacific in search of higher growth opportunities on a risk-adjusted basis,’ Jane Murray, Asia-Pacific head of research at Jones Lang LaSalle, said yesterday in a report.

The world’s biggest banks and securities firms wrote down US$45 billion of assets this year and cut 10,000 jobs because of the collapse of the market for mortgages made to borrowers with poor credit.

Commercial real estate transactions fell in the UK and the US after defaults on subprime pushed up borrowing costs, creating turmoil in financial markets.

Global direct real estate investment in Asia gained 14 per cent to US$54 billion in the first half of the year, compared with the year-earlier period, Jones Lang LaSalle said. Asian deals are about a third of the volumes in the Americas or Europe.

‘Although regional investment volumes are still a comparatively low proportion of global direct property investment, interest levels are very high and we foresee the continuation of rapid growth in volumes,’ said Ms Murray.

Japan remained the dominant market in Asia for international investors in the first half, accounting for more than half of investment in the region, the broker said.

Capital values gained 8.7 per cent in Japan during the quarter to 3.96 million yen (S$52,075) per square metre.

Goldman Sachs Group bought the building that houses Tiffany & Co’s flagship store in Tokyo in August for 37 billion yen, or about 54.45 million yen per square metre, the highest price paid since the burst of the bubble economy in the early 1990s, according to Jones Lang LaSalle.

Average monthly rents for grade A office buildings advanced 3 per cent from the second quarter to 54,882 yen per tsubo (US$150 per square metre), the 13th-straight quarter of gains, Jones Lang LaSalle said.

Grade A office buildings are sites with total leasable floor area of more than 10,000 square metres and more than 800 square metres per floor, according to Jones Lang LaSalle.

The buildings should be no older than 25 years.

 

Source: Bloomberg (Business Times 14 Nov 07)

Inflation back to 6.5% in Oct as food prices rise

More monetary tightening, further rate hikes seen to rein in inflation

(BEIJING) China’s consumer prices rose sharply in October, tying a decade- high monthly inflation rate of 6.5 per cent, the government reported yesterday, adding to pressure for measures to cool a politically sensitive surge in food prices.

Food prices jumped 17.6 per cent in October over the same month last year, while the price of pork, China’s staple meat, soared 54.9 per cent, according to the National Bureau of Statistics.

The overall October inflation rate was higher than the 6.2 per cent reported in September and matched August’s 6.5 per cent, the highest rate in 11 years.

‘We expect more monetary tightening to rein in inflation, including further rate hikes,’ Lehman Brothers economist Mingchun Sun said in a report to clients.

Inflation has surged in recent months due to double-digit increases in food prices blamed on shortages of pork and other basic goods.

The food price spike is especially sensitive for the communist government, because China’s poor majority spends as much as one-third of its income on food.

A deputy central bank governor said last month the government expects inflation for the full year to be 4.5 per cent, overshooting the official target of 3 per cent.

Inflation for non-food items in October was just 1.1 per cent, the statistics bureau said.

Beijing froze prices of cooking oil and other basics in September, and is pressing farmers to raise more pigs, promising free vaccinations and other aid. Economists say price pressure should ease when a new grain crop is harvested and more pigs come to market.

Farmers had been reluctant to raise more pigs in part because of an outbreak of blue ear disease, which killed 70,000 animals and prompted the government to destroy thousands more. The government declared last week it had brought the outbreak under control.

An official of China’s top planning agency, the Cabinet’s National Development and Reform Commission, said in October that the government would consider investment curbs and other unspecified ‘measures to adjust prices’.

The government said in October that pork prices fell in August due to increased supplies. There was no immediate explanation yesterday for the sharp price increase in October.

Regulators raised state- set prices for diesel and gasoline by 10 per cent on Nov 1 in an effort to curb demand amid a fuel shortage. But the government said that should add only 0.05 percentage points to the monthly inflation rate.

The government has raised interest rates repeatedly this year to curb a boom in construction and investment that regulators worry could lead to financial problems.

Economists say the recent inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP (Business Times 14 Nov 07)

Credit squeeze won’t hit emerging markets

ALLAN CONWAY and NICHOLAS FIELD explain why emerging markets would be able to withstand any global contagion from the US housing market collapse

THERE are now growing fears of global contagion from the US housing market collapse. Will emerging markets be able to withstand this threat? We think they can, and here’s why.

First, a recap on the sub-prime crisis. Low quality US mortgage debt has been repackaged and sold on but as defaults grow in this sector, the re-packaged debt loses value. Now, banks and funds around the world are forced to re-price the debt, and realise large losses.

How this affects the real economy is through the re-pricing of debt. As US banks tighten lending requirements, debt becomes more expensive for the borrower, and harder to obtain. If this problem worsens, it could severely impact consumer confidence and curtail spending.

So far, there is no evidence that emerging market financial institutions have any meaningful exposure to debt. These repackaged sub-prime debt has only appeared in Germany, Australia and the UK. The world of proprietary trading desks, and in-house hedge funds is largely alien to emerging banking.

Direct economic contagion is also limited. The first obvious point is that emerging markets do not themselves have a sub-prime debt market, since personal finance is under-developed in these markets. Average leverage levels are very low. Many countries are now only developing mortgage markets, and have only begun lending at the higher quality end of the market.

Emerging markets also continue to improve their resilience to external shocks. On almost all measures – external and domestic balances, external debt levels, local interest rates – emerging markets have markedly improved over the last five years.

Emerging markets now have considerable firepower to stabilise their economies in the face of external shocks. Last year was another very good year for emerging markets – and for the first time in history we can say we have seen four consecutive years of positive returns.

In our view, it is high time investors realised that they shouldn’t take their cue on emerging markets from the US. Those who still see the region as the riskiest place to be in times of a US slowdown seriously need to re-examine where economic growth in the world is now coming from.

America has always been seen as the engine of global growth, but emerging markets are now running on their own engine, no longer primarily dependent on exports to developed economies to achieve their growth. Particularly so as China and India have arrived on the global economic scene.

It is estimated that growth in emerging markets as a whole accounts for some two thirds of global growth. The BRIC (Brazil, Russia, India, China) economies by themselves account for around a third of global growth.

So, instead of being dependent on the global economy for their own growth, emerging markets are actually key drivers of the global economy.

Several economies in Asia are strong enough on their own to generate their growth, as well as to drive it elsewhere. In China, India and Malaysia, the contribution to GDP growth in the last year has been almost entirely from increasing domestic demand, rather than exports – whether to the rest of Asia or to the likes of the US and Europe.

Other countries, like the Philippines, Taiwan and Thailand, are still dependent on exports. However, they are significantly less dependent on the US as they benefit from strong trade with nearer neighbours. Emerging Asian countries’ exports to China now exceed those to the US.

Importantly, China’s self-sustained growth story is admittedly one driven primarily by investment spending, and not yet by the China consumer. There has been concern about whether China is actually over-spending on its own growth. We disagree. China’s capital investment spending as a percentage of GDP is running at just over 40 per cent – in line with Japan in the late 1950s and 1960s, and in line with Korea and Taiwan in periods of strong growth. The level of investment spending in China is commensurate with this stage in its economic cycle.

The ability of emerging markets to sustain their own growth is down to massive structural improvement in these economies. In the past, you knew you were investing in more volatile, weaker economies, characterised by hyper-inflation, debt crises and currency crises. That’s no longer the case.

Inflation is down to single digits across the world’s emerging markets, and Latin America’s days of hyper-inflation are well and truly over. Most countries have seen a massive reduction in debt. The total level of government debt as a percentage of GDP (at 38 per cent) is at less than half the level of developed economies (at 89 per cent).

Overall, there are no direct financial or economic linkages from US credit problems to emerging markets. What we are left with are sentiment effects and a global increase in risk aversion – in other words, some increase in the cost of capital. No doubt there will be further headline-grabbing stories of funds realising large losses, and increased volatility in global equity markets over the next few months. Emerging markets will be buffeted by this, but they should still see strong economic growth.

And with their relatively limited exposure to global credit, they should be able to avoid any drastic outcome.

Despite the strong fundamental economic case for emerging markets, there is a note of caution when it comes to equities. Share prices have risen sharply in recent weeks and valuations are beginning to look stretched, particularly in China and India. While we remain positive on the medium to longer-term prospects for emerging markets, in the near term we expect markets to be volatile and they could be vulnerable to a setback.

Allan Conway is head of emerging markets equities, and Nicholas Field, economist & strategist emerging markets, Schroders

 

Source: Business Times 14 Nov 07

Still positive on Asian equities

Region will continue to expand at a respectable pace even if below-potential US growth extends into 2008.

DESPITE a credit crisis emanating from the US and fresh highs in oil prices, global stock markets have broken records again this year. In Asia, especially since the August turmoil, investors have experienced impressive returns. Most regional equity indices boast year-to-date gains well above the returns seen in the US or Europe. Economic growth has been strong and regional markets have risen on the back of robust earnings growth, PE multiple re-rating, and strong currencies.

Naturally, the question arises: Can this continue in 2008?

We believe it can. Valuations have increased but do not seem stretched. With the exception of China, PE multiples are not at astronomically high levels. Current PE ratios for the Asian indices (excluding China, India and Japan) range from 14 to 23, which are not a far cry from 18 for the S&P500.

We believe Asia will continue to grow at a respectable pace in 2008, which keeps us positive on Asian equities as an asset class. Asian economies should remain healthy, ie, continue to see more broad-based growth, current account surpluses and lower debt levels. They will also continue to see stronger intra-regional trade – rising dependence on China, in particular, and falling dependence on US demand.

Our central scenario is that Asia will continue to expand at a respectable pace even if below-potential US growth extends into 2008. A gloomier US growth outlook is not good news for Asia, but weak US growth for the past two years has not prevented Asia from accelerating modestly all the while.

Another year of 2 per cent growth in the US, should it be that weak, would make little discernible difference to Asia.

We believe the US economy will avoid a recession as the drag from housing construction fades and core consumption remains resilient. We continue to take confidence from the fact that in the far sharper downturn of 2000-01, when 2.5 million Americans lost their jobs, consumption growth remained above 2 per cent year-on-year.

Major risks

It is true that the balance sheets of Asian corporates, like the economies they operate in, are in much better shape than 10 years ago, before the financial crisis of 1997-1998. But although Asian stock markets are less vulnerable than in the past, they are not insulated from developments in the rest of the world.

There are, as always, a number of risks for Asian markets. What are they?

First, on a PE basis, Asia’s emerging markets no longer trade at a discount to developed markets.

Valuations have been catching up and re-rating (ie, stock price increases per dollar of earnings) over the recent years has helped push many Asian markets to a premium (Table 1). Clearly, investors are seeing better long-term earnings growth potential in Asia.

Second, on a price-to-book basis many Asian markets trade at higher multiples now than in 2004.

China and India, in particular, trade at huge premiums to developed markets. Thailand and Taiwan are the only exceptions, with the SET and the TWSE trading below and near 2004 levels (Table 2).

Third, borrowing costs have risen, as uncertainty has increased and risk has been repriced. This is evidenced by tighter liquidity and wider credit spreads in money markets and steeper yield curves. It has become more difficult for businesses to obtain loans, not only in the US but also in Europe.

Money markets are unlikely to normalise in the near-term but they should function normally again in 2008 after more information on financial sector exposure to certain credit markets has surfaced. If history is any guide, it will take a while before the credit crunch subsides.

Fourth, there is the risk that inflation will eat more aggressively into returns. Markets seem to have forgotten about this amid US growth concerns but policy makers have not. Inflation risk will almost certainly return as a major theme in markets in 2008. Central bankers are sure to remind markets of this.

Bottom line, we remain positive on the outlook for Asian equity markets, but risks surrounding this central scenario have increased slightly in recent months and the earnings outlook has become more cloudy.

Bonds, commodities

The outlook for Asian bond markets is bearish as yields are expected to rise. Inflation risks suggest that central banks will be biased towards tighter monetary policy in 2008. Moreover, inflation expectations, while currently very low, are likely to rise. Sentiment among bond investors is hence likely to be weak and returns in 2008 will be less impressive than in 2007. After a strong showing in 2007 and with slower global growth expected, the outlook for commodities appears less certain now and there are material downside risks in many markets.

Taking all the above into consideration, investors will have to come to terms with the idea that volatility is returning. The recent turmoil in markets likely marks the end of the low-volatility period we have witnessed from 2004 to 2006. But this is not a bad thing. As the swings in financial markets increase, opportunities for investors to achieve high returns increase too. But, as there is no more easy money, it also means that the portfolio approach to investing, ie, risk diversification, is becoming even more important.

The Chicago Board Options Exchange SPX Volatility Index (VIX) reflects a market estimate of future volatility in the S&P 500, based on the weighted average of the implied volatilities for a wide range of options. The Merrill Option Volatility Estimate (MOVE) is a yield curve weighted index of the implied volatility on Treasury options and reflects a market estimate of future Treasury bond yield volatility.

According to modern portfolio theory, investors should assess portfolios based on overall risk-reward characteristics rather than the individual risk-reward characteristics of the constituent securities. Put differently, investors should not assess the risks and rewards of securities individually but in a portfolio context, ie, how they affect the portfolio’s overall risk and return. This is because a portfolio’s risk is not only a function of the individual securities’ risks but also of their correlations.

Exposure to risk is reduced by combining a variety of securities, all of which are unlikely to move in the same direction. Because not all markets move up and down in value at the same time or at the same rate, a portfolio approach promises more consistent performance under a wide range of economic conditions.

Our asset allocation model, which helps us find portfolios that have optimal risk/return characteristics, suggests that for a 12-month allocation horizon 54 per cent of funds should be allocated to equities, 28 per cent to bonds, 18 per cent to cash and zero to commodities (Figure 1). The resulting portfolio has an expected return (annualised hedged return in SGD terms) of 15 per cent and expected risk (annualised standard deviation of daily hedged returns) of 8.4 per cent. It is an optimal portfolio, given our hedged-return expectations, historical risks, and the historical correlations between markets.

Within the portfolio context we favour Singapore, Hong Kong, China, Taiwan, and Malaysia among regional equity markets; and China, the Philippines, Korea, India, and Thailand among regional bond markets. While some markets are not accessible to all investors, we believe that keeping these markets in our framework provides the best summary of our investment outlook.

 

Source: Business Times 14 Nov 07

MGM Mirage to open first casino in Macau in Dec

(LAS VEGAS) Casino developer MGM Mirage Inc said on Monday it would open its debut property in the Chinese gambling destination of Macau on Dec 18.

The US$1.25 billion project is a joint venture with Pansy Ho, daughter of Hong Kong billionaire Stanley Ho, a gambling industry veteran.

The resort will feature 600 rooms, suites and villas, 375 table games, 900 slot machines and 16 high-end private gambling salons.

It also has a conservatory called Grand Praca that is three times the size of a seasonal botanical garden at its Las Vegas property, Bellagio, and was designed with the traditional Portuguese architecture of the former colony in mind, said MGM Mirage spokesman Gordon Absher.

MGM Mirage chief executive Terry Lanni said in a statement that the opening would mark ‘the beginning of a new era in Macau’, which has overtaken the Las Vegas Strip as the top gambling revenue generator in the world.

 

Source: AP (Business Times 14 Nov 07)

Surprisingly low bids for Marina View site

Top offer of $952m a sign that property investors could be turning cautious

BARELY two months after a site at Marina View fetched a record $2.02 billion, a similar plot next door has managed only half that price.

The unexpectedly low bids for the plot, which was seen as highly attractive, came on top of lukewarm response to other recent land sales. This is further proof that sentiment in the property market has started to cool, consultants warned.

The second Marina View plot drew only two bids when its tender closed yesterday. The top offer came in at $952.9 million – a far cry from the first site’s price and well below the experts’ predictions of up to $1.6 billion.

Both Marina View sites, which are located behind the One Shenton condominium, had the same high bidder: Macquarie Global Property Advisers (MGPA), a private equity real estate firm partly owned by Australia’s Macquarie Bank Group.

Property group CapitaLand also put in offers for both plots.

MGPA’s offer in September for the first site, which is slightly bigger, worked out to $1,409 per sq ft per plot ratio (psf ppr), almost double the $779 psf ppr bid it submitted for the second site.

The stark difference shows how much the mood in the market has shifted in just two months, said Knight Frank director of research and consultancy Nicholas Mak.

‘Clearly, they had a change of heart,’ he said. ‘The two sites are right next to each other, but the second bid is only 55 per cent of the previous bid.’

Mr Mak agreed that the price is ’still decent’, and that there was ‘a fair bit of exuberance in land tenders previously’.

But, in general, property investors are now turning more cautious, he said. This is due to stock market volatility, uncertainty over the global credit crunch and recent government measures in the property market.

The Government last month removed the deferred payment scheme for homebuyers in a surprise move that is being seen as an act to discourage speculation.

Mr Mak suggested, however, that this may have helped overcool the market.

Following the Government’s move, a residential land parcel on Enggor Street at Tanjong Pagar attracted only two offers when it went on sale, while an office site in Tampines found just one bidder.

This is despite these plots being fairly attractive, said Mr Mak.

‘If the Government throws in a site in Jurong, they may not get any bids at all.’

But while other consultants agreed that developers and investors are now more circumspect, some said the low Marina View bids could be an aberration.

‘The mood has changed somewhat, but it’s not as drastic as this. This is a bit of a flash in the pan,’ said Mr Li Hiaw Ho, CB Richard Ellis’ executive director.

He had expected bids for the second Marina View site to come in at a lower level because 25 per cent of the plot’s gross floor area must be used for hotel rooms, which have slightly lower land values.

Mr Li said, however, that the huge difference in bids was unexpected. He attributed it partly to the fact that there were only two bids: ‘This cannot draw out the most competitive offers.’

The Marina View site has a land area of about 0.9ha and a maximum floor area of 1.2 million sq ft. On top of the hotel use requirement, at least 60 per cent of the plot’s area must be given to offices.

If MGPA is awarded the second site, it could lower its average price for the two plots to about $1,100 psf ppr and combine them to form a mega commercial development, said Mr Donald Han, managing director of Cushman & Wakefield.

 

Source: The Straits Times 14 Nov 07

HORIZON TOWERS HEARING – DTZ: $500m was best en bloc price possible

Site unattractive; but ex-sales committee member says higher offers were received

$500 million – the amount it eventually attracted – was realistically the best price Horizon Towers could have fetched in an en bloc sale, DTZ Debenham Tie Leung director Tang Wei Leng told the Strata Titles Board (STB) yesterday.

She was one of several marketing agents invited in early 2006 to make a presentation on the en bloc sale potential of the development to its newly formed sales committee.

Ms Tang’s testimony to STB yesterday suggests the eventual price of $500 million obtained by the Horizon Towers sales committee was the highest it could have hoped for, given some of the development’s shortcomings.

Ms Tang said the Leonie Hill 99-year leasehold development was a challenge to market, compared with other sites in the area.

She described the site as unattractive because it had a limited view, was oddly shaped and impossible to subdivide.

She also said the two access roads leading to it were not an advantage.

She compared it to its neighbouring development The Grangeford, which she said had a regular shape, a full view of Orchard Road and a Grange Road address.

Her testimony comes in the face of some of the arguments put up by minority owners – those who did not agree to the en bloc sale.

It is the minorities’ case that the collective sale of Horizon Towers should not be allowed because the deal was done in bad faith – as the sales committee did not do its best to secure the highest possible price.

Still, the minorities’ case got support when former sales committee member Henry Lim returned to the stand later yesterday. He had first testified last Friday.

Yesterday, he said the sales committee received a higher offer than the $500 million from Hotel Properties (HPL) and its partners, which was eventually accepted by the bulk of the owners.

Mr Lim said Hong Kong developer Vinyard Holdings, through its Malaysian lawyers Chan & Shu, offered $510 million for Horizon Towers. He said he made attempts to contact them but was advised by lawyer David Ang of Drew & Napier not to pursue the offer as Chan & Shu was an ‘unknown name’.

Mr Limsaid last Friday that there were at least four offers comparable to or better than HPL’s $500 million bid. He said three out of nine of the sales committee members were happy with the HPL offer but rushed into the deal and had failed to consult the majority owners before accepting it.

The hearing continues today.

 

Source: Business Times 13 Nov 07

Lippo launches retail Reit IPO, aims to treble size by end-09

Trust comprises 7 Indonesian malls and 7 retail spaces in other malls

THE Lippo Group aims to triple the portfolio size of its latest real estate investment trust (Reit) to $3 billion by end-2009, the Reit’s manager said yesterday.

The Lippo-Mapletree Indonesia Retail Trust (LMIR Trust), which will be the first Singapore-listed Reit to offer exposure to Indonesia’s retail sector, aims to raise $516.4 million from its initial public offering (IPO).

The trust, which has an initial portfolio of seven Indonesian shopping malls and seven retail spaces in other malls, will sell 645.5 million units at 80 cents each.

The trust had earlier gave an indicative range of 78-91 cents a unit for the IPO.

Of the offer, some 625.5 million units have been placed with institutional and other investors – and is 1.6 times subscribed – while the remaining 20 million are being offered to the public.

‘Investors we met during the roadshows welcome this opportunity to participate in Indonesia’s growing retail sector, given Indonesia’s robust economic fundamentals underpinned by a growing and affluent urban middle-class population of about 66 million consumers,’ said Viven Sitiabudi, chief executive of the Reit’s manager.

PT Lippo Karawaci, Indonesia’s biggest listed real estate developer, will hold 27 per cent of the trust after the unit sale, while Singapore’s Mapletree Investments will own 12 per cent, the trust said.

LMIR Trust is projecting a yield of 6.9 per cent for 2007, 7.3 per cent for 2008 and 7.8 per cent for 2009, it said.

The public offer will close at noon on Nov 15 and trading is expected to start on Nov 19 at 2pm.

The trust is listing at a time when market sentiment is poor.

Japanese trust Saizen Reit tumbled 14 per cent on its debut on Friday, while Japan’s Asia Pacific Land delayed its $514.9 million Singapore IPO last week, citing ‘negative market sentiments’.

But Ms Sitiabudi said that she is confident of LMIR Trust’s quality, even as Lippo’s Indonesian hospital trust First Reit, which was listed last December, fell below its IPO price last week.

‘The market goes up and down, but we’re confident of the quality of our product,’ she said.

Lippo president Stephen Riady, who was speaking to reporters at a news conference to launch the trust, said that the group plans to list two to three Reits – worth some US$3-4 billion in all – in Singapore over the next two to three years.

‘These new Reits would most likely be for hotels, offices and for retail malls outside of Indonesia,’ Mr Riady said.

 

Source: Business Times 13 Nov 07

IRAS to raise annual values of HDB flats

Market rental values have increased significantly, it says

THE Inland Revenue Authority of Singapore (IRAS) is raising annual values (AVs) for all Housing & Development Board (HDB) flat types for the first time in about four years, to reflect the ’significant increase in their market rental values’.

From Jan 1, 2008, the average AVs will go up between 18 and 25 per cent, with the biggest hike for three-room flats.

IRAS’ spokeswoman noted that IRAS regularly reviews AVs of properties in Singapore to reflect their prevailing rental values.

‘In the case of HDB flats, however, AVs had not been increased since 2004 as they had been supportable by actual rental evidence. The AVs of most private residential properties have already been re-assessed to reflect the current market rental levels during the year,’ she added.

In a joint statement with the Ministry of Finance, IRAS yesterday said it will be revising upwards the AVs of most properties, including HDB flats.

Generally, HDB flats in more centralised and popular areas like Bishan, Bukit Merah and Marine Parade would have higher AV increases, compared with other areas, the statement added.

The property tax rate in Singapore is set at 10 per cent of a property’s AV, although owner-occupied residential properties enjoy a concessionary 4 per cent tax rate.

Island-wide, the average AV hike in percentage terms for the various HDB flat types are: 20 per cent for one-room and two-room flats, 25 per cent for three-room flats, 18 per cent for four-room flats, 20 per cent for five-room flats, and 18 per cent for executive flats.

However, the increase in AVs for owner-occupied HDB flats does not translate to a proportionate increase in property tax actually payable, due to the property tax rebates granted by the Government, including those announced as part of the GST Offset Package in Budget 2007.

As a result, 90 per cent of all HDB flat owners will not pay more property tax in 2008 even after the AVs of their flats go up.

For four-room, five-room and executive flat owners, about 15 per cent will pay a higher property tax but the increase will be less than $40, or about $3 a month.

All HDB flat owners will receive their valuation notices and property tax bills by Jan 1.

‘IRAS encourages HDB flat owners to join the Giro scheme as it allows them to enjoy up to 12 interest-free monthly instalments,’ the joint statement said.

 

Source: Business Times 13 Nov 07

No plans for more measures to cool property market: Mah Bow Tan

(SINGAPORE) No further measures are planned to cool Singapore’s booming property market, the government said yesterday, following the end of the deferred payment scheme (DPS) for buying uncompleted private properties.

‘There is no need and there is no intention for us to take any further action,’ National Development Minister Mah Bow Tan said in Parliament yesterday.

The DPS allowed homebuyers to put down just a 10 per cent or 20 per cent of the price when purchasing a property, with the rest due only upon the project’s completion.

Critics said that this was fuelling speculative activity and driving up property prices – leading to the government’s Oct 26 announcement that it was withdrawing the scheme.

When asked in Parliament yesterday if the government would look at more measures – such as increasing interest rates – to rein in property prices, Mr Mah said that no further measures are planned. But the government, he said, will continue to monitor the property market closely to ensure that property prices are supported by economic fundamentals.

He added: ‘The government will make sure that there is sufficient supply to meet the demand of private housing.’ As at the end of September, there were about 65,000 units planned or under construction, he said. Private home prices in Singapore have climbed 22.9 per cent since the start of the year on the back of a supply crunch, official data shows.

The increase in property prices and rentals has contributed to inflation hitting a 12-year high of 2.9 per cent year-on-year in August – and the figure could rise further.

During Parliament yesterday, Trade and Industry Minister Lim Hng Kiang said that inflation could hit 5 per cent in the first quarter of next year.

Mr Mah told Parliament that while it is too early to ascertain the overall impact of withdrawing the DPS, he is confident that the move will pay off.

‘I believe that over time, the withdrawal will encourage homeowners to be more financially prudent and dampen some of the speculative activity in the market,’ he said.

In the longer term, the withdrawal will encourage the property market to grow in a healthier and more sustained manner, he added.

The DPS was introduced in 1997 when the economy was in recession and the property market was slow.

Before the end of the scheme, up to 90 per cent of buyers in some high-profile projects launched by Singaporean developers were opting for such payment schemes, reports have said.

The government said that ending the scheme would compel investors to have enough funds or bank loans available before they agree to buy properties.

 

Source: Business Times 13 Nov 07

3 Bukit Timah properties up for joint collective sale

THREE adjoining freehold properties at Robin Drive, off Bukit Timah Road, have been put up for joint collective sale.

Credo Real Estate, the marketing agent representing the majority owners of Robin Court and Robin Star and the sole owner of No 1 Robin Drive, has indicated a price range of $128-138 million for the combined plots, which have a total land area of 64,878 sq ft. This reflects a unit land price of about $1,500-1,600 psf of potential gross floor area inclusive of an estimated $8 million development charge.

Based on this, the breakeven cost for a new condo on the site works out to about $2,075-2,190 psf, Credo executive director Yong Choon Fah said. The combined site of the three properties is large enough for a condo with about 43 units averaging 2,000 sq ft.

The site is zoned for residential use with a 1.4 plot ratio (ratio of maximum potential gross floor area to land area) and a five-storey maximum height.

 

Robin Court comprises 15 apartments, Robin Star 10 apartments, and No 1 Robin Drive is a detached house with a pre-school operating on its site.

Owners controlling more than 80 per cent of share values in each of Robin Court and Robin Star, and the sole owner of No 1 Robin Drive have agreed to the sale, Credo said. The tender for the three properties closes on Dec 12. Source: Business Times 13 Nov 07

Inflation may hit 5% in Q1 ‘08 as oil, food prices head north

But Singapore’s competitiveness still intact: Hng Kiang

(SINGAPORE) Singapore’s inflation rate could hit 5 per cent in the first quarter of 2008 on the back of record oil prices and higher food and transportation costs, Trade and Industry Minister Lim Hng Kiang told Parliament yesterday.

‘We expect (inflation in) the first quarter of next year to reach the peak of between 4 and maybe even 5 per cent,’ Mr Lim said.

For the present quarter, the consumer price index (CPI) is expected to rise at least 2.7 per cent, he said.

The index rose 0.5 per cent in the first quarter of 2007, one per cent in the second quarter and 2.7 per cent in the third quarter.

‘Food prices have risen mainly due to dearer imports arising from supply disruptions in some of our major food import sources,’ Mr Lim said.

Similarly, oil prices have reached historical highs in recent months due to strong global demand, tight supply and low global inventories, he said.

The index in the first quarter of 2008 will also be high because it will be compared to the first quarter of 2007’s relatively lower base, he said. But inflation is expected to moderate in the second half of 2008, Mr Lim added.

Singapore’s central bank – the Monetary Authority of Singapore (MAS) – has an official inflation forecast of 1.5-2 per cent for 2007 and 3 per cent for 2008.

MAS has allowed the Singapore dollar to appreciate in recent months to ease inflation. The government has also taken steps to cool the booming property market, which experts said is contributing to inflationary pressure.

The new forecast for the first quarter of 2008 is ‘a bit shocking’, Citigroup economist Chua Hak Bin told a news wire.

Dr Chua said that the central bank may need to tighten policy again, possible before its next scheduled meeting in April.

Yesterday, Members of Parliament also voiced fears that rising prices could affect Singapore’s ability to attract foreign companies.

In response, Mr Lim said that Singapore is still competitive in this respect.

‘We are tracking our competitiveness position very closely and so far we are in quite a good position,’ he said.

Mr Lim pointed out that Singapore’s inflation rate was still lower than what other countries are seeing. And while wages here climbed in 2006 and in the first three quarters of this year, the increases came on the back of a long period where wages did not move up much, he said.

On Sunday, Prime Minister Lee Hsien Loong said that the government is unlikely to impose controls on food or utility prices in response to rising inflation, but will continue to use other ways to help Singaporeans cope with the cost of living.

He was speaking at the People’s Action Party annual convention after a party member had asked how the PAPcontrolled government could help lower-income Singaporeans cope with rising prices.

 

Source: Business Times 13 Nov 07

Fears of bigger sub-prime losses spook markets

Asian stocks take a beating, with Singapore’s STI sliding a hefty 2.5%

(SINGAPORE) Stock markets around the region were again mauled yesterday in a widely expected retreat after share indices in the United States ended sharply lower on Friday.

The sell-offs on Wall Street last week and those around Asia yesterday were triggered by fears that banks and other financial institutions are likely to suffer much larger losses than earlier expected from the turmoil that began in the US sub-prime mortgage market.

Shares in companies outside the financial sector were also hit, particularly those that depend heavily on export sales, as investors feared that the rising number of home repossessions and mortgage loans gone bad in the US housing market is spreading pain to consumers there who may spend less.

Worries that the US could be headed for an economic recession – never far from investors’ thoughts since late July when the financial market upheaval began – seem to have resurfaced with new intensity.

Some market observers have suggested that the US Federal Reserve’s ability to stave off a recession through further interest rate cuts may be hampered by rising inflationary pressures – a fear that has been stoked in the past week by higher oil prices and a fast-weakening US dollar.

But the broad consensus – for now – seems to be that the US economy is likely to see slower but still positive growth rather than fall into recession, said economist David Cohen at Action Economics. ‘It doesn’t appear that the US is going off a cliff.’

Around the region, major share indices fell sharply yesterday. In Singapore, the Straits Times Index finished 2.5 per cent lower, while in Hong Kong, the Hang Seng Index fell 3.9 per cent. In Japan, the Nikkei 225 index was down 2.5 per cent, while the two main indices in mainland China ended 2.4-2.5 per cent lower.

The gyrations in the market are likely to last at least until early next year when companies report their earnings results for the current quarter, said Philip Lee, JPMorgan’s chief executive of investment banking in South-east Asia. ‘A lot of it is sentiment-driven. People want to see how the fourth-quarter results come out.’

The results, which would indicate the extent of the impact from the recent spike in oil prices and other factors, would be ‘a good harbinger of things to come’, he said.

Meanwhile, investment banking deals are still being done in China and India, he said. ‘People who can do deals are still doing them. Fundamentally, a lot of companies are still doing very well in this part of the world.’

But last week’s slide in the US dollar, which has weakened considerably against the euro and major Asian currencies since August, has also prompted fresh worries over demand for Asian exports destined for the US.

CIMB economist Song Seng Wun said there was ‘quite a lot of fear on the street’ of a US economic recession, but Singapore’s economy was robust enough to withstand a hiccup, though not a protracted downturn. ‘We do have some slack in domestic consumption which is still resilient enough to cushion us in the near term.’

Citigroup’s US research team is still forecasting a ’soft landing’ for the American economy, said economist Chua Hak Bin in a report yesterday.

But he warned that the evidence so far suggests that Singapore and other Asian economies are still vulnerable to a sharp downturn in US economic growth, although less so than in the past. ‘Arguments about decoupling is premature and probably 10 years too early. Asia or emerging markets will not be able to escape the effects of a fullblown US recession.’

Singapore’s prospects in 2008 ‘will hinge critically on the extent of the slowdown in US economic activity next year’, he said.

Still, ‘the current US slowdown is largely housing and construction-led, which has less of an impact on Asian and Singapore exports,’ he added.

Minister Mentor Lee Kuan Yew said on Sunday that Singapore’s economy was ‘doing fine’, but warned that ‘there are dangerous market signals’ – higher oil prices among them.’

 

Source: Business Times 13 Nov 07

Sub-prime woes continue to hold sway

ST Index hits two-month low after 2.5 per cent fall, in line with Hang Seng Index

AS EXPECTED, the local stock market was unhinged yesterday by Wall Street’s continuing fears over the impact the sub- prime crisis might have on its earnings and the US economy, fears which have now rendered the two interest rate cuts of the past seven weeks nothing more than a distant memory.

The end of a weak session saw put warrants – instruments that gain in value in a falling market – occupy 18 of the 20 spots available in the top gainers list, while the Straits Times Index (STI) stood 88.55 points or 2.5 per cent down at 3,511.12, the lowest in two months.

This loss was very much in line with that in Hong Kong, where the Hang Seng Index closed 1,117.68 points or 3.9 per cent lower at 27,665.73.

Other than describe the market as ‘very nervous’ and ‘jittery’, brokers were at a loss to comment further on the present sentiment. ‘Who knows what might spook Wall Street next?’ asked a dealer, echoing the feelings of the majority. The December futures contract on the Dow Jones Industrial Average, usually a reliable guide to how Wall Street might open later that same day, first dropped 50 points but regained about 40 points by 5pm.

The broad market experienced one of its worst performances, registering only 61 rises versus 497 falls and 266 unchanged or untraded counters, excluding warrants. This works out to about eight falls for each rise.

Since peaking at an all-time high of 3,875 almost exactly one month ago, the STI has now lost 364 points or just under 10 per cent. A weak Wall Street has been chiefly responsible, with stocks coming under severe pressure following announcements by the major banks of large write-offs relating to the sub-prime problems in the US.

Here, banks have also led the decline. In yesterday’s session, falls in the three banks cut a total of 25 points off the index. DBS continued to lead the sector’s decline, losing 70 cents at $19.80 versus 50 cents for UOB at $19.60 and 15 cents for OCBC at $8.50.

With sentiment as shaky as it is, positive broking recommendations had little impact – Kim Eng’s ‘buy’ on construction firm Lian Beng with a $1.22 target price, for example, was shrugged off by the market, and the stock closed 2.5 cents weaker at 74 cents. The local broker based its call on the upswing in construction, the company’s healthy profit margins and sound financial management.

‘We are initiating coverage with a $1.22 target based on a sum-of-the-parts valuation with 16 times FY09 PE on recurrent income from its construction business, along with the addition of the present value of development profits,’ said Kim Eng.

On the outlook for Wall Street, US newspaper Barron’s Nov 5 issue carried the results of its latest Big Money poll of fund managers, which is always an interesting read. Some of the findings are: 22 per cent thought Wall Street (with the Dow at 13,595) was overvalued, 23 per cent undervalued and 55 per cent fairly valued.

The single factor seen which could lift stocks over the next few months was better-than-expected corporate earnings while, overall, 42 per cent of respondents said they are still bullish on stocks. However, this figure was down from the 64 per cent of a year ago.

 

Source: Business Times 13 Nov 07

Soilbuild bags industrial site for $12.2m

JTC Corporation has awarded a 21,871 square metre (235,417 sq ft) industrial site at L7 Pioneer Road/Tuas Avenue 11 to property-based Soilbuild Group Holdings for $12.2 million.

Based on the maximum plot ratio of 1.4, the cost for the site works out to be $398 per sq metre/gross plot ratio. The industrial site is on a 30-year lease and development of the site is expected to take place in 2008-09.

Soilbuild said in a statement yesterday that its subsidiary SB (Westcove) Investment will act as a single purpose vehicle to hold and develop the factories. Total development cost, including the land, is estimated at about $43 million. The project will be funded by the group’s internal resources and bank borrowings.

With this latest acquisition, Soilbuild has a total of more than 1.4 million sq ft of business space properties for development over the next two years.

Its other projects in the pipeline include the logistics and warehousing development at Penjuru Lane with gross floor area of about 410,000 sq ft and a development at Tuas Crescent (gross floor area of about 740,000 sq ft) for engineering companies and supporting industries in the oil and gas, and marine clusters.

Both projects are slated for completion in 2008 or 2009.

The listed group’s completed projects include its flagship 8-storey Eightrium @ Changi Business Park for MNCs, the 12-unit Kranji Linc for light industries, the 15-unit Senoko Food Connection for food industries, and 33-unit Pioneer Lot for light industries.

 

Source: Business Times 13 Nov 07

Bakrieland plans 1t rupiah bond issue

(JAKARTA) Indonesian property developer PT Bakrieland Development Tbk plans to issue 1 trillion rupiah (S$157.8 million) worth of bonds early next year, to finance the development of its property projects, a local newspaper reported yesterday.

Bisnis Indonesia said the bonds will have a maturity of 5-10 years and the funds will be used to develop an integrated residential and commercial complex in South Jakarta.

‘We are planning to issue 1 trillion rupiah worth of bonds in the first quarter of next year. Currently we are in the process of selecting the underwriter for the issue,’ Ferdinand Sadeli, Bakrieland’s finance director, was quoted as saying.

Bakrieland, which is controlled by the family of Indonesian chief social welfare minister Aburizal Bakrie, has a market capitalisation of US$1.24 billion.

 

Source: Reuters (Business Times 13 Nov 07)

NZ house sales down 23%

(WELLINGTON) New Zealand house sales fell 23 per cent in October from a year earlier, adding to signs the property market is slowing after interest rates rose to a record.

House sales dropped to 6,854 homes, from 8,857 a year earlier, according to a report from the Real Estate Institute of New Zealand Inc. Sales rose from a six-year low of 5,894 in September.

Reserve Bank governor Alan Bollard last month kept the benchmark interest rate at a record-high 8.25 per cent after four increases between March and July as he seeks to curb domestic demand. Last week, he said bank lending levels have dropped and there had been a ’sharp downturn’ in home-loan approvals.

‘Agents were having to work hard for vendors to get buyers across the line,’ Murray Cleland, national president of the Real Estate Institute, said in a statement. Still, ‘the beginning of spring helped the market regain some volume and there appears to be no great pressure on prices’.

 

Source: Bloomberg (Business Times 13 Nov 07)

JLL to take control of Japanese Reit eAsset

The Tokyo Stock Exchange Reit index has declined 11% this year

(TOKYO) Jones Lang LaSalle Inc (JLL), the world’s second-largest commercial real estate broker, will gain control of eAsset in the first takeover in Japan’s 4.9 trillion yen (S$63 billion) Reit market.

LaSalle Investment Management Inc will buy Asset Realty Managers Co, the asset manager of eAsset, for an undisclosed sum, giving it control of the Reit.

The Jones Lang unit will expand eAsset as part of its plans to invest 300-500 billion yen a year over the next few years, said Jack Chandler, chief executive officer of LaSalle Asia-Pacific.

Japanese Reits have declined this year at a time when land prices and rents are rallying.

LaSalle’s decision to take over eAsset may spur international property managers to follow suit, lured by higher returns than those available in North America and Europe after rising defaults on US sub- prime mortgages sapped investor confidence.

‘You’ve seen dramatic reduction in transaction activity in the UK and the US as capital values have declined,’ said Mr Chandler.

‘It is extraordinary how different the investment climate is here than in other regions.’

The Tokyo Stock Exchange (TSE) Reit Index is heading for its first decline since 2004 after rising defaults on US sub-prime mortgages prompted some foreign investors to sell stock.

The TSE Reit index has declined 11 per cent this year, after gaining by at least 8.2 per cent in each of the past three years.

‘J-Reits are having trouble finding properties because there are few available for sale,’ said Yoji Otani, a real estate analyst at Credit Suisse Group who expects further acquisitions of Japanese Reits’ asset managers.

‘Sponsorship and asset managers are very important for J-Reits because they are the main source of real estate.

Asset managers for some small Reits need to be replaced for Reit prices to gain.’

LaSalle Investment and other investors agreed on Nov 8 to pay 22.8 billion yen for a stake in eAsset, which will sell 57,000 new shares in the transaction. It had 64,000 shares outstanding as of October. eAsset will gain two shopping centres in Tokyo and Kobe, worth a combined 57.6 billion yen, from LaSalle as part of the transaction.

‘Tokyo is by far the largest office market in the world, a lot of that stock here is obsolete,’ Mr Chandler said on Nov 9 here.

‘Even with low growth, just obsolescence and replacement and some of the emerging areas in Tokyo will create a tremendous amount of opportunity.’

Japanese Reits are controlled through their asset managers. The trusts themselves lose corporate tax breaks if their three largest shareholders own more than 50 per cent of the Reit between them.

Asian Investment LaSalle, which plans to triple its investment in Asia to US$20 billion in three to four years, is seeking growth in a region that has seen the least effect from the sub-prime problem.

 

Source: Bloomberg (Business Times 13 Nov 07)

ART buys rental apartments in Tokyo

ASCOTT Residence Trust (ART) is acquiring more than 500 rental apartments in 18 blocks in Tokyo for 12.2 billion yen (S$158.6 million).

The properties, the subject of a conditional sales and purchase agreement, are being acquired from a private equity firm. There are a total of 509 units in eight wards in Tokyo – Shinjuku, Bunkyo, Meguro, Setagaya, Nakano, Suginami, Nerima and Taito Ku. They are all freehold and have an average age of 18 months. Total net lettable area is estimated at 13,318 square metres.

The newly purchased properties include purpose-built studio and one-bedroom apartment units which are popular with an increasing number of singles customers. Each of the 18 sites is within walking distance of the Tokyo subway, other public transportation, restaurants and supermarkets.

The apartments are currently managed under a mixture of four Japanese rental housing brands – Zesty, Joy City, Gala and Asyl Court.

All of them have broadband Internet, security access phones, air-conditioners, fully-fitted kitchens, builtin wardrobes and water heaters. ART said in a statement yesterday that the properties were acquired at an estimated annualised property yield of 4.1 per cent in the forecast year 2008.

The transaction will be funded by borrowings, which will bring ART’s gearing to 36.8 per cent, well within the 60 per cent gearing limit allowed under the Monetary Authority of Singapore’s property fund guidelines.

Upon legal completion, all 18 rental housing properties will be managed by Ascott International Management Japan (AIM Japan), a 60:40 joint venture between The Ascott Group and Mitsubishi Estate Co, a major real estate developer in Japan.

Chong Kee Hiong, ARTML’s chief executive officer, said: ‘The longer tenancy leases of the rental housing model and high average occupancy of 90 per cent across the 18 properties ART is acquiring provide good income stability and potential for organic growth in ART’s Japan and overall portfolio.

‘In addition, ART will be able to enlarge the customer base for its Tokyo portfolio as it now offers both serviced residence and rental housing options to cater to a wider range of budgets and customer needs.’

With the latest purchase, ART’s diversified portfolio now comprises 22 per cent rental housing units and 78 per cent serviced residence units. Its length-of-stay profile will improve from an average of seven months to eight.

ART’s existing properties in Japan are Somerset Azabu East and Somerset Roppongi, located in Tokyo’s Minato ward.

Upon completion of the acquisition, ART’s total portfolio value will stand at S$1.34 billion, comprising 3,463 units in 36 properties in 10 cities across seven countries.

 

Source: Business Times 13 Nov 07

UK home prices may decline in ‘08: Citigroup

(LONDON) UK house prices may fall next year as a ‘toxic mix’ of higher interest rates, overvaluation and record debt deters property investors, Citigroup Inc said.

‘We suspect that the number of buy-to-let home purchases will fall outright in 2008, hence contributing to a sharp drop in overall housing turnover’ and a price decline of between one per cent and 2 per cent, said Michael Saunders, chief western European economist at Citigroup, in an e-mailed note. ‘There is a sizeable risk that the outturn will be worse.’

The UK’s housing boom has been driven in recent years by so-called buy-to- let investors, who purchase properties to rent them to tenants, Citigroup says.

With rental yields declining and buy-to-let mortgage lenders finding it more expensive to raise funding in the money markets, house prices may lose that prop.

The number of new buy-to-let mortgages, which have more than doubled since 2002, may drop 45 per cent in 2008, Citigroup says.

Loans for first-time buyers have dropped 31 per cent in the past five years and may be little changed next year, the bank said.

Britons are shouldering a record £1.4 trillion (S$4.2 trillion) in debt and trying to cope with five interestrate increases in a year from the Bank of England.

The US sub-prime mortgage slump has also pushed mortgage rates higher, further hurting affordability.

Citigroup said house prices may also fall as the government’s decision to cut capital gains tax encourages owners to sell.

The new levy came into effect in April and will lower the tax on second-home sales to 18 per cent from as much as 40 per cent.

‘Buy-to-let investors may be tempted to sell soon in case the government, as it often does, reverses the tax change in a year or two,’ said Mr Saunders.

UK house prices, which have tripled in the past decade, are already showing signs of falling. Values dropped for a second month in October, the first back-to-back decline since May 2005, mortgage lender HBOS Plc said last week.

Higher prices have made it harder for investors to profit from letting out their properties.

Rental yields on houses and apartments are now about 5 per cent, says Citigroup, which compares with the 6.37 per cent average rate offered by lenders this month on a two-year mortgage for 95 per cent of the property price.

 

Source: Bloomberg (Business Times 13 Nov 07)

Rising oil prices may mean US recession

US growth expected to slow to less than 2% in the fourth quarter

(NEW YORK) Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened US economy into recession.

‘We are in a danger zone,’ says Nariman Behravesh, chief economist at Global Insight and a former Federal Reserve economist.

‘It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.’

Crude-oil prices are poised to cross the US$100-a-barrel mark while the US economy is still reeling from a surge in corporate borrowing costs.

Europe and Japan are vulnerable as well, after the US sub-prime mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected US growth to slow to less than 2 per cent in the fourth quarter – half the third quarter’s pace.

Andrew Cates, UBS economist in London, said his models suggest a 45 per cent chance of a US recession next year, up from 33 per cent last month, as oil prices prove a ‘growing concern’.

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade.

The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 per cent from 2.5 per cent, partly because of costlier crude.

The economy grew 2.8 per cent last year.

The world economy may still dodge recession as emerging markets continue to expand.

A report last week by Deutsche Bank said gains in energy efficiency mean the effect of more expensive oil will ‘remain muted’. Even so, gloom is spreading at a speed that suggests ‘we’re walking a really fine line’, says John Silvia, chief economist at Wachovia Corp.

‘Even a month ago, you probably wouldn’t have thought we’d be seeing a sustained credit problem and oil holding up above US$85 a barrel.’

Crude oil traded at a record US$98.62 last week on the New York Mercantile Exchange and ended the week at US $96.32, bringing its increase this year to 58 per cent.

Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.

The dilemma for central banks is how to balance oil’s drag on their economies against the risk of higher inflation.

Fed chairman Ben S Bernanke told Congress last week that oil prices threaten both ‘renewed upward pressure’ on inflation and ‘further restraint on growth’.

Such concerns prompted the European Central Bank to keep interest rates on hold last week, and president Jean-Claude Trichet said he still sees a danger that inflation will accelerate.

 

Source: Bloomberg (Business Times 13 Nov 07)

NY mayor’s housing plan faces risks: report

More progress made in preserving existing homes than creating new units

(NEW YORK) New York Mayor Michael Bloomberg’s 10-year plan to create 165,000 new and renovated units of below-market ‘affordable’ housing by 2013 may encounter difficulty reaching its goal, the city’s Independent Budget Office said.

In a study released on Friday, the agency created to monitor New York’s finances said the city had achieved about 40 per cent of its target, creating almost 64,000 units in the past four years.

‘More progress has been made towards the 10-year goal of preserving 73,000 units of existing affordable housing than the goal of creating 92,000 new affordable housing units,’ the report said. Another 101,000 units, mostly new, would need to be financed in the next six years, it said.

The housing plan – first announced in 2003 with a 68,000-unit goal by 2008, then expanded to 165,000 last year – has been described by Mr Bloomberg as the largest city affordable housing project in US history. Last week, the Real Estate Board of New York reported the average price of a city home jumped 20 per cent in the third quarter of 2007 compared with last year, to US$782,000.

Mr Bloomberg is scheduled to leave office on Dec 31, 2009.

Neill Coleman, spokesman for the city Department of Housing Preservation and Development, said the

administration will have committed enough funding to pay for completion of all 165,000 units – enough to house 500,000 people – by then. ‘We are pleased the report confirms that we’re basically on track with 40 per cent funded or built four years into the 10-year plan,’ he said.

‘Certainly there’s an emphasis on preservation rather than new construction in the first years because they’re the easiest and fastest to pay for and get done,’ Mr Coleman said. ‘The housing plan is flexible enough that we can succeed in financing 165,000 units within the 10-year time frame.’

In July, Mr Bloomberg said the city had financed 83,000 units of affordable housing, or half of the goal, since he took office on Jan 1, 2002, and created 64,000 since he announced his ‘New Housing Marketplace Plan’, Mr Coleman said. The administration reached that target a year ahead of schedule, he said.

The blueprint will not be easily fulfilled, the report said. ‘Over the plan’s remaining six years and with over 100,000 units still to go – two-thirds of which will have to be new construction in order to achieve the plan’s goals – the city faces some potential challenges to building on the progress to date,’ the report said.

Of the US$7.5 billion planned administration expenditure between 2004 and 2013, US$2.5 billion was spent through the 2007 fiscal year, it said.

Almost 64,000 units of housing have been created, including 24,000 new units, or 26 per cent of the administration’s goal, and 40,000 renovated units, or 55 per cent of the goal.

The city has struck agreements with building owners to charge below market rents as a condition for giving them low-cost mortgages and other financing. Buildings taken over because owners failed to pay property taxes accounted for about 9,300 units preserved. They have been transferred to private ownership, the report said.

The plan envisions about 68 per cent of the units be ‘low- income housing’, with rents for people earning 80 per cent or less of Area Median Income, or US$56,700 for a family of four.

Another 11 per cent are for ‘moderate-income households’, earning as much as US$85,080 for a family of four the report said. The remaining 21 per cent would be for ‘middle-income’ households earning 250 per cent of the area median, or US$177,000 for a family of four.

 

Source: Bloomberg (Business Times 13 Nov 07)

Mortgage market losses may hit US$400b

(NEW YORK) Losses from the falling value of sub-prime mortgage assets may reach US$300 billion to US$400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street’s largest banks and brokers will be forced to write down as much as US$130 billion because of the slump in subprime-related debt, according to a report yesterday by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup Inc, Merrill Lynch & Co and Morgan Stanley led more than US$40 billion of writedowns of assets as record US foreclosures plundered asset prices. About US$1.2 trillion of the US$10 trillion of outstanding US home loans are considered to be sub-prime, Mr Mayo said in the note.

‘We’re not out of the woods yet,’ said Mondher Bettaieb-Loriot, who helps manage the equivalent of about US$58 billion at Swisscanto Asset Management in Zurich. ‘There are more losses to be taken and there’s more negative news to come. At some point it will be a buying opportunity but we’re not there yet.’

Deutsche Bank expects 30 per cent to 40 per cent of sub-prime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mr Mayo wrote. The forecasts on total writedowns are based on ’seat-of-the-pants’ estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off US$60 billion to US$70 billion this year, Mr Mayo wrote. The estimate is based on known charges of US$43 billion and expected additional losses of US$25 billion.

The report didn’t include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros (S $4.56 billion) in the third quarter. Loss rates on about US$200 billion of securities based on derivatives linked to sub-prime debt will run to as high as 80 per cent, Mr Mayo wrote.

Estimates of losses have soared this year as defaults and foreclosures increased.

Meanwhile, Morgan Stanley analysts said that HSBC Holdings may have to set aside more money for bad loans in the US. They cut the stock’s rating to ‘equal-weight’, from ‘overweight’. Morgan Stanley expects ‘a significant jump in credit costs across consumer loan classes,’ Hong Kong-based analyst Anil Agarwal wrote in a note yesterday. With defaults increasing, HSBC’s US$2.1 billion of provisions against its US $45 billion mortgage services business ‘looks light’, he said.

 

Source: Bloomberg (Business Times 13 Nov 07)

Foreign cash could provide relief for US housing market

Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas

(NEW YORK) The weakening dollar has caused many problems for consumers, but it may also be providing the fuel for one unintended – and very welcome – benefit: a rally in the struggling US housing market driven by foreign investors.

For an individual or developer trying to sell a home, interested buyers are just as likely to already have a place in London or Paris as they are to be first-timers new to the market.

‘European investment is likely to pick up,’ said Mark Vitner, chief economist for Charlotte, North Carolina-based Wachovia Corp. ‘Now is the time to come over and take advantage.’

The theory goes that foreign investors step in and replace first-time home buyers who have been squeezed out of the housing market during the recent downturn. These new investors in turn allow current homeowners to sell and trade up to larger homes.

That will help restart owners moving up the housing ladder, a process that had been key to economic growth in recent years.

Some mortgage brokers are already seeing a boost in inquiries about buying property from overseas. Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com, said the number of inquiries he has received from outside the US is probably five to 10 times larger than it was a year ago. A boost in the number of homebuyers would provide needed relief for the beleaguered housing market.

Home sale prices fell every month in 2007 through August, according to the S&P/Case-Shiller index. Existing home sales have declined for eight straight months through September, according to the National Association of Realtors.

As the housing market has plummeted, the dollar has also sunk to record lows compared to other currencies, such as the euro, meaning more spendable cash in the US.

‘The dollar is on sale,’ said Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania.

Today, a foreign buyer would need only 34,100 euros to make a US$50,000 down payment on a house. At the beginning of the year, the same buyer would have needed 37,920 euros to make the same down payment.

The influx of foreign investors can help set a floor for the real estate market, Mr Green said.

Because lending guidelines have been so restricted in recent months due to rising delinquencies and defaults, it is more difficult for US customers to get a home loan. First-time homebuyers are especially being squeezed right now, Mr Green said, and that is where the foreigners can provide support.

For investors from countries like Ireland, the exchange rate is providing a boost in spending power, said Phillip Hegarty, the sales director for Castleroc Estates, a Dublin, Ireland-based firm that works with Irish investors to buy residential and commercial real estate in the United States. ‘It’s an enticing investment,’ Mr Hegarty said.

Mr Hegarty said there is plenty of demand for investment in locations like Chicago and New York, and often that demand exceeds supply.

But New York and Chicago are not the only locations likely to provide popular options for foreign investors.

Places like Florida and California are likely to see a surge in foreign investment.

‘In a market with great turmoil, (the weak dollar) is one factor supporting some key markets,’ Prof Wachter said of the weakening dollar.

Prof Wachter said markets like Miami and San Francisco, which are under pressure from the US slowdown, are increasingly being supported by foreign investors.

 

Source: AP (Business Times 13 Nov 07)

Property market: No further plans to cool it

Govt assurance dampens speculation on capital gains tax

 

THE Government is not planning any fresh measures to cool the property market for now, National Development Minister Mah Bow Tan said yesterday.

His statement effectively hosed down speculation that a capital gains tax might be reintroduced to stop people flipping units for quick gains.

The news brought some relief to players in the property market, which has been hit by uncertainty after the scrapping of the deferred payment scheme two weeks ago.

The 10-year-old scheme, allowing people to buy property with a downpayment but no further payments until the completion of the project, was abolished to curb speculation.

Now, buyers have to make progressive payments while their homes are being built.

The change spooked developers, and was seen as the reason why there were only two bids when the tender for a residential site in Enggor Street in Tanjong Pagar closed on Nov 1.

That followed a sizzling 22.9 per cent growth in private home prices in the first nine months this year.

Sub-sales, when uncompleted properties change hands, made up almost 22 per cent of total sales in central Singapore from July to September.

Addressing questions on the scrapping of the scheme in Parliament yesterday, Mr Mah said it was too early to ascertain its overall impact.

But he did not think genuine home buyers would be unduly affected because they could still get home loans from banks. Over time, the change will encourage the property market to grow in a ‘more healthy and sustained manner’, he said.

Responding to a question from MP Ho Geok Choo (West Coast GRC), he said the Government will closely monitor the market to ensure that prices are supported by economic fundamentals, and that there are sufficient private homes.

He said there is no need for any new measure, and that the Government is not considering any for the property market now. ‘Our bias is really not to over-regulate or to interfere in the market if we don’t have to,’ he said.

If a capital gains tax – which was introduced in 1996 but lifted in 2001 – was imposed again, it would dampen foreign investor sentiment, said the director of research and consultancy at Colliers International, Ms Tay Huey Ying. ‘This is good news for the market. It brings stability.’

Mr Mah stressed that there was no reason to panic over a perceived shortage of homes, as there was a stock of 65,000 private homes in the pipeline at the end of September this year.

About two-thirds are likely to be built and made available over the next three years.Still, househunters such as bank executive Luanne Lim were disappointed at the Government’s declaration.

The 33-year-old bank executive, who feels private homes have become ‘unaffordable’, said: ‘I think people can still afford to speculate without the deferred payment scheme.’

On the public housing front, Mr Mah said the Housing Board was ramping up its building programme to meet demand for new homes.

MP Cynthia Phua (Aljunied GRC) asked about the supply in the next three years, saying newly-weds found it harder to get new HDB flats.

But Mr Mah said about 4,000 flats will be launched under HDB’s build-to-order programme this half year. He did not think the HDB should meet all demand for new flats. If it did, it would be laying the groundwork for a future oversupply problem.

These same newly-weds would then find it hard to sell their homes if they wanted to upgrade. It was better to channel some of the demand for new flats to the resale market, he said. Source: The Straits Times 13 Nov 07

Annual values of HDB flats to rise

GET ready to pay more property tax next year. Along with the rise in home prices, the taxman is revising the value of most properties upwards.

However, rebates given to offset the impact of the goods and services tax (GST) hike this year will soften the move’s impact.

The annual values of all types of Housing Board (HDB) flats will be raised from Jan 1, said the Inland Revenue Authority of Singapore (Iras) in a statement yesterday. This means property taxes, which amount to 4 per cent of the annual values of owner-occupied homes, will rise.

Asked about private homes, Iras said: ‘The annual values of most private residential properties have already been reassessed to reflect the current market rental levels during the year. The average increase for these private residential properties is about 20 per cent.’

Annual values of private residential properties in the central core area have generally increased between 20 per cent and 50 per cent this year.

The annual values will increase by an average of 18 per cent for HDB four-room and executive flats and 20 per cent for one-, two- and five-room flats. Three-room flats will face the greatest increase of 25 per cent.

Most HDB flat owners, however, will not pay higher taxes even after the revision, because of property tax rebates granted earlier this year to offset the impact of the GST hike.

Currently, owners of all one- and two-room flats, as well as 13 per cent of owners of three-room flats, do not pay property taxes because of earlier GST rebates.

The 2007 GST offset package gives all owners who are living in their property an extra $100 rebate annually for next year and 2009.

This means 90 per cent of all owners of HDB flats will not pay more property tax next year. In fact, 60 per cent of three-room flat owners will pay zero property tax, while 40 per cent will pay less tax than now.

About 15 per cent of owners of four- and five-room and executive flats face a hike in tax payable, but not more than $40.

The last time the annual values of HDB flats were raised was in 2004, and that doubled the number of home owners paying property tax. The increase brought in an extra $40 million a year for the Government.

 

Source: The Straits Times 13 Nov 07

Inflation could hit 5% early next year, then taper off

AS CONSUMER prices continue to rise, inflation in Singapore will likely surge to 4 or 5 per cent in the first quarter of next year.

But it should taper off by the second half of the year to ‘more normal conditions’, said Trade and Industry Minister Lim Hng Kiang yesterday.

The average rate for next year should be around 3 per cent.

Fuelled mainly by rising global oil and food prices, inflation recorded a 13-year high of 2.9 per cent in August.

It is expected to dip to 2.7 per cent in the last quarter, Mr Lim told Parliament.

But it was his 2008 forecast that made analysts and consumers sit up yesterday.

Citigroup economist Chua Hak Bin said that the 5 per cent rate predicted would be a ‘historic high’ in the 25 years since 1983. The previous high was in July 1991, when it hit 4 per cent.

Most economies, including Singapore’s, size up inflation by tracking the Consumer Price Index, or CPI. The CPI measures the cost of a basket of goods and services consumed by most households.

Yesterday, Mr Lim cautioned against ‘interpreting a rise in the headline CPI as necessarily reflecting an increase in the cost of living’.

It depends on the individual household’s spending. ‘Switching to cheaper products can reduce the cost of living despite a rise in the CPI,’ he added.

A CPI increase may also not reflect actual hikes in consumer prices. For instance, flat prices soared, but flat owners do not pay rent.

Higher inflation, he said, should also be viewed against rapid economic growth, with the gross domestic product rising more than 6 per cent on average since 2003 and wages also on the up.

‘Against this backdrop, we should not be surprised to see inflation rise above the unusually low levels seen in recent years.’

However, MPs such as Madam Halimah Yacob worry that residents, especially the elderly on fixed incomes, are feeling the pinch. ‘They go to the market with a similar sum of money. But they can buy less,’ she said.

Mr Lim promised: ‘The Government will continue to keep a tight watch to ensure that inflation remains low.’

He sketched out how the landscape will look like next year.

Explaining why there will be a spike in inflation before it plateaus, he cited two reasons: First, it is as compared to the first quarter of this year, when inflation was at 0.5 per cent and oil prices were low.

Second, the ‘one-off’ effect of the goods and services tax hike, which will be felt until next June.

Thereafter, the trend will ‘revert to more normal conditions in the second half of next year’.

The numbers come against a global backdrop of rising oil and food prices, such as more expensive chicken due to costlier feed. Adverse weather in food-supplying countries has also reduced supply, even as demand has risen.

Diversifying sources is one way to maintain more stable food prices, Mr Lim said, but there was a limit to this given the worldwide increase in food prices being seen now.

But inflation has not affected Singapore’s economic competitiveness, he said.

‘We are tracking our competitiveness position very closely and so far we are in quite a good position,’ he said, adding that inflation here was lower than in other countries.

He noted that imported inflation has been reduced because of the policy of gradually appreciating the Singapore dollar.

Other watchers suggest more aggressive measures. Citigroup’s Dr Chua, for instance, believes that the economy is in danger of overheating.

He called on the Government to re-prioritise projects, given that unemployment is already at a low.

‘The economy cannot be growing at that pace – it is reaching a bottleneck, there’s a supply constraint, with wage, price, rent increases. It is costly for everyone.’

 

Source: The Straits Times 13 Nov 07

Lippo may launch new Reits worth $5.8b

INDONESIAN conglomerate Lippo Group plans to list two or three real estate investment trusts (Reits) worth about US$4 billion (S$5.8 billion) in Singapore within the next two to three years, its president Stephen Riady said yesterday.

He spoke after the launch of Lippo’s Lippo-Mapletree Indonesia Retail Trust (LMIR Trust), the second the group has sponsored after First Reit, which has a portfolio of hospital assets.

Mr Riady was upbeat, saying: ‘I believe Asia is in a long-term bull market, and this will be for at least the next 10 years’.

He said that the new Reits would most likely centre on hotels, offices and shopping malls. It was unlikely Lippo would list a residential Reit as earnings from such assets would be more volatile.

Mr Riady said Lippo had not been affected by the scrapping of the property deferred payment scheme. None of its three residential projects to date – including Newton One – had offered the scheme, yet all had sold well.

Next month, Lippo’s Sentosa Cove development, Marina Collection, will be launched. Buyers will be given free membership in the One Degree 15 club.

The newly launched LMIR Trust, priced at the lower end of the indicative range at 80 cents, will raise around $516 million.

Recent market turbulence has seen Japan’s Asia Pacific Land Trust’s issue being postponed and Saizen Reit’s price falling 14 per cent on its debut last Friday.

Still, LMIR Trust is upbeat, saying it has secured global and local institutional investors. The projected yield is about 7.3 per cent for next year – higher than the average of 5.1 per cent for other Reits in Singapore – and the distribution per unit is 5.84 cents.

The trust’s seven malls are in Greater Jakarta and in nearby Bandung. The tenants include Indonesian department store Matahari and Giant supermarket.

Ms Viven Sitiabudi, the chief executive of the trust manager, said investors are keen on Indonesia’s retail sector ‘given the country’s robust economic fundamentals, underpinned by a growing and affluent urban middle-class population’.

LMIR Trust’s offer will close on Thursday and trading will start next Monday.

 

Source: The Straits Times 13 Nov 07

S’pore won’t fight inflation with price controls: PM Lee

Rising cost of living for lower-income, elderly to be met in other ways

(SINGAPORE) The government is unlikely to impose controls on food or utility prices in response to rising inflation, but will continue to use other ways to help Singaporeans cope with the cost of living, said Prime Minister Lee Hsien Loong yesterday.

Although many other countries control oil prices, electricity prices and even bus fares to help poor people, ‘our approach in Singapore is different’, he said.

‘We help – we do a lot – but we don’t help by keeping the prices individually controlled. We help by making sure that the low-income are able to pay for their necessities, able to earn a living, able to have a house over their heads.

‘We help you through Workfare, so if you work, you get more. And then we have packages like the Progress Package.

‘This is the way we help Singaporeans and low-income Singaporeans to cope with the cost of living.’

He made the remarks at the People’s Action Party (PAP) annual convention at the National University of Singapore’s University Cultural Centre yesterday.

More than one party member had asked how the PAP-controlled government could help lower income Singaporeans cope with rising price inflation.

The difficulties faced by lower-income Singaporeans and the elderly were also raised by several Members of Parliament who spoke during the three-hour convention.

Mr Lee said: ‘We’ve had a period now where the cost of living actually has been very stable. Inflation has been very low, bus fares have not gone up very much, food prices have not gone up very much, housing prices have been stable.

‘Going forward, we’re not sure that we can keep the cost of living as stable and as low as it has been. Oil prices are high and may rise further. Food prices have gone up.

‘And bus fares will have to adjust when energy prices go up. Electricity prices have to go up. So I think this is something which people are going to be worried about.’

Although some expect the government to step in to keep prices low through controls, he said that it would be unwise to do so.

‘If you look at bus fares in many countries, these are controlled so the bus companies lose money, the government just coughs up. Electricity prices similarly in many countries are controlled. And that is one way those governments try to help the poor people.’

‘We do care,’ he said. ‘The principle is, you help yourself, you work, the government will help you. But you must make the effort. And that is how Singapore will succeed, that’s how you will succeed. And I think that’s an approach that’s worked for the economy, for the country, and we must keep that.’

 

Source: Business Times 12 Nov 07

S’pore still top HQ choice but China closing in: report

Republic scores on economic policies, infrastructure and political stability

MULTINATIONAL companies (MNCs) in the Asia-Pacific still see Singapore as the best place to base their regional headquarters but China is catching up fast, according to a survey.

The findings by Spire Research & Consulting show that manufacturing companies based in Asia-Pacific still consider Singapore the best location from which to manage their regional operations – for now.

But more companies are beginning to favour mainland China and Hong Kong, especially those with dual regional HQs, the report said.

‘Singapore will need to evolve new strategies to retain regional HQs in the face of fierce competition,’ said Spire’s group managing director, Leon Perera, in a statement.

Spire said that it surveyed more than 100 global companies located in the Asia-Pacific region. Of the 105 respondents, some 60 per cent said that they operate in at least three Asian countries and nearly a third operate in seven or more.

Fifty-seven ranked Singapore as among their top location choices for a regional HQ, mainly because of its economic policies, infrastructure and political stability. The information technology and lifestyle and leisure sectors were the main industries that ranked Singapore as the best location.

Mainland China came a close second with 56 votes. This was unsurprising, as ‘China is a mecca for international manufacturing companies, who account for roughly half of China’s manufactured exports’, said Spire.

Many MNCs increasingly want to locate their regional HQs in China because of the overwhelming importance of the Chinese domestic market, it added. While some companies have China HQs that serve the greater China market only, others such as General Motors and Fuji-Xerox have China HQs that manage their entire Asian  operations, it said.

In the future, ‘many international companies may be tempted to locate a South Asia headquarters in Singapore, with Malaysia providing keen competition, and a North Asia headquarters in Hong Kong, Shanghai or Beijing,’ it said.

The companies surveyed rated economic policies, domestic market size and infrastructure as their top three criteria in deciding how attractive a place is as a location for a regional HQ.

 

Source: Business Times 12 Nov 07

Lippo, Mapletree price Reit listing at 80cents a unit

INDONESIA’S Lippo Group and Singapore’s Mapletree Investments have priced a US$358 million (S$516.2million) initial public offering (IPO) for their joint property trust at 80 cents per unit, at the lower end of an indicative range.

The IPO for the Lippo-Mapletree Indonesia Retail Trust will sell 645.469 million units, according to a prospectus submitted late last Friday.

An earlier prospectus, lodged last month, had given an indicative price range of 78 cents to 91 cents per unit.

The Lippo-Mapletree trust is based on around $1 billion worth of properties that comprise seven Indonesian shopping malls and seven retail spaces found in other malls, the latest prospectus said.

The IPO for the Indonesian trust comes after Saizen Real Estate Investment Trust (Reit), which is based on residential buildings in Japan, tumbled 14 per cent at its Singapore market debut on Friday.

Saizen’s rout prompted Japan’s Asia Pacific Land to say last Friday that it would delay a planned US$350 million IPO in Singapore.

UBS, OCBC Bank and BNP Paribas are the lead managers, the issue managers and the underwriters of the deal.

Mapletree, which is owned by Temasek Holdings, has a 40 per cent stake in the joint-venture that will manage the Indonesian trust.

The Lippo conglomerate, controlled by Indonesia’s Riady family, owns the remaining 60 per cent.

Reits – seen by investors as a cross between bonds and equities because of their regular dividends and capital appreciation gains – have taken off in Singapore since the first was listed in 2002.

Singapore now has the third-largest Reit market in the Asia-Pacific after Australia and Japan.

 

Source: REUTERS (The Straits Times 12 Nov 07)

WARRANT WATCH – Turbulent market puts spotlight on STI contracts

THE choppy market conditions and the recent correction in the Singapore bourse have drawn investors’ attention to warrants of the Straits Times Index (STI).

The STI has been plagued by soaring crude oil prices, a weaker US dollar and lingering fears about the American sub-prime problem.

These factors combined to lower the STI by 73.34 points as it ended at 3,599.67 last Friday.

‘Although the domestic economy is robust, investors are wary that the external factors may eventually affect the economy if they take a turn for the worse,’ said Mr Ooi Lid Seng, Societe Generale’s (SG’s) vice-president of structured products for Asia, excluding Japan.

He singled out two contracts offered by the French bank.

Those who are bullish about the index can consider an SG call warrant expiring on Jan 30 that pays out if the index tops 3,800 points.

That contract was one of the more actively traded warrants last Friday. It dipped nine cents to 41 cents, with 10.8 million units done.

In contrast, those with a negative view can consider an SG put warrant, also expiring on Jan 30, that pays investors if the index dips below 3,400.

That warrant surged 7.5 cents to end at 41.5 cents last Friday, with 1.2 million units exchanging hands.

The most active STI contract last Friday was an SG put warrant with a strike level of 3,700, which lapses on Dec 27.

That warrant saw a volume of 18.3 million units as it gained five cents to close at 34.5 cents.

Mr Ooi said the technical outlook of the STI is slightly negative.

He added: ‘It is now trading at around the psychological 3,600 mark, which is a major support level.

‘If it can stay above this level, the index may attempt to break above its 50-day moving average at 3,665.

However, should the STI weaken further, the next major support would be at 3,500.’

A call warrant lets an investor buy into a stock or index at a preset price over a period of three to nine months.

A put warrant allows an investor to sell the stock or index at a preset price over a fixed period of time.

 

Source: The Straits Times 12 Nov 07

TAKING STOCK – S’pore bourse may face fresh selldown

Regional banks set to be hit hardest by fear of US fallout spreading to Asia

WALL Street’s late selldown last Friday bodes ill for Asian markets as they open for trading today.

What may un-nerve traders is the contagion that seems to be spreading across Wall Street, as more United States banks unveiled write-downs on their pools of debts backed by souring US mortgages.

Last Friday, it was Nasdaq’s turn to get hammered, as technology stocks fell by 2.5 per cent on fears that banks may trim their capital spending to preserve capital.

And while the Dow Jones Industrial Average’s 223- point or 1.7 per cent fall on Friday was nowhere as severe as Wednesday’s 361-point plunge, the precipitous nature of the sell-off during the final hour of trading is likely to weigh on investors’ sentiment today.

Colliding with the bad news coming out of Wall Street was an unwelcome move by China to tighten money supply by raising the reserve requirement for banks for the ninth time this year.

The biggest fear is again an unholy combination of fund managers selling down their holdings of Asian shares to meet redemption calls of investors back home and hedge funds taking advantage of the chaos to ’short-sell’ in the hope of buying back the shares more cheaply later on.

‘The fear factor is what traders will have to contend with. The selldown on Wall Street last Friday may extend to Asian markets,’ said a dealer.

And among the stocks likely to be hit the hardest are regional banks, even though their exposure to souring US mortgages may be small when compared with that of the European and US banks.

‘Call it collateral fallout. Billions of dollars of suspect mortgages have been diced up into bonds and sold all over the world. They can land anywhere, but financial institutions are the chief suspects,’ said an analyst.

This will weigh heavily on bank-dominated indexes such as the Straits Times Index (STI) and Hong Kong’s Hang Seng Index as banks come under selling pressure.

Last week, the STI fell 115.65 points, or 3.1 per cent, to 3,599.67, while the Hang Seng was down 1,685 points, or 5.5 per cent, at 28,783.41.

There will also be fresh concerns over a possible unravelling of the yen carry trade, as the greenback weakens further against the Japanese currency.

Many hedge fund managers had borrowed heavily in yen because of Japan’s very low interest rates to buy higher-yielding assets.

‘Given the volatile trading conditions, a 100-point drop in the STI and a 1,000-point plunge in the Hang Seng is quite possible. This will be a nail-biting week,’ said CIMB-GK research head Song Seng Wun.

 

Source: The Straits Times 12 Nov 07

RESERVE RATIO AT 20-YEAR HIGH – Regional fallout expected as China curbs lending again

BEIJING – ASIA’S financial markets are bracing themselves for the fallout after China ordered banks to put aside more reserves for the ninth time this year to cool a red-hot economy, stock and property markets.

The 0.5 percentage point rise in banks’ reserve ratio will take effect on Nov 26 and bring the ratio for big banks to a record 13.5 per cent, the central bank said last Saturday. The ratio is now the highest since at least 1987.

The hike in the reserve requirement means that commercial banks must retain more of their deposits, rather than lending the funds out in the broader economy.

Along with reserve increases, the central bank has also been notching up deposit and lending rates, with five hikes this year, to discourage lending.

Despite the moves, money is pouring into China, brought in by hugely successful export industries and by Chinese and foreigners hoping to cash in on the boisterous economy, the rising value of the currency and a stock market whose main index has increased six times in value in two years.

For most of the year, China’s banks have largely shrugged off the ordered increases in required reserves. But recent volatility suggests that the latest hike could have a substantial impact on the markets.

China’s main stock index, which more than doubled to last month’s all-time high, plunged 8 per cent last week, its biggest weekly drop this decade.

Short-term interest rates in the money market also jumped to multi-year highs as cash-strapped smaller banks scrambled to raise funds.

Last Saturday’s move came two days after the central bank issued its strongest warning so far this year about rising prices.

Some government officials and economists worry that, if inflation is left unchecked, it could spill over into the wider economy, though it has been largely confined to food prices so far, and hastily-made loans could sour, leaving banks saddled with higher debts.

 

Source: REUTERS, BLOOMBERG NEWS (The Straits Times 12 Nov 07)

HIGH OIL PRICES – A bubble that’s hard to prick

OIL prices are testing US$100 (S$144) a barrel, a key psychological threshold. Once over that hump, how much higher will the price go? Of course, given oil’s limited supply and the world’s expanding appetite, lowpriced oil will never come again.

That, however, is different from another consideration: Whether current high prices are truly reflective of supply and demand, or are prices being pushed up to a significant extent by speculation? And if the latter, is there an ‘oil bubble’?

The answer to that is wrapped up in arcane terms such as ‘backwardation’ and ‘contango’, which affect the prices of commodities, as well as in developments in the American prairie town of Cushing, Oklahoma. But more on this later.

In fact, an oil bubble may not necessarily be bad news. For if current prices reflect a bubble, there is the hope that the market will eventually readjust to equilibrium and there is the possibility of relief; it means the time for US$100 oil has not yet truly arrived. The oil bubble would be one whose pricking would benefit far more people than it would hurt.

The bad news is that if there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

That’s because, unlike equities, oil is a much more complex trading class. Buyers and sellers are users and producers, but also large trading houses, hedge funds and institutional investors like pension funds. Although exchange- traded funds now allow retail investors to diversify into oil, the big moves depend far more on the large players than on the collective calculations of small investors. If this is a bubble, it’s also one with more discipline.

Indeed, over the past three years, any number of analysts and economists have said that oil should be in the US$50 range, the US$60-plus level and so on. Yet it’s remained stubbornly stuck on a steeper trajectory. In fact, here we are today, knocking on US$100.

Those who say oil is priced correctly point to China’s increasing hunger for energy, India’s demand for power and the US dollar’s steep decline. Others might cite the correlation between oil and gold, which in recent periods has seen oil priced at 7.5-8 barrels to an ounce of gold. With oil just under US$100 and gold comfortably above US$800, you might well reckon that oil has legs yet.

But is Chinese and Indian demand, coupled with the weakness of the US dollar, enough to explain a more than threefold rise in oil’s price since 2001? Is this justified under the calculus of demand and value? The week before the Sept 11, 2001, attacks in New York and Washington, oil was trading at US$28.

Terrorism, wars, civil unrest and weather uncertainties – all have been kneaded into prices as well. Yet have these resulted in enough of a consistent constriction in supply to justify prices of nearly US$100?

India’s petroleum secretary, Mr M.S. Srinivasan, isn’t likely to think so. He was reported by the International Herald Tribune last Friday as saying there are ‘no supply constraints right now, and demand has not escalated out of control’. Mr Srinivasan has a suggestion for cooling the market: stop trading crude oil on commodity exchanges, which he believes contributes greatly to high prices. Do this much, and we’d see a ‘drastic reduction’ in the price of oil, Mr Srinivasan said.

His suggestion is unlikely to gain traction. For however much exchange trading contributes to speculative positions, it also provides price transparency. Without this, we’d have backroom brokering instead, which would more likely exacerbate the situation than help.

Yet Mr Srinivasan’s frustration is understandable. And this can be seen in how prices have been bubbling up lately.

Yes, demand is strong. No arguing. But the recent surge is also connected to how the premium in prices has shifted from later to earlier delivery.

Because of a complicated series of events, oil prices in the past several months are in a situation called backwardation. This means prices are higher for oil about to be delivered than for oil for later delivery. The opposite is contango, when prices are higher for future delivery than for supply sooner – reflecting the expense of storage and other carrying costs.

Until the middle of this year, conditions in the market were such that it was more profitable to buy lots of oil and hold it in storage tanks until later. But suddenly, it became more profitable to sell than to hold. The subprime mortgage crisis in the US, for one thing, has also made financing for holding oil more expensive.

So in backwardation, those who hold oil have an incentive to drain their tanks – kept in places like Cushing.

This Oklahoma prairie town is one of the biggest storage sites for oil, with capacity possibly as high as 35 million barrels. Since 1983, Cushing has been the New York Mercantile Exchange’s official delivery point for futures contracts in light, sweet crude, the global benchmark. So the market pays close attention to what happens in Cushing.

Maybe too much.

What the market has noticed is that the tanks in Cushing are down to perhaps 15 million barrels. Attention drawn to this decline in inventory is helping push up prices.

Yet, as Opec’s head of petroleum market analysis, Mr Mohammad Alipour-Jeddi, has said: ‘There is enough crude in the markets.’

Thus, it isn’t a huge mismatch between supply and demand that’s yanking up prices. Instead, backwardation is causing a draw-down of inventory, starting what’s called a ‘backwardation vortex’. By focusing on places like Cushing, the market has worked itself into a frenzy – whatever the real ability at the moment of producers to supply users.

Prices can be high in contango and oil investments profitable; but in backwardation there is an incentive to sell existing stocks, resulting in lowered inventories that spark market anxieties. As a result, some investors are reaping big profits and setting up conditions for even more gains.

Does speculation in oil amount to a bubble, then? Look again at the correlation between oil and gold.

Over a longer period of a half century, oil has been priced at 15 barrels to an ounce of gold. At gold’s current price, that means oil should be in the mid-US$50 level. Sure, there’s some wiggle room on the up side. But even then, there’s going to be enough of a gap between the implied and actual price to suspect that oil’s frothier than natural.

The question, in turn, is how do you prick this bubble?

LOGIC OF ITS OWN

If there is an oil bubble, it is unlike other bubbles – in Internet stocks, in properties and so on. An oil bubble would be more difficult to deflate.

 

Source: The Straits Times 12 Nov 07