How much should you invest in a stock?

By TEH HOOI LING

SENIOR CORRESPONDENT

THE science of numbers has developed quite a bit since June 1955, when a new quiz show called The $64,000 Question made its debut on American television. The show was a hit. It captured as much as 85 per cent of the viewing audience and spawned dozens of copycat shows.

There was even betting on which contestants would win. But the problem was the show was produced in New York and aired live on the East Coast of the US. The telecast, however, was delayed by three hours on the West Coast. A gambler took advantage of the time difference by finding out by phone who the winners were, and then placing his bets before the West Coast airing.

John Kelly, a physicist at Bell Labs, heard about the scam on the news. After some pondering, he was convinced that a gambler with ‘inside information’ could use some of the equations developed by his colleague – Claude Shannon – to achieve the highest return on his capital. Mr Shannon, who created information theory after having realised that computers could express numbers, words, pictures, audio and video as strings of digital 0s and 1s, had developed formulas to deal with the signal noise of long-distance telephone transmission. Mr Kelly saw that the equations could be applied to the problem of a gambler who has inside information, say, about a horse race, and who is trying to determine his optimum bet size.

A gambler gets a tip on a race’s outcome. He could bet everything he’s got on the horse that’s supposed to win. But if the gambler adopts this approach, he will lose everything should the information turn out to be wrong. Alternatively, he could play it safe and bet a minimal amount on each tip. This squanders the considerable advantage the inside tips supply.

In Kelly’s analysis, the smart gambler should be interested in ‘compound return’ on capital. That is, to optimise the long-term growth rate of one’s capital, the gambler – the theory also applies to investors – should vary the wager as a proportion to his overall capital depending on the probability of bet being a winning one, and on the payout of the winning bet.

The Kelly formula or Kelly criterion has become a popular money-management formula for investors, hedge fund managers and economists.

Uncertain events

As the saying goes, the only certainties in life are death and taxes. For everything else, we form some kind of expectations of the outcome based on our experience, or what have been documented by others.

In finance, the expected value is used to account for the uncertain outcome of, say, a project or an investment.

Project A, has 30 per cent chance of making a profit of 20 per cent, 40 per cent of a profit of 12 per cent and 30 per cent of making a loss of 15 per cent. So the expected return is 6.3 per cent (30%x20% + 40% x12% + 30% x -15%).

If there are numerous investment opportunities with that kind of probabilistic outcome, then over a long period of time, the investor will earn an average of 6.3 per cent return per investment, as indicated by the expected return.

However, some investments or gambles are such that there is a one in a million chance of getting a $2.5 million payoff for a $1 bet. But for the other 999,999 times, you lose 100 per cent of your wager.

The expected return is a good 150 per cent. But if one were to bet a significant sum of one’s wealth on this kind of gamble, it is almost a certainty that one would be bankrupted before the big payoff comes along.

According to Kelly’s formula, two numbers should decide how much capital one should allocate to bet on an uncertain event: the probability of the bet being a winning one, and the payout. The formula is this: (Probability of bet being a winning one x (expected rate of return +2) -1) / (expected rate of return + 1).

So if you think that an investment has a 51 per cent chance of returning 20 per cent, then according to the formula, you should put 10 per cent of your capital in that investment. But if the probability of the investment yielding 20 per cent drops to 45 per cent or less, then you should not make any bet at all.

Meanwhile, a stock with half a chance of returning 30 per cent, the wager size should be 11.5 per cent of your portfolio.

This method forces an investor to seriously and thoroughly analyse the potential of a stock. And when he or she comes across a stock whose potential they think is severely unappreciated by the market, then they should have the conviction to commit a sizeable bet on it.

The prerequisite for this kind of approach is that the investor must have deep understanding of a stock and the industry it operates in, and have knowledge of how companies are valued by the market.

In a way, the world’s most successful investor, Warren Buffett, also subscribes to this strategy. He advocates focus investing, and to bet big on high probability events.

There have been studies done that, using Kelly’s formula one can minimise the expected time to reach a fixed fortune.

From the table, it appears that the probability of a favourable outcome carries a much bigger weight in determining how much one should put into an investment.

Disadvantages

The Kelly formula was developed to solve similar problems in gambling where the outcome is either win or lose. And it assumes a 100 per cent loss when the outcome is unfavourable. In the stock market, one rarely lose 100 per cent of one’s investment in a single trade.

Also, a financial investor cannot completely rely on the number suggested by the Kelly formula as it does not take into consideration the possibility of a few available investment options.

In gambling, using Kelly’s formula can produce a rather volatile result. There is a one-third chance of halving the bankroll before it is doubled. According to some literature, a popular alternative is to bet only half the amount suggested, which gives three-quarters of the investment return with much less volatility.

Where money accumulates at 9.06 per cent compound interest with full bets, it still accumulates at 7.5 per cent for half-bets.

And as mentioned, this kind of strategy is applicable to those who know their ways around the stock market. But even for experts, putting 30 per cent of one’s portfolio in a stock with a 60 per cent probability of a 35 per cent return seems rather big a bet. The numbers should at best be used as a rough guide.

And for those who don’t have the time or the inclination to carry out in-depth studies of stocks, a diversified approach is perhaps safer.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg

Source: Business Times 24 Nov 07

Inflation rises with policy posers in tow

Analysts expect swift counter-measures as monthly numbers climb to a 16-year high

(SINGAPORE) The need for further policy action to stem price pressures – sooner rather than later – has grown with an unexpected surge in October’s inflation rate to 3.6 per cent, economists say.

The market consensus estimate was 2.8 per cent. ‘We thought we had a high inflation forecast for October at 3 per cent,’ said HSBC Bank economist Robert Prior-Wandesforde.

In fact, the latest rise in the consumer price index (CPI) has leapt well beyond these estimates. Climbing from a 2.7 per cent third-quarter average (itself a sharp jump from the first six months’ 0.8 per cent pace), it was driven by rising food and oil prices, and is the highest monthly inflation rate since August 1991.

‘I don’t think it’s a one-off (spike) to be ignored,’ said Chetan Ahya, chief economist for South-east Asia and India at Morgan Stanley Asia. ‘The risks of more policy reaction have increased with this latest data. One more month with figures like these may mean that the government needs to move quickly.’ The urgency will be apparent if crude oil prices touch US$120 a barrel, he added.

Most economists believe there will be further monetary tightening via a steeper appreciation of the Singapore dollar at the Monetary Authority of Singapore (MAS)’s next half-yearly policy review in April 2008.

The question, Mr Ahya said, is whether MAS needs to act sooner than April, following its move last month to allow the Sing dollar to rise at a slightly faster pace to help curb imported inflation.

At a media briefing on the Q3 economic data on Monday, MAS deputy managing director Ong Chong Tee said there were no plans for any intermeeting monetary policy review. The current policy stance of allowing the local currency to strengthen gradually and modestly remains appropriate, he said, though economists have asked, in the light of rising price pressures, if the nudge-up was enough. Yesterday, when contacted, a senior MAS official would not comment.

But Morgan Stanley’s Mr Ahya reckons that managing current inflationary pressures calls for the use of not just monetary tools.

While the exchange rate can be employed to deal with ‘tradeable’ inflation in food, transport and other oil-related items, the bigger cost pressures now stem from demand-induced resource constraints in an economy that has been growing above its potential pace, he said.

There is basically a need to slow demand and economic growth, he reiterated.

For the year to October, consumer inflation averaged 1.6 per cent. The 2007 year-round pace is now estimated at about 2 per cent. Next year, it may well hit 5 per cent in Q1 before easing.

Inflation rates of 4-5 per cent would be high against the muted figures of the last two decades. But inflation in Singapore actually ran past 8 per cent in 1980 and 1981, and averaged over 20 per cent during the 1973 and 1974 oil crises.

While MAS has maintained that, even amid the recent CPI uptrend, underlying inflation has remained steady, Mr Ahya said that, with the persistent climb in the headline figure, core inflation will inevitably and eventually pick up too.

Said HSBC’s Mr Prior-Wandesforde: ‘Even if inflation is set to fall in the second half of next year, the worry will be that wage growth will rise higher still, leading to second-round effects on underlying inflation.’ He believes the government will consider additional cooling measures.

‘While denying that the economy is overheating, the government has clearly shown its concerns for the future via the various measures to cool the housing market as well as the delay to several construction projects, an increase in immigration and a contraction in real government spending,’ he noted.

And while there is little Singapore can do about rising energy and food commodity prices, cost pressures from a booming economy also reflect strong consumer confidence, in his view.

‘The fact that retailers have been able to push through virtually all the GST rise and sustain it smacks of strong confidence in the consumer,’ Mr Prior-Wandesforde said. Even with rising inflation, he believes the robust wage growth will be reflected in stronger consumer spending.

‘Notwithstanding concerns about the US economy and a wobbly equity market recently, Christmas should be a good one for retailers,’ he said.

 

Source: Business Times 24 Nov 07

Top Stories for Front Page – Market sticks to singing the US sub-prime blues

STI loses 115 points for the week reinforced by rising oil price and weak US$

LOCAL stock market investors must by now have grown tired of hearing about the US sub-prime mortgage market, collateralised debt obligations (CDOs) and what the US Federal Reserve might or might not do on interest rates.

Unfortunately, like it or not, these have been the main drivers of stock prices for the past month and were again the prime determinants of direction this week.

There was, however, another fluctuating variable to contend with – rising oil price, which this week came within a hair’s breadth of crossing US$100 per barrel for the first time in history.

Combine all of the above with a sliding US dollar – which makes it less likely that the Fed will cut interest rates – and a downward revision by the Fed for its 2008 economic growth forecast and the ‘buy stocks’ story clearly lacks a certain gloss that it used to have.

As a result, the Straits Times Index came under heavy pressure throughout the week, always appearing more likely to fall at any one time than rise.

Despite a short-covering bounce of 13.01 points yesterday to 3,325.89, the index for the week lost 115 points or 3.3 per cent.

Traders have been deserting stocks in large numbers, leaving house traders and proprietary desks to provide most of the daily volume. Yesterday’s session was one of the quietest in recent months with turnover of 1.4 billion units worth $1.53 billion, down from Thursday’s $2 billion.

Wall Street’s Thursday closure for Thanksgiving robbed the market of some direction, resulting in prices trading within narrow bands. As a result, warrants turnover was also down to 565 million units worth $146 million compared with $220 million on Thursday.

Shipping/shipyard stocks have been among the worst hit and volatile, although the same counters were the market’s best performers in October.

STX Pan Ocean, for example, yesterday plunged to $2.60 before recovering to close a nett 3 cents firmer at $2.91, while Cosco Corp, which only a few weeks ago traded above $8, closed yesterday at $5.90.

The fall in blue chips in the meantime has been led by the banks, Singapore Exchange and SingTel. Interest in penny stocks has dwindled, replaced by punting of structured warrants while new listings over the past two weeks have mainly failed to perform.

In assessing the current situation, AMP Capital Investors said ‘while the correction in shares may still have a bit more to run, it is likely we will soon get a decent rebound on the back of improved valuations, pessimism having reached an extreme, the prospect for further Fed rate cuts and positive seasonal conditions around year end’.

AMP added that ‘US economic data was weak and while the minutes from the Fed’s October meeting indicated that its last interest rate cut was a close call, the huge asset writedowns at US banks and the renewed deterioration in credit markets this month mean that the Fed will be forced to cut rates again, with the next move likely to be next month’.

The US Federal Reserve next meets on Dec 11 and investors are hoping for another interest rate cut.

 

Source: Business Times 24 Nov 07

HK billionaire on the hunt for bargains

Now is the time to get back into stocks: Lee Shau Kee

(HONG KONG) Billionaire investor Lee Shau Kee, sometimes nicknamed Hong Kong’s Warren Buffett, said that he spent more than HK$1 billion (S$185 million) in the stock market on Thursday as the first salvo in a HK$10 billion bargain hunt.

‘Now is the right time to get back to the stock market and start buying,’ Mr Lee told a news conference.

The HK$10 billion that Mr Lee is poised to pump into stocks will most likely target his favoured portfolio of 11 companies.

The initial HK$1 billion went into China Life Insurance Co, China Merchants Bank, oil firm CNOOC Ltd, coal producer Shenhua Energy and stockmarket operator Hong Kong Exchanges and Clearing Ltd.

But Mr Lee warned investors that although he was being open about his plans, he was not expecting anyone to follow him and he was not promising speculators would profit by doing so.

‘Gamblers like to complain if they lose their money,’ he said, according to Bonnie Ngan, spokeswoman for his firm Henderson Land.

Mr Lee said Hong Kong’s stock market had fully priced in negative news, such as the fallout from the US subprime crisis, and it was time for investors to hunt for bargains.

He forecast that the benchmark Hang Seng Index, which closed 2.3 per cent down at 26,004.92 on Thursday, would hit 30,000 later this year before climbing to reach 33,000 by Chinese new year, during the first quarter of 2008.

The index hit a high of 31,958.41 at the end of last month, but has fallen steadily since.

 

Source: Reuters (Business Times 24 Nov 07)

CLOSING MARKET REPORT – Wall St lifted higher by retailers, banks

NEW YORK – US stocks rebounded on Friday in an abbreviated session as the start of holiday shopping lifted retail stocks, while progress in a plan to relieve the credit market’s strain aided bank shares.

Shares of JPMorgan Chase, Bank of America and Citigroup all rose more than 2 per cent. The three banks, spearheading an effort to establish a superfund to ease problems in the credit market, are expected to seek support from others in the industry, The Wall Street Journal reported.

Discount chain Target led retailers higher as droves of shoppers turned out – in some cases before dawn – for Black Friday, the official beginning of the holiday shopping season.

Trading volume was thin in the shortened session. US financial markets were closed on Thursday for Thanksgiving. On Wednesday stocks suffered heavy losses on credit market and housing sector worries.

The Dow Jones industrial average was up 181.84 points, or 1.42 per cent, at 12,980.88. The Standard & Poor’s 500 Index was up 23.93 points, or 1.69 per cent, at 1,440.70. The Nasdaq Composite Index was up 34.45 points, or 1.34 per cent, at 2,596.60.

JPMorgan shares rose 3 per cent to US$41.90. Bank of America stock was up 2.4 per cent to US$43.13 and Citigroup stock climbed 3.2 per cent to US$31.70.

Consumers, many with the day off from work, visited stores and shopping centers in search of bargains.

Chains refer to the day after Thanksgiving as ‘Black Friday’ because it once marked the day many retailers turned a profit and went into the black for the year.

Shares of J.C. Penney, which last week cut its forecast for the holiday season, were up 3.1 per cent to US $41.30. Target’s stock jumped 5.7 per cent to US$57.17.

Boeing’s stock rose after the chief executive of Airbus, Boeing’s chief rival, said the weakness of the dollar is ‘life-threatening’ for the European aircraft maker. Boeing shares were up 2.4 per cent to US $89.54.

 

Source: REUTERS (24 Nov 07)

October inflation hits 16-year high of 3.6%

Figure surprises economists, who say Govt may do more to cool economy

CONSUMER prices rose at their fastest pace in 16 years last month as food, housing and transport costs all accelerated their rate of increase.

Inflation hit 3.6 per cent, resuming an upward trend after September’s 2.7 per cent breather.

Yesterday’s figure caught out virtually every economist in town – ‘I almost fell off my chair,’ said DBS Bank’s Irvin Seah – and sent them scrambling to raise forecasts.

Last month’s number beat all estimates in a Bloomberg News survey of economists. ‘We thought we had a high forecast at 3 per cent as the market was at 2.8 per cent,’ said HSBC’s Robert Prior-Wandesforde.

Analysts said the Government may do more to cool the red-hot economy, but the pain of rising living costs will be felt for some time as these measures do not have an immediate effect.

‘This is way beyond market analyst expectations,’ said Mr Seah. ‘We knew inflation would go up. We just didn’t know it would come so quickly.’

Monthly inflation figures going forward are likely to track last month’s figure, as prices seldom fluctuate sharply unless there is a significant change in the economic environment. For instance, noodle prices that were raised last month are unlikely to come down any time soon.

Yesterday’s Department of Statistics figure follows Monday’s new inflation figure from the Monetary Authority of Singapore (MAS).

It forecast inflation to hit 3.5 per cent to 4.5 per cent next year, up from an earlier estimate of 2 per cent to 3 per cent. The figure is expected to be 2 per cent this year.

Inflation is rising across Asia as oil and food prices increase. China, for instance, reported that prices last month rose the fastest in a decade.

In Singapore, a 2 percentage point hike in the goods and services tax in July is bumping up prices even more.

Food costs, which make up the biggest part of the consumer price index, surged as dairy products, eggs, meat and poultry became more expensive. Eating out was 3.2 per cent more costly, too.

Transport and communication, the next big item, rose as spiralling oil prices lifted petrol costs for cars and buses.

High energy prices have also sent electricity rates up twice since July. This and higher rentals bumped up housing inflation to 2.3 per cent.

Health-care costs, which make up just 5 per cent of the index, were up 6.2 per cent.

Mr Prior-Wandesforde said the Government may consider more cooling measures after recent initiatives to dampen the housing market and delay several major construction projects.

If inflation does hit 5 per cent early next year, as suggested recently by Trade and Industry Minister Lim Hng Kiang, the MAS may move to let the Sing dollar strengthen even faster, as it did last month. A stronger local currency can help counter price rises in imported goods.

But these measures take time to kick in, said Mr Seah. He suggested that the Government provide more help to low-income families in next February’s Budget.

But Mr Prior-Wandesforde said help may not come as wage growth may be strong enough to enable the poor to cope with the price rises.

For people like freelance publisher Chiam Choon Yong, it is belt-tightening time. The 44-year-old father of four has been hit by increases in petrol costs – up about 10 per cent to $500 a month – and utility rates – up from $140 a month to $160.

‘We just have to be more economical and stay away from things like seafood and exotic fruits,’ he said.

 

Source: The Straits Times 24 Nov 07

4 office floors at The Arcade put up for sale

ALMOST 18 per cent of The Arcade at Raffles Place comprising four floors have been put up for sale through an expression of interest exercise, and the indicative price range is between $80 million and $90 million.

Based on the indicative price, the unit price for the 32,120 sq ft of space is between $2,500-$2,800 psf.

CB Richard Ellis (CBRE) and Jones Lang LaSalle are advising the owners jointly on the divestment.

CBRE added that the owners are Singaporean.

CBRE director (Investment Properties) Charles Hoon also said that the four strata-titled floors for sale represent a rare opportunity to own commercial space at Raffles Place because most of the office buildings in the area have single owners.

Mr Hoon did say that the original developer of The Arcade still owns about 30 per cent of the building so there is a potential to redevelop the site through a collective sale especially as the existing built-up gross floor plot reflects a plot ratio of about 8 but can be maximised to about 14.

The Arcade is a 20-storey mixed commercial and retail building comprising an office tower and a three-storey retail podium with a total net lettable area of about 118,317 sq ft.

The property is held on a mixture of 999-year and 99-year leasehold interests.

The current yield is about 2 per cent but Mr Hoon said that with leases expiring next year, rental appreciation can be expected.

The lease profile shows that 60 per cent of the current leases will expire in 2008 and the yield can be expected to increase to around 5 per cent.

Existing leases are tenanted out at around $9.20 psf.

Gains from capital appreciation are likely to be higher.

In Q3 2007, CBRE noted that average capital value for prime offices was estimated at $2,900 psf, reflecting an increase of 16 per cent quarter-on-quarter (QOQ) and 114.8 per cent year-on-year, while prime office yields were at 4.32 per cent, up slightly from 4.23 per cent QOQ.

The office sector is still seeing buoyant investment sales. In October, 12 floors at Springleaf Tower (near Tanjong Pagar MRT station) were sold for $225 million representing a unit price of around $2,000 psf.

In August, the entire Chevron House at Raffles Place was sold for $730 million or a record $2,780 psf of net lettable area.

 

Source: Business Times 23 Nov 07)

Koh Brothers buys 2 Shell kiosks for $19.6m

It aims to use one site for condo, other for hotel project

KOH Brothers has bought two petrol kiosks from Shell – one in Bukit Timah and the other in Changi – for close to $19.6 million.

The first site, at 383 Bukit Timah Road, is next to Koh Brothers’ freehold serviced apartment complex, Alocassia Apartment. The site has a strata land area of 13,500 square feet and cost Koh Brothers $13.3 million.

Singapore-listed Koh Brothers bought Alocassia Apartment – a residential and commercial site – in May last year for $30 million.

The company intends to convert the whole site to full residential use and launch a luxury condominium with about 50 units in the third quarter of next year, chief executive Francis Koh told BT.

With the new acquisition, the entire freehold site covers 44,900 sq ft and has a 1.4 plot ratio. The latest purchase brings the price paid by Koh Brothers for the site to $799 per square foot (psf) per plot ratio, including an estimated development charge of $6.9 million.

Mr Koh estimates the project could break-even around $1,250 psf since the company does not plan to tear down the whole building. Luxury apartments in the Bukit Timah area now go for about $1,800-$2,000 psf.

‘Given its prime location, freehold status, proximity to reputable schools and easy accessibility to the city centre, we are confident the site will appeal to home buyers who appreciate the exclusivity and prestige,’ Mr Koh said.

The second site bought by the company – at 80 Changi Road – adjoins its freehold Changi Hotel.

Bought for $6.3 million, the site has a strata area of 8,000 sq ft. The entire freehold Changi Road site now has a total area of 26,400 sq ft.

Mr Koh said the company will look to build a newer, larger hotel on the combined site. Changi Hotel is now a three-storey, 61-room hotel.

Shell’s general manager for retail, Henry Chu, said such sales allow the company to capitalise on the hot property market.

‘The timing of closure and sale of these sites is a commercial decision and is to allow us to take advantage of the buoyant property market to maximise our returns,’ he said.

 

Source: Business Times 23 Nov 07

Topshop to open China store next year

(SHANGHAI) British fashion retailer Topshop plans to open its first China store early next year, following rivals such as Inditex’s Zara and Hennes & Mauritz AB in setting up shop in the world’s fastest growing major economy, sources familiar with the situation said yesterday.

Topshop had signed a deal to rent space in the Shanghai Superbrand Mall in the city’s financial district, said the sources, who declined to be identified.

The mall, in which Zara and H&M already have shops, is managed by a property arm of Charoen Pokphand group, Thailand’s biggest agricultural business conglomerate. ‘Topshop is definitely not coming to China for just one store,’ one of the sources said.

‘It is also looking at many other Chinese cities, such as Beijing and Hong Kong.’ Other sources confirmed Topshop was in talks with several property developers in the former British colony of Hong Kong in the hope of launching Topshop stores in the city next year. Topshop could not immediately be reached for comment.

China’s fashion retail market is booming alongside changing lifestyles and income growth. Retail sales in general are expected to grow about 15 per cent in 2007, analysts have said.

 

Source: Reuters (Business Times 23 Nov 07)

Shimao to shun debt markets for up to a year

(HONG KONG) Shimao Property Holdings Ltd, a developer owned by Chinese billionaire Hui Wing Mau, said it will shun debt markets for up to a year as yields on its dollar bonds rose to a record.

The Hong Kong-listed company doesn’t plan to sell foreign- currency bonds or convertible debt in the next six to 12 months, it said in an e-mail to Bloomberg News.

‘We have strong sales proceeds from pre-sales and we have a big portfolio of investment properties that can help us raise bank loans in China more easily than other pure residential property developers,’ Shimao said in the e-mail.

Investors are asking for record high risk premiums to hold Chinese real estate developers’ bonds as concern that the US economy may enter into recession drives asset managers away from high-risk, high yield debt.

Country Garden Holdings Co, China’s most profitable developer, earlier this month scrapped a plan to raise US$1 billion from its first overseas bond sale.

‘There was quite bit of speculation that other Chinese developers, including Shimao, were thinking about selling dollar bonds,’ said Lawrence Koo, a Hong Kong-based director of credit trading at hedge fund Tribridge Investment Partners Ltd. ‘It would take a bit of pressure off Shimao’s existing bonds if they announce there is no such plan, but it won’t help too much unless other developers also decide not to sell debt.’

The spread, or extra yield, investors demand to hold Shimao’s US$350 million of 8 per cent bonds maturing in 2016 rather than Treasuries widened to a record 590 basis points at 3:53pm in Hong Kong, according to Merrill Lynch & Co prices. A basis point is 0.01 percentage point.

Credit-default swaps on Shimao’s debt were unchanged at 480 basis points, according to Barclays Capital.

That means it costs US$480,000 a year to protect US$10 million of Shimao’s bonds from default for five years.

The debt is rated BB+, one level below investment grade, by Standard & Poor’s (S&P).

The developer plans to increase its land bank to as much as 35 million square metres at the end of 2008 from 21 million square metres, according to the e-mail.

It said it plans to fund the estimated 10 billion yuan (S$2 billion) cost of buying land from planned property sales of 17 billion yuan next year.

Many Chinese real estate developers will be forced to seek other funding avenues for their rapid expansion until credit market conditions stabilise, S&P said in a report on Nov 15.

Small developers with limited capital are likely to find the market conditions too tough to survive while bigger companies will become more reliant on internally generated cash and bank loans until they can tap debt markets, the rating assessor said.

‘The increasing ambition of many developers to aggressively grow, both in size and geographic coverage, creates high execution risks,’ according to S&P.

‘If growth is heavily debt-funded, the financial health of developers will come under pressure.’

 

Source: Bloomberg (Business Times 23 Nov 07)

Japanese Reits likely to be takeover targets

Those trading at less than their net asset value are likely to be bought out

(TOKYO) Japanese real estate trusts and asset managers may be ripe for takeovers after share prices plunged and stricter compliance guidelines raised costs, said property managers including a local real estate executive at Morgan Stanley.

Regulations to boost investor protection went into effect on Sept 30, raising compliance costs which may make it difficult for smaller real estate managers to survive.

Real estate investment trusts (Reits) trading at less than their net asset value are likely to be takeover targets.

‘Consolidation is imminent,’ said Marcus Merner, managing director for real estate at Morgan Stanley Japan Securities Co, at a conference on Wednesday. ‘All the arrows are pointed in the right direction for that to happen.’

The Tokyo Stock Exchange Reit Index has fallen even as land prices advanced.

The index has dropped about one-third in the past six months, eroding gains earlier in the year, after rising defaults of sub-prime mortgage loans in the US prompted some investors to sell stock to make up for losses elsewhere.

Japan may see buyouts of property holders similar to some of those in the US, said Alan Miyasaki, managing director of the Blackstone Group Japan KK.

Blackstone Group LP bought Equity Office Properties Trust (EOP), the biggest US office landlord, for US$23 billion in March, and may have made as much as US$2 billion in profit by selling off properties in EOP’s portfolio, according to Bloomberg calculations. ‘Growth fundamentals in the market place are appropriate to have similar M&A here in Japan,’ Mr Miyasaki said.

Thirty out of 40 Reits listed on the Tokyo Stock Exchange (TSE) trade below their net fixed asset value, according to Bloomberg calculations.

The share declines may have prompted LaSalle Investment Management Inc, a unit of the world’s second-largest commercial real estate broker, to take control of eAsset Investment Corp, the first ever takeover in Japan’s 4.9 trillion yen (S$64.6 billion) Reit market.

LaSalle, a subsidiary of Jones Lang LaSalle Inc, bought the asset manager of eAsset on Nov 19 and plans to expand the trust.

Earlier this month, Goldman Sachs Group Inc and Aetos Capital LLC bought property manager Simplex Investment Advisors Inc for 154.1 billion yen.

Goldman plans to invest about 200 billion yen this year in Japanese property, betting that real estate is short of its peak after a two-year rally.

Tighter regulations under the Financial Instruments and Exchange Law have increased administration costs for compliance standards, and the burden could turn smaller funds into takeover targets, said Yasuhiko Amino,

operating officer and chief marketing officer of Japan at GE Real Estate Corp.

‘The number of opportunities will increase,’ Mr Amino said.

As land prices recover, property values on some companies’ books are increasing at a faster pace than their market worth.

Property assets generated more profit last year for Sapporo Holdings Ltd, Japan’s third-largest beermaker, than its alcohol business did.

Sapporo formed a property alliance with Morgan Stanley on Oct 30 as it seeks to fend off a hostile bid from Warren Lichtenstein’s Steel Partners Japan Strategic Fund, which wants the brewer to sell off its real estate.

Mitsubishi Estate Co and Sumitomo Realty & Development Co, Japan’s second and third-biggest developer by revenue, are among builders that have set up takeover defences this year.

 

Source: Bloomberg (Business Times 23 Nov 07)

India’s retail rents rank 16th most expensive

Khan Market in New Delhi the most costly at 950 rupees psf a month

IN NEW DELHI

INDIA has been ranked the 16th most expensive global retail ‘high street destination’ by a prominent real estate consultant.

According to the report Main Streets Across the World 2007 by Cushman & Wakefield, Khan Market, located near the famous India Gate in New Delhi, is the most expensive retail location in India with rentals of 950 rupees (S$35) per square foot (psf) a month.

Rents at Khan Market, known for its book, music, grocery stores and popular restaurants that are patronised by the diplomatic community in the city, have witnessed an annual growth of 35.7 per cent over the same period last year.

‘Khan Market is the biggest riser in the ranking of the world’s most expensive shopping locations in terms of retail rents, moving up eight places from last year’s 24th position,’ the report says.

New York’s Fifth Avenue held its position as the world’s most expensive shopping destination followed by Hong Kong’s Causeway Bay and Avenue des Champs Elysees in Paris.

‘Retail is going through a revolution in India, although a part of the increase in rents is due to lack of high quality space in the right location,’ Cushman & Wakefield India head (retail) Rajneesh Mahajan said.

India also figures among the world’s top 10 locations that have recorded the biggest rental increase in local currency terms.

Connaught Place, the main commercial and shopping hub of Delhi, is the biggest gainer in Asia and globally second only to Chicago’s East Oak Street, with an annual rise of 87.5 per cent.

Kemp’s Corner in Mumbai has also clocked very high rental growth of over 78 per cent, making it the fourth highest riser.

The rental at Connaught Place was 750 rupees psf a month and Kemp’s Corner was 490 rupees psf a month.

Greater Kailash in South Delhi and Fort/Fountain and Colaba in Mumbai also saw steep rises in rent of over 55 per cent for the first two and over 50 per cent for the third.

High rental in the above-mentioned locations is also attributed to the very narrow scope for expansion, as these areas are located in the heart of the various cities.

However, suburbs such as Noida or Gurgaon, adjoining Delhi, offer very good and cheaper retail options, as space for expansion is not an issue.

 

Source: Business Times 23 Nov 07

CapitaLand sets up $880m India property fund

CAPITALAND, South-east Asia’s biggest developer, yesterday said that it has successfully established its first India private property fund with a fund size of $880 million.

The company first announced the fund – CapitaRetail India Development Fund – in July.

The closed-end private fund has the mandate to invest in retail mall developments in India. CapitaLand holds a stake of about 45 per cent stake in it, with the remaining held by insurance companies, pension funds and corporations.

CapitaLand chief executive Liew Mun Leong said that the fund will allow the company to increase its multi-sector presence in India.

‘We are conscious of the vast opportunities presented by India’s retail real estate market, driven by the country’s strong macro-economic growth and rapid urbanisation,’ he said in a statement. ‘Over time, we expect to deepen our retail and fund management presence in India to become a significant long-term retail real estate player there.’

CapitaLand, which also has similar funds in China, hopes to replicate its successful China retail business platform in India.

CapitaLand’s shares closed unchanged at $6.50 yesterday. The company’s stock has risen some 4.8 per cent since the start of the year.

 

Source: Business Times 23 Nov 07

Australian poll largesse risks high rates, inflation

(SYDNEY) Generous promises from Australia’s two main political parties ahead of tomorrow’s general election have stoked fears that interest rates, already at the highest in a decade, may go up even further than the market anticipates.

Financial markets are pricing in a rate rise early next year, but analysts say investors might have to factor in more increases if the tax cuts and spending promised by the politicians boost demand and add to price pressures.

‘In the run-up to the Federal election, both political parties are running a real risk of eliminating the budget surpluses projected by the Treasury,’ said Stephen Halmarick, co- head of economics and market analysis at Citigroup here.

‘The result could be more upward pressure on inflation and rates. We already expect another rate rise from the Reserve Bank of Australia (RBA) early next year and the risks are slanted to the official cash rate going beyond the 7 per cent that markets are currently pricing.’ The central bank raised the cash rate to an 11-year high of 6.75 per cent this month.

Latest polling suggests the opposition Labor Party will be swept into office, unseating veteran conservative Prime Minister John Howard, who is hoping for a fifth term in office.

In a bid to win back voters, Mr Howard has promised A$34 billion (S$43 billion) in income tax cuts as part of some A$66 billion in election largesse. Labor’s Kevin Rudd, almost as generous, has unveiled a package worth A$59 billion, including A$31 billion in tax cuts. Both are relying on large budget surpluses as Australia rides a commodities boom.

The surplus for 2006/07 was A$17.2 billion, or about 1.6 per cent of gross domestic product (GDP), and the Treasury estimates it will total A$61.4 billion over the next four years, boosted by high revenue at a time of robust domestic growth. GDP grew 4.3 per cent in the year to June, giving 16 years of uninterrupted expansion.

But that is pushing up consumer prices. The RBA raised its forecast for annual underlying inflation to 3.25 per cent for the current quarter and up to mid-2008, up from a 3 per cent forecast.

The RBA, which aims to keep inflation in a 2 to 3 per cent band, cautioned that the economy was showing little sign of slowing despite five rate increases since May 2006, with demand remaining healthy and the jobless rate at a near-33-year low.

Some economists argue that the tax cuts and spending will not come all at once, so they might not be as inflationary as feared.

‘Many of the commitments are spread over five years,’ said Craig James, chief equities economist at CommSec. ‘It’s also important to remember that these are just spending commitments; they haven’t been made as yet, and they could be amended down the line. Further, revenue measures haven’t been announced. That’s for later.’ However, Rory Robertson, an interest rate strategist at Macquarie Bank, said the political parties’ priorities were clear.

‘Both sides of politics have agreed their priority was tax cuts and increased spending,’ he said.

Neither was ’showing much interest in providing real support for the RBA’s efforts to slow demand growth and dampen growing inflation pressures’.

 

Source: Reuters (Business Times 23 Nov 07)

ADB warns sub-prime fallout could get worse

Financial volatility, repricing of credit risk may lead to capital flight: report

IN TOKYO

FALLOUT in Asia from the US sub-prime mortgage crisis, through financial and other channels, may prove heavier than expected, the Asian Development Bank warned in a report published yesterday.

This came as a Bank of Japan Policy Board member cautioned that the impact of the crisis is likely to be longlasting, and is also on the heels of US Treasury Secretary Henry Paulson’s warning that US financial defaults could accelerate next year.

Strong economic growth and improved financial systems, plus limited exposure to US sub-prime mortgages, have helped limit the regional impact from global credit problems, the ADB said. But ‘though there are no signs of widespread problems in emerging East Asia, downside risks to regional economic and financial market trends remain and wider ramifications cannot be ruled out’, it suggested.

Prolonged global financial market volatility, a rise in risk aversion and re-pricing of credit risk could lead to a reversal of capital flows into Asia, Jong-Wha Lee, head of the ADB’s Office of Regional Economic Integration, said in the Bank’s latest Asian Bond Monitor publication.

The ADB called for improved transparency in credit markets through better valuation and accounting of offbalance sheet instruments, strengthening of risk management and enhancing the enabling environment for local currency bond markets. It also urged stronger regional cooperation in monitoring and regulating financial markets and in developing financial institutions’ risk management techniques.

The ADB’s comments echoed the increasing concern being voiced in various quarters about the spreading impact of the sub-prime crisis. Bank of Japan Policy Board member Seiji Nakamura said yesterday that problems were taking longer to settle than expected and that their impact could broaden from here on.

Mr Paulson also cautioned this week that potential US financial defaults would be markedly bigger in 2008 than this year as less creditworthy mortgages are exposed.

The OECD (Organisation for Economic Cooperation) has calculated that some US$890 billion of poor credit quality mortgages will need to have their interest rates reset next year. Cumulative losses in the US$200 billion to US$300 billion range from the mortgage market crisis ’seem feasible’, as a result, it has suggested.

Following a series of write-offs by leading US banks, Japan’s Mitsubishi UFJ Financial Group on Wednesday reported a near 50 per cent drop in first-half profits owing to losses of 24 billion yen (S$320.4 million) on subprime related investments and on its credit card unit.

Other Japanese banks have also declared significant sub-prime related losses this week. Mizuho Financial Group, another of Japan’s three megabanks, booked the largest loss related to recent financial market turmoil. It took 70 billion yen of losses in the first half of the current financial year while the third megabank, Sumitomo Mitsui Financial Group, took losses of 32 billion yen in the first half while indicating that these could rise to 87 billion yen for the full year.

 

Source: Business Times 23 Nov 07

Reception for IPOs cooling as market sentiment dives

Poor debuts by recent listings fail to dampen plans by at least five firms to go public soon

THE investing public’s appetite for new listings has turned sour amid the current stock-market turmoil.

But the recent rocky reception for several initial public offerings (IPOs) has not deterred several more firms from making plans to list soon.

Out of seven new listings over the past three weeks, only two issues – those of China telco Sinotel Technologies and Cacola Furniture – are still trading above their offer prices.

The other five, including big offerings such as Lippo-Mapletree Indonesia Retail Trust and China New Town Development, quickly tanked.

Investors who had believed the IPOs were sure bets for quick riches were left licking their wounds.

Still, the current dip in sentiment is unlike the IPO drought in September, when firms delayed their listing plans altogether. This time, a steady stream of IPO hopefuls is seeking public comment by displaying their preliminary prospectuses on the Monetary Authority of Singapore’s Opera website.

Two firms are poised to list on the Singapore Exchange (SGX). Dynamic Colours, which makes compounded resins and packaging materials, debuts on the mainboard today, while ChungHong, a printed circuit board assembly service provider, starts trading next week.

A check with Opera shows there are at least five more firms planning to launch IPOs soon. These include well known names such as curry-puff maker Old Chang Kee and China shipbuilder JES International.

Two business trusts – Hyflux Water Trust and Altitude Aircraft Leasing Trust – are slated to go public too.

This is despite a rapidly weakening risk appetite. The Straits Times Index has fallen by a staggering 493 points, or 13 per cent, in just three weeks – losing two months worth of gains.

Some traders have expressed dismay at the speed at which some recent IPOs have slipped from grace, as their share prices plunged after listing.

‘It is simply incredible. In October, new listings like Marco Polo Marine and China Oilfield were still registering strong double-digit percentage gains. Then came the great bear market for IPOs in November,’ said a local brokerage remisier, Mr Alan Koh.

This should highlight to retail investors the importance of reading an IPO aspirant’s prospectus before they subscribe to its shares.

China New Town, which fell 25.3 per cent from its 83-cent issue price to 62 cents in one week, was hurt by fears it might face delays getting approval from Beijing for a 1.17 billion yuan (S$228.5 million) project.

‘The company had prominently highlighted this concern as a risk factor; yet, few investors paid attention until it was listed,’ said the dealer.

Similarly, those who had read the Lippo-Mapletree Indonesia Retail Trust document carefully would have noticed it was offering 20 million units for public subscription.

While this was a mere fraction of the 645.5 million shares placed out to institutions, the allocation was far bigger than the usual two to three million shares offered to retail IPO investors.

This would have spared punters, who applied for more than one million shares, the anguish of getting a higher-than-expected allocation of 733,000 shares – and losing a staggering $87,960 per person, as the stock dived 15 per cent on its Monday debut.

But Ms Wong Bee Eng, the chief executive of boutique corporate finance firm Provenance Capital, said a listed firm’s lacklustre debut should not be seen as a gauge of future performance.

‘There is a lot of time and effort involved in getting a company listed. Unless market sentiment is so poor that an issue manager is unable to place out all the shares, a company will still go ahead with its listing plan, even if the initial reception may not turn out to be warm.’

Still going ahead

A check with the Monetary Authority of Singapore’s website shows there are at least five more companies planning to launch IPOs soon, including well-known names such as curry-puff maker Old Chang Kee and China shipbuilder JES International.

Two business trusts – Hyflux Water Trust and Altitude Aircraft Leasing Trust – are slated to go public too.

The current dip in sentiment is unlike the IPO drought in September, when companies delayed their listing plans altogether.

This time, a steady stream of IPO hopefuls is seeking public comment by displaying their preliminary prospectuses on the MAS’ Opera website.

Also, two firms are poised to list on the SGX: Dynamic Colours debuts on the mainboard today while ChungHong starts trading next week.

 

Source: The Straits Times 23 Nov 07

CapitaLand opens business school as CEO launches book

PROPERTY giant CapitaLand has opened its own business school at a heritage building in Sentosa.

Yesterday, chief executive Liew Mun Leong also used the venue to launch a book that is a compilation of nine years of e-mail messages to his staff, written mostly on Sundays.

The developer spent $10 million to renovate the building, which used to house a museum of rare stones. It leased the building earlier this year for a period of 10 years for Climb, short for CapitaLand Institute of Management & Business.

Climb has started offering learning and development programmes for the group’s staff – about 8,900 globally, of whom 1,400 are in Singapore.

Started last year, Climb has six full-time staff and previously conducted its courses at various locations, including hotels.

Mr Liew, who is involved with some of Climb’s programmes, yesterday launched his book, Building People: Sunday Emails From A CEO, with President SR Nathan, who also officially opened Climb.

The book contains some of the e-mail that Mr Liew has written to his staff in past years – an activity which he described in his book as enjoyable and relaxing.

An e-mail sent in 1998 carried the message: ‘Don’t take everything from the table. Leave something for your partners, too.’

Another, sent in 2001 and titled ‘There are no fat CapitaLand executives’, addressed the group’s ‘keep fighting fit’ culture.

Mr Liew ended it with: ‘So get out, you lazy bones and get going. It is all about discipline and then habit… Have fun doing it!’

 

Source: The Straits Times 23 Nov 07

US sub-prime losses may reach $434b, says OECD

Organisation says worst is not over and credit turmoil could wreak more havoc on markets

LONDON – OVERALL losses caused by the United States mortgage market crisis could feasibly hit US$300 billion (S$434 billion), and the broader credit crunch could yet inflict greater damage on equity markets, the OECD said.

‘Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions,’ the Organisation for Economic Cooperation and Development (OECD) said in a report.

‘As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn.’

Financial institutions and policymakers needed to buy time to ensure an orderly end to the trouble which spilled from the US mortgage sector to financial markets globally in July and August, the report said.

The OECD said the super fund being set up by Citigroup, Bank of America and JPMorgan Chase to pool securities of ailing special investment vehicles – thus preventing a further fire sale of these asset-backed securities – was a useful mechanism.

The Paris-based forum said the US housing market downturn had further to run and would continue to depress mortgage-linked debt held by banks, hedge funds and insurance firms.

‘We still have not hit the worst point in resets, delinquencies and ultimate losses on mortgages,’ the OECD said, adding that about US$890 billion of sub-prime mortgages, or poor credit quality loans, will have rates reset next year – and peaking in March.

The OECD report said a hypothetical 14 per cent loss rate on sub-prime mortgages being reset next year could deliver an overall US$125 billion hit to lenders.

Including Alt-A, or ‘near prime’, mortgages, cumulative losses in the US$200 billion to US$300 billion range ’seem feasible’, it said.

The financial sector’s exposure to these losses lies mainly in holdings of mortgage-backed securities repackaged within complex collateralised debt obligations (CDOs) held by hedge funds, banks and bank-sponsored structured investment vehicles.

The OECD said hedge funds held 21 per cent, or US$650 billion, of riskier BB-rated and equity tranches of

CDOs. Banks held just 5 per cent, or US$150 billion, of these.

With mortgage-related assets constituting about 56 per cent of the backing for CDOs, the direct mortgage exposure in these investments could be reduced to US$360 billion for hedge funds and US$90 billion for banks.

Assuming the US$3 billion total CDOs outstanding has been cut over the past six months due to lower prices and asset restructuring, the US$200 billion to US$300 billion estimate of total losses due seems reasonable, the OECD said.

 

Source: REUTERS (The Straits Times 23 Nov 07)

US sub-prime woes ’should not deter Asian bond growth’

ASIAN bond markets must continue to grow and develop, even though it was their relative lack of sophistication that spared them from the worst of the United States sub-prime crisis.

A conference on regional bonds in Singapore yesterday heard that the highly complex financial products used by American and European banks are still not that prevalent in the Republic. Yet it is these same products that are at the heart of the credit mess now.

This has led some observers to ask if Asia should slow the pace of innovation in its bond and credit markets.

But Mr Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore, said: ‘It is important to avoid the mistake of planning only based on the last crisis.

‘Each financial crisis or shock will bring with it unique circumstances and lessons. But in and by themselves, they should not become reasons to dampen market development and growth.’

He was echoing Senior Minister Goh Chok Tong’s remarks at the Barclays Asia Forum earlier this month.

Mr Goh had urged Asian institutions to press on with efforts to develop capital markets and create robust and efficient systems.

Developed financial markets across the world have been shaken by problems in the US housing market, with big-name American and European banks reporting billion-dollar losses on investments linked to poor-quality home loans.

By contrast, banks in the region have been largely unscathed as their exposure, if any, to these complex instruments has been small, said Dr Lee Jong Wha, who heads the Asian Development Bank’s (ADB’s) regional economic integration office.

But Mr Ong stressed that bonds and other capital market products are good alternatives to bank loans for firms.

The heads of the fixed-income sections at various banks told the seminar, which was organised by The Asset magazine and the ADB, that growth momentum has eased for more complex instruments but deals have not dried up.

Standard Chartered Bank’s capital markets global head, Mr Brad Levitt, said Asian currency-denominated bonds have outgrown issues in the US dollar, euro and yen.

 

Source: The Straits Times 23 Nov 07

Jack Investment raises Iluma project cost

Entertainment, retail mall bill to soar to $160m from $100m

JACK Investment, which won the tender to build a retail and entertainment mall on a site opposite Bugis Junction in 2005, has revised its projected total investment cost from $100 million to $160 million.

Project director Lim Swee Teck said that Jack Investment intends to ‘ensure that the final finished product will be of an iconic stature’. The development is now called Iluma.

Mr Lim said that the mall, designed by award-winning architectural firm WOHA, will have high-tech features like a light and media facade and a 27,000 sq ft column-free space on the rooftop dedicated to theme restaurants and concept dining.

Other features will include exhibition and promotional spaces within the mall, as well as a flexible performing space which can seat up to 400 people.

Also confirmed is the vital link-bridge across Victoria Street to Bugis Junction.

Jack Investment also owns Leisure Park Kallang, West Coast Recreation Centre, Woodlands Point and 600@ToaPayoh.

One of the main entertainment attractions at Iluma will be a cineplex, with a capacity for 1,400 seats, which will be run by Jack Investment. This will be a new business for company that will begin with the recently announced sixhall, 830-seat cineplex next to Leisure Park Kallang.

Iluma will be 10 storeys high. Up to 60 per cent of the gross floor area will be dedicated to entertainment uses.

There will be 191,580 sq ft of net lettable area with a total of 150 retail units.

Iluma’s marketing consultant Knight Frank said that the primary target market will be fashion conscious 20 to 30- year-olds.

Knight Frank head of retail Sherene Sng added that entertainment attractions could also include brand-name dance clubs similar to the Ministry of Sound.

She said that rents at Iluma can be expected to range between $10 and $30 per square foot (psf). Currently, top rents at neighbouring Bugis Junction are said to be in the region of $40 psf.

The mall is currently under construction and is expected to be completed in the final quarter of next year.

 

Source: Business Times 22 Nov 07

Hot market smokes out solo land sites

19 single-owner plots worth $1.05b sold this year

(SINGAPORE) With the property market running hot, it is not just collective sales that have ballooned. Over the past two years, more residential land sites owned by single owners were sold as well.

So far this year, 19 residential sites owned by single owners and worth some $1.05 billion in all were sold to developers, data provided by property firm CB Richard Ellis (CBRE) shows.

And in 2006, there were 15 single-owner land sales worth a total of $865 million. By comparison, just four singleowner land sales worth $303 million were done in 2005.

Market watchers say a property market that is strong and active will bring out more sellers – both of the en-bloc variety as well as single owners.

‘Collective sales have hogged the limelight of late, but the single-owner sales have also been very active,’ says CBRE executive director Jeremy Lake. ‘If you look at overall residential sales, you will see that they have gone up too. So single owners are just mirroring the overall market.’

Ku Swee Yong, director of marketing and business development at Savills Singapore, says that in the case of those sites owned by associations or clubs, members who were looking to sell might have been able to convince those who were previously not in favour of selling to change their minds, considering the prices that the properties can now fetch.

‘When the price is better, they (those looking to sell) manage to clear the hurdle,’ Mr Ku says.

The 19 sites sold by single owners this year include a few owned by associations, including one sold by Chui Hui Lim Club. The club sold a Keng Lee Road site to Sim Lian Group for some $115.8 million.

CBRE’s data also shows that this year, while there were a few large single-owner sites that were sold, the bulk of the 19 properties were small – with 10 of them going for less than $30 million each.

Market watchers attributed the increased interest in smaller sites to new players in the property market. These smaller developers generally do not have the resources to bid for en-bloc sites that go for hundreds of millions dollars – the province of the likes of CapitaLand, City Developments and foreign property funds.

‘When the market is good, it will attract new entrants,’ says CBRE’s Mr Lake. ‘And you will find some people who will want to get into the market, but might not be able to afford the big sites.’

Sesdaq-listed Tee International is an example of one new entrant which has been snapping up smaller sites. The company, which has a market capitalisation of $41.5 million, has been in the electrical and mechanical engineering business since 1980. But since the start of the year, Tee has been buying a string of freehold terrace houses and apartments with plans to develop them into luxury ’boutique’ homes.

Among its purchases are three single-owner sites, CBRE’s data shows. Tee acquired two single-owner plots in Cairnhill Circle in July – one for $7.7 million and the other for $5.5 million. It also bought a single-owner property in Thomson Road for $6.9 million in January this year.

Similarly, Eastern Holdings, which publishes magazines, also picked up two small single-owner sites in Grove Drive this year – one for $12.5 million and the other for $10.3 million. The company is also relatively small, having a market capitalisation of about $70 million.

Savills’s Mr Ku says that there are also some high net worth individuals who are buying smaller sites, redeveloping them and then selling them – all within a short span of time – to capitalise on the property market.

These wealthy individuals were also adding to the demand for smaller sites, he says.

 

Source: Business Times 22 Nov 07

Credo Real Estate sells 5 adjacent developments in en bloc package

Five developments with total site area of 74,355 sq ft sold to KSH for $120m

FIVE in one fell swoop – taking collective sales to the next level is Credo Real Estate, which has just managed to sell a package of five neighbouring residential developments to a single developer for $120 million.

The five developments, which are at Mergui Road, off Rangoon Road, are Norfolk Court, Mergui Lodge, Northern Mansion, Mergui Court and The Mergui.

With a total site area of 74,355 square feet and a plot ratio of 2.8, the $120 million price reflects a unit price of $580 per square foot per plot ratio (psf ppr).

It has been sold to KSH Holdings. The publicly listed construction, property development and property management company said in a statement released yesterday that the site has a potential to be developed into a 142-unit development with units averaging 1,250 sq ft.

KSH also said that the acquisition will be financed through internal funds and bank borrowings, and that it is currently negotiating with other investors to form a joint venture to develop the site.

On the challenge of bringing together the owners of five developments, Credo executive director Yong Choon Fah said that it had been looking at the possibility of a combined collective sale for several years.

She also explained that each development had different attributes and that only by combining them could a ‘winwin’ be achieved for all.

The five developments have land areas ranging from 10,061 sq ft to 18,524 sq ft and Ms Yong said that all the home owners have accepted the same unit price.

There are a total of 88 homes and the owners will receive between $906,856 and $1,908,491 each.

The site, which is considered to be in the ‘city fringe’, is estimated to have a breakeven price of about $1,000 psf.

In the immediate vicinity, Pristine Heights is currently selling for between $1,000 and $1,150 psf.

In 2006, Credo marketed Lock Cho Apartments, Comfort Mansion and a four-storey walk-up block for a combined collective sale. They were eventually sold to City Developments Ltd. The latest deal, however, is thought to be the only one to involve five developments.

 

Source: Business Times 22 Nov 07

SINGAPORE INTERNATIONAL – Big market in projects from int’l agencies

S’pore firms can grow their overseas businesses and leverage on the IOs’ facilities

Many Singapore companies do not realise how big the market is for projects awarded by international organisations (IOs) like the Asian Development Bank (ADB) and World Bank. The World Bank and ADB jointly award about US$31 billion of business projects annually through loans, grants and technical assistance programmes to developing countries.

In fiscal 2007, the World Bank committed US$34.3 billion in loans, grants, equity investments and guarantees to its 185 member countries. ADB approved US$7.9 billion of loans and US$241.6 million in grants in 2006.

According to ADB, from January 2001 to June this year, Singapore companies won US$548 million of contracts from ADB-financed projects. In terms of World Bank-financed projects, local firms were awarded just US$158 million in contracts from 2000 to 2007.

Besides these two huge organisations, others like the Inter-American Development Bank, the Andean Development Corporation, the African Development Bank and the various agencies of the United Nations also award contracts for development projects.

These IOs are an additional and viable source of business for Singapore companies. The channel funds to health care, education, transport, water and sanitation, agriculture, public administration and governance, financial sector development and the environment.

Apart from the obvious financial aspect, there are many benefits to be had by partnering and working with IOs.

They are a good way to grow international business through overseas consulting projects, civil works contracts and the supply of equipment and goods. And ventures in developing markets are slightly less risky because IO-funded projects typically come with payment guarantees.

While dipping their feet into overseas markets, companies can also leverage on the IOs’ facilities like political risk insurance and debt/equity project finance. Access to these facilities helps strengthen the value proposition when striking out abroad.

A subsidiary benefit of taking part in such projects is the satisfaction of contributing to the long-term needs of developing countries.

‘International organisations like the ADB and World Bank have established systems and networks to serve the financial and technical needs of developing economies,’ says IE Singapore’s deputy chief executive officer, Chua Taik Him.

‘Singapore’s knowledge and experience in developing its economy, particularly infrastructure development and urban management, are highly relevance to these countries.’

According to IE Singapore’s IO division assistant director G Jayakrishnan, areas in which Singapore companies can participate are bidding for contracts for consultancy work, goods and civil works, as well as in public-private partnership and other projects.

Consultancy and procurement contracts range from providing advice, education, training and health care to urban planning, transport and logistics, infocomm technology, water and environmental management, he says.

But Singapore firms may be unfamiliar with the typical cycles of IO-funded projects and may not have a strong track record if they are new to a market.

Recognising the huge potential of the IO-related market, IE Singapore set up a dedicated International Organisations division in 2004. IE helps in two main areas:

1. First, it raises awareness of opportunities while equipping companies with the knowledge and competencies to partner IOs. IE Singapore, in collaboration with the IOs, organises regular procurement and business opportunities seminars and workshops, said Mr Jayakrishnan. These broad-based outreach activities are supplemented by one-toone company-level advisory sessions that aim to provide in-depth information to companies.

2. Second, IE Singapore identifies IO-related project opportunities and channels these to Singapore-based companies. The referrals are backed up by on-the-ground market assistance and intelligence from IE’s overseas offices.

   IE also helps by raising awareness among IOs of the capabilities, pools of expertise and track record of Singaporebased companies. For example, sector-specific briefings are organised for IOs, at which Singapore companies can present their solutions to IO officials and project team leaders, while the latter give more information about upcoming projects. Programmes to showcase Singapore’s development experience in sectors such as education, water resource management and urban management are also arranged.

   IE is also establishing longer-term institutional partnerships with IOs, like the Asia Training and Research Initiative for Urban Management (Atrium), which it signed with ADB in March. Under this initiative, which focuses on cooperation activities in the areas of urban master-planning, urban transport management, water and environmental management, Singapore will provide up to US$1 million over the next three years, while ADB will complement this with up to US$2 million of ADB-supported technical assistance and loan projects in the various developing countries.

   ‘IE Singapore aims to help Singapore-based enterprises leverage on IOs to participate in international projects and contribute to the growth of developing countries,’ says Mr Chua.

   The IO projects market is large and Singapore companies have unique strengths that enable them to take advantage of it. With the help of IE Singapore, it seems likely their market share will continue to grow.

    

   Source: Business Times 22 Nov 07

Average Grade A office rents here on par with HK

But top rents in HK are 1.8 times higher than in comparable buildings here

AVERAGE island-wide Grade A rents are currently just a shade under those of Hong Kong, but the highest rents achieved by Hong Kong Grade ‘AAA’ office buildings are still about 1.8 times higher than the top rents achieved in comparable buildings here.

A report by Savills reveals that in the CBDs of Hong Kong and Singapore, Grade A rents are now the equivalent of $9.80 and $9.70 psf respectively.

However, top rents in Hong Kong’s Grade ‘AAA’ buildings like the International Financial Centre, Chater House and AIG Tower are closer to $32 psf while those in Singapore’s Republic Plaza, One Raffles Quay and 6 Battery Road are at about $17.50 psf.

Rising business costs have come under scrutiny recently and Savills Hong Kong senior director (research and consultancy) Simon Smith does say that there is the perception that Hong Kong and Singapore are in direct competition to attract businesses for this segment of the property market. However, he added: ‘I have not come across any financial institutions that have chosen to relocate from Singapore to Hong Kong yet.’

Indeed, Mr Smith believes that the financial institutions that are so important to the economies of both cities are more likely to set up offices in both cities to service different markets.

In terms of new supply of office space, Mr Smith does point out that Hong Kong will see some ‘AAA’ space become available next year in areas like West Kowloon where the 2.5 million sq ft International Commerce Centre (ICC) is set to open. The ICC is said to have attracted some major financial institutions already.

In contrast, Savills notes that the recently awarded commercial development sites including those at Marina View and Beach Road are expected to generate a combined 3 million sq ft of office space, scheduled for completion between 2010 and 2012.

But competition actually could come from more unlikely quarters.

Savills’ survey of regional office rents includes the emerging Vietnamese cities of Hanoi and Ho Chi Minh City and already average Grade A office rents in both cities have outpaced those in Shanghai and Beijing (but are still less than Tokyo, Hong Kong and Singapore).

Mr Smith believes that rising rents and 100 per cent occupancies in Hanoi and Ho Chi Minh City are largely due to the shortage of quality buildings in these cities, and hence adds: ‘There is a huge potential there for developers.’

Giving an insight into the pace of development there, he said: ‘Vietnam is much like China was in the 1990s, where companies were running their businesses out of hotel rooms. But when the market matures, rents will settle down.’

Savills believes the outlook for Singapore office sector remains positive, with rents continuing to rise, although at a slower pace for Grade A space due to ‘resistance from tenants’.

‘Demand from multinational companies for offices in suburban areas and high-tech space is expected to increase, especially by those who are more conscious of their bottom-line,’ it said.

 

Source: Business Times 22 Nov 07

Viet firm to raise funds for 11 projects

(HANOI) Saigon Thuong Tin Real Estate Joint-Stock Co, part of the same group as the only bank listed on the Ho Chi Minh City Stock Exchange, will sell bonds and shares this year to raise capital for investments.

The Ho Chi Minh City-based property developer aims to raise funds for 11 property projects, Dang Hong Anh, chairman and general director, said in an interview in Hong Kong on Tuesday. The company will get 2 trillion dong (S$181 million) from a bond sale, and 125 billion dong from selling shares, he said.

‘We have many good opportunities and projects and we need more capital,’ Mr Anh said. ‘The difficulty for an issuer in selling bonds is creating opportunities for use of the proceeds, but Sacomreal has a lot of projects now.’ The company will pay a coupon of as much as 10.5 per cent on the securities, with an ‘interest rate that is still lower than borrowing from a bank,’ Mr Anh said. The company sold 1 trillion dong of 10 per cent five-year notes on Nov 15.

The minimum price for the sale of shares to strategic investors will be 100,000 dong, Mr Anh said. Viet Capital Securities Joint-Stock Co will advise on the sale, he said. ‘Strategic partners need to commit not to sell the shares at least in the next three years,’ he said. ‘They will be expected to provide us support in terms of management, human resources and experience.’ The developer was created in 2004 from the real estate interests of Saigon Thuong Tin Commercial Joint-Stock Bank, or Sacombank, the third-biggest company on the Ho Chi Minh City Stock Exchange. Mr Anh’s father is the chairman of Sacombank.

Sacomreal, which has interests in property development, brokerage and sales, forecasts profit this year will be 192 billion dong, compared with 17.9 billion dong in 2006.

 

Source: Bloomberg (Business Times 22 Nov 07)

World’s most expensive office rentals in London, Mumbai

Singapore rents grew the fastest at 83%, says survey by CB Richard Ellis

(SEATTLE) London and Mumbai tenants paid the most for high-quality offices this year, while Singapore rents grew the fastest as economic growth lured international banks to Asia, said CB Richard Ellis Group Inc, the world’s largest commercial real estate broker.

London’s West End led with average annual rents of US$328.91 per square foot (psf) this month, compared with US$180.80 for the UK capital’s main financial district.

Mumbai had the second-most expensive leases at US$189.51, CB Richard Ellis said in its semi-annual Global Market Rents survey.

Asia’s booming economies drove up demand for financial and computing services in the region, catapulting Mumbai to second spot and fuelling Singapore’s 83 per cent growth in rents.

The US currency’s decline also drove up costs in dollar terms, while a dearth of new space bolstered London rents, CB Richard Ellis said.

‘Markets that moved up that quickly had the highest growth rates based on the economy’ as well as a scarcity of space, said Ray Wong, director of research operations for the Americas for Los Angeles-based CB Richard Ellis.

‘In the most expensive markets, if they’re close to their peak, the expectation for increase is marginal, but other markets, especially resource sectors, are enjoying an increase in demand so they’re going to move up a lot quicker.’

Mumbai’s rents rose 55 per cent, driven by computer related tenants, according to CB Richard Ellis.

Midtown Manhattan was the most expensive North American market, with rents averaging US$100.79 psf, 12th highest worldwide. Downtown New York ranked 46th globally at US$53.47.

Moscow rents jumped 65 per cent after crude oil prices tripled in the past five years, bolstering the economy of the world’s second-biggest exporter of the fuel.

Rents in the oil hub of Edmonton, Canada, rose 43 per cent, the ninth- fastest worldwide, as energy companies leased more space to house expanding workforces, the survey showed. Edmonton did not rank in the top 50 markets by rental prices.

Eighty-five per cent of the 171 cities included in the survey saw rental increases in the year ended Sept 30, according to CB Richard Ellis. This bodes well for investment returns, Mr Wong said.

The survey measures the most expensive rents based on US dollars. Rental growth rates were measured in local currency terms.

 

Source: Bloomberg (Business Times 22 Nov 07)

Lone Star to sell Japanese hotel operator Solare

(TOKYO) Lone Star has hung a for sale sign over its Japanese hotel operator Solare Hotels and Resorts Co Ltd, sources familiar with the matter said, in a deal which could raise 150 to 200 billion yen (S$2.6 billion).

The US investment fund has engaged real estate services firm Jones Lang LaSalle to handle the sale process. Blackstone is believed to be among several parties interested in Solare, the sources said. Lone Star and Blackstone declined to comment.

Lone Star has two ways to cash out; it has paved the way to list a hotel real estate investment trust (Reit) which could include Solare. This would be managed by Star Hotel Reit Management Co Ltd, which Lone Star has recently set up.

But with the Japanese Reit market under pressure amid the US sub-prime mortgage crisis, they may instead seek to sell Solare to a trade buyer or another fund in an auction.

Dallas-based Lone Star took over hotels owned by real estate developer Chisun Co which filed for bankruptcy protection in 2002 and created Solare. Solare now has 55 locations nationwide with a total of 10,823 rooms as at August. The group includes hotels, spas and a ski resort. The firm operates roadside hotels under the Chisun brand and upscale hotels under the Solare Collection banner.

 

Source: Reuters (Business Times 22 Nov 07)

Dubai developer Damac to invest US$5b in India

It will build houses, offices, shops in Mumbai, New Delhi, Hyderabad, Bangalore

(MUMBAI) Damac Properties, a closely held developer based in Dubai, plans to invest as much as US$5 billion in India over the next three years as a booming economy spurs demand for real estate.

The developer will construct houses, offices and shops in the Indian cities of Mumbai, New Delhi, Hyderabad and Bangalore, chairman Hussain Sajwani said. The first project will be started in 12 months, he added.

Soaring office rents and a shortage of apartments are luring developers including Donald Trump Jr and Emaar Properties PJSC to India. The real estate market is set to grow to US$90 billion by 2015 from US$12 billion, according to Moody’s Investors Service.

Demand for property is soaring as the world fastest-growing major economy after China is poised for 9 per cent growth in the year to March 31, following an average 8.6 per cent average rise over the past four years.

India’s 1.1 billion population faces a shortage of 25 million housing units, according to government data. The government is seeking to encourage the purchase of homes by giving tax breaks and ensuring easy availability of bank loans.

‘We plan to meet the funding requirement from our internal resources,’ Mr Sajwani said. Damac has built waterfront luxury projects in the United Arab Emirates and is investing in Saudi Arabia and Egypt.

 

Source: Bloomberg (Business Times 22 Nov 07)

China needs to levy property tax: official

(BEIJING) China should levy a general property tax to discourage speculation and rein in runaway real estate prices, according to a member of the central bank’s monetary policy committee.

Fan Gang’s comments in the latest issue of a Chinese Academy of Social Sciences magazine echo concerns voiced this week by Premier Wen Jiabao that China’s soaring housing market must be brought under control.

‘Realty investors don’t care whether their houses can be rented out or not,’ Mr Fan said in an interview. ‘If a continual and incremental tax is imposed on real estate, investment in the sector will cool down.’

Mr Fan, one of China’s best-known economists, has previously called for an annual tax on homeowners based on the value of their property but had previously said that technical obstacles stood in the way. His latest comments described the reforms as urgent.

‘Demand will continue to expand unchecked if realty investors are not required to pay anything to compensate for the housing price hike,’ he said.

China has adopted a number of measures to cool the real estate sector, such as increasing capital gains taxes on property and tightening land-use rules.

But property prices have resumed their surge, up 9.5 per cent year-on-year in October and even more in major cities, after briefly calming earlier in the year.

Mr Fan, who is also director of the National Institute of Economic Research, added that authorities must crack down on insider trading and illegal loans in the stock markets, or ‘the consequences will be unthinkable’.

However, he was optimistic about China’s potential for stable growth at around 11 per cent a year, saying that the country would continue to benefit from low labour costs, a high savings rate, capital inflows and advances in education and technology.

The challenge, he said, was for China to fix its economic problems from its current position of strength, so that it would be better able to withstand international financial crises.

He also said that the profitability of Chinese businesses was exaggerated because of artificially low resource prices, tiny social security outlays and lax environmental rules.

 

Source: Reuters (Business Times 22 Nov 07)

Bankers bought fewer luxury London homes in past 4 mths

(LONDON) Bankers and money managers purchased fewer luxury homes in central London in the past four months as turmoil in the credit markets escalated, real estate broker Savills plc said.

Purchases of homes costing £2 million (S$6 million) to £4 million by financial services employees declined almost 26 per cent between August and last week, London-based Savills said in a report on Tuesday.

‘We’re going to see a similar picture for at least another six months,’ said Lucian Cook, a director of Savills’ residential research department. ‘There’s a reasonable likelihood’ that the slowdown will deteriorate, he added.

Sales are slowing as bank losses incurred from US$40 billion in writedowns on US mortgage investments have heightened concerns about job cuts and lower annual bonuses. Bonus-earners in London’s financial services industry accounted for more than half the sales of homes this year in this segment of the ‘prime’ central London residential market, Savills estimated.

Since the end of July, the proportion of purchasers employed in finance or business services declined to 44 per cent for the 27 properties in this price bracket sold by Savills. In the first seven months of the year, 60 per cent of the 60 properties Savills agents sold were to bonus-earners.

Companies in the City of London, the British capital’s main financial hub, may cut 6,500 jobs and reduce bonuses by 16 per cent this year, the Centre for Economic and Business Research said last month.

For the past two years, most of the bonus money has been spent on real estate, fuelling demand for homes in neighbourhoods like Chelsea, Kensington and Notting Hill. Prices climbed by about 34 per cent in October from a year earlier.

 

Source: Bloomberg (Business Times 22 Nov 07)

Ascott buys another KL serviced residence

THE Ascott Group is adding another serviced residence in Kuala Lumpur – its sixth property in Malaysia.

The group said yesterday it has signed a conditional agreement to buy a 208-unit serviced residence from HSC Properties (HSCP) for RM112.5 million (S$48.3 million).

The property will be named Somerset Ampang when it opens in the first half of 2010.

Somerset Ampang is in Kuala Lumpur’s ‘Golden Triangle’ – the business, shopping and entertainment district marked by Jalan Ampang, Jalan Sultan Ismail and Jalan Bukit Bintang.

When completed, the serviced residence will be part of an integrated development that will house one of Malaysia’s leading medical, heart and diagnostic centres, HSC Medical Centre. The high-end medical centre will be separately owned and managed by HSCP. It will occupy five levels of the 23- storey development, with amenities such as a medical spa, restaurant and cafe.

Ascott’s deputy CEO for finance and investment Chong Kee Hiong said: ‘Demand for international-class serviced residences, especially in the capital of Kuala Lumpur, is expected to remain strong. Given its excellent location in Kuala Lumpur’s business and lifestyle district, Somerset Ampang will enable Ascott to capture a larger share of the serviced residence market.

‘Somerset Ampang will cater not only to business travellers but also to visitors to the medical centre who require post-treatment accommodation, as well as their families and friends.’

Somerset Ampang’s facilities will include a swimming pool, gymnasium and children’s playground, Ascott said.

Its portfolio in Malaysia will increase to more than 760 units when Somerset Ampang opens. Ascott’s other properties in the country are Ascott Kuala Lumpur, Somerset Seri Bukit Ceylon in Kuala Lumpur, Somerset Gateway in Kuching and two corporate leasing properties in Kuala Lumpur.

‘Somerset Ampang is our second Somerset-branded serviced residence in KL,’ said Ascott’s deputy CEO for operations Gerald Lee. ‘Having more serviced residences in the city enables us to leverage on economy of scale and brand awareness for better operational efficiency and cross-selling. Adding more properties in Malaysia also means that our customers can choose from a wider portfolio.’

The group operates three brands – Ascott, Somerset and Citadines. Its portfolio spans 53 cities in 23 countries, 11 of which are cities where Ascott’s serviced residences are being newly developed.

 

Source: Business Times 22 Nov 07

US commercial property sales down 70% in Oct

But report says the five-year bull run may not be over

(NEW YORK) US office building sales fell 70 per cent in October from a year earlier, yet another sign the credit crunch that began in the US housing market has spread to the commercial real estate market, Real Capital Analytics said on Tuesday.

But the five-year bull run on commercial real estate may not be over, although the participants have clearly changed, the real estate research firm said.

The credit crisis has weighed on US commercial real estate and the office market in particular, making purchases funded nearly all by debt a thing of the past. Even lower-leveraged deals are harder to come by as borrowing rates rise and risk becomes a significant factor in obtaining a loan.

‘The remarkable increase in sales activity, rise in prices and compression of cap rates (the first year’s yield on the property) since 2001 ended abruptly in August,’ the Capital Trends Monthly report said. ‘Since then, the dramatic fall in sales volume, drop in prices and rise in cap rates certainly meets the definition of an inflection point.’

But capital has continued to flow into commercial property, especially globally, and the greater cycle may not be quite over, the firm said.

Sales of significant office properties – those more than US$5 million – fell to US$4.4 billion in October. More than US$14 billion are reported in contract, but only US$4 billion of these have been announced. Sellers have pulled properties off the market when they could not get the price they wanted.

New offerings have exceeded closings 2-to-1 over the past 60 days, the report said.

The credit crisis has meant cash rules again and those loaded with it – foreign and institutional investors – make up more of the buyers. Since the onset of tighter credit, their market share has grown to 38 per cent of purchases from 26 per cent. These buyers generally favour stable, steady cash producing properties in major markets.

The large, highly leveraged buyers, such as private equity players, acquired US$78.5 billion worth of office properties from January to August. But not a single significant acquisition involving those funds have been announced since then.

Real estate investment trusts also have not been active buyers since September. But the report said that may change soon. Some larger players, such as mall owner Simon Property Group Inc and apartment owner AvalonBay Communities Inc, have raised capital by increasing their credit facilities.

Apartments sales in general also have plummeted. Excluding the US$22 billion sale of Archstone- Smith Lehman Brothers Holdings Inc and a fund run by Tishman Speyer, sales fell 50 per cent from a year ago to US$3.3 billion.

The sales of garden apartments were even worse, down 60 per cent.

 

Source: Reuters (Business Times 22 Nov 07)