A Quick Run-Through Of Global Real Estate Hotspots

Real estate is a cumbersome slow moving asset. Its not like stock prices which can move up and down a few percent on the same day. Real estate is however a reflection of liquidity, a wealth indicator, a confidence indicator, a leading indicator, and a lagging indicator as well, depending on how you argue and look at things. Hence it opportune to have a peek at some real estate hotspots to see if the surprising bull run ties in with the investing situation in real estate.

Australia

The Australian housing market downturn is likely to be milder than in the U.S., UK and EU in 2009. Australia's house price correction had a head start going back to 2003. Furthermore, housing demand from migrants to the commodities-rich west and the chronic housing shortage in eastern Australia will keep prices from stabilizing back at pre-boom levels unless Australia fails to avoid a deep recession. Indeed, building approvals and housing loans to owner-occupiers began to recover since October 2008 after the government doubled grants for first-time purchases of homes until December 2009. Mortgage interest rates fell to their lowest level in four decades after the Reserve Bank of Australia cut the overnight cash rate 425bp within a year to 3% in April 2009, the lowest since 1960. Tax cuts, government handouts and lower petrol prices will also raise the affordability of housing. Affordability may not mean higher house prices, though. Despite increased sales (new home sales in Q1 2009 rose 20% since end-2008), house prices fell 6.7% y/y in Q1 2009. Rising unemployment and lower household wealth will keep buying sentiment mild this year but, short of a deep recession, improved affordability and ongoing housing shortages will help Australia avoid a housing crash as bad as in the U.S. and Europe.

New Zealand

New Zealand housing market is in worse shape than Australia's but is also likely to avoid as deep a correction as in the U.S. and Europe. The Reserve Bank of New Zealand has cut 575bp since July 2008 to 2.5% in April 2009 but longer-term, fixed mortgage rates have recently begun to rise again due to expectations of a quick recovery and higher interest rates. Fiscal policy has been laissez-faire towards the recession, opting merely for tax cuts as the government would rather not stand in the way of the economy's structural adjustment. With housing assets 5.7 times the household disposable income, New Zealand property markets are even more leveraged than their U.S. counterparts. House prices fell 8% in 2008 and are down 9.2% y/y as of April 2009. Some analysts believe the housing market will bottom on an annual basis in 2009. The housing market has already bottomed on a month-over-month basis, with the median price rising from $325,000 in January 2009 to $340,000 in April. Immigration has revived housing demand and sales have been strongest in the low-end segment thanks to increased affordability. However, new building starts and new home sales remain below the boom levels of 2004 and will likely remain so due to credit constraints, rising unemployment and sluggish economic growth in the year ahead.

United Kingdom

The housing sector is one the most important factors affecting the economic slump in the UK, which is similar in many ways to the difficulties facing the U.S. economy. The latest data on the UK housing sector continues to be mixed but some analysts are tentative to call the bottom in Q2 2009. The latest Halifax price index fell 1.7% m/m in April with price levels back to 2004 readings. Nationwide data brought a 0.4% decline in April but the y/y contraction fell from 15.7% in March to 15% in April. Mortgage lending showed some signs of recovery in April according to the data from CML with a 9% m/m drop. Despite hopes of a recovery, lending is still 60% lower than a year. The monthly data could be quite volatile in the coming months, drawing a slow bottom-like pattern. A real recovery of the housing sector will depend on improvement in the personal income and employment situation in the economy, which are not yet foreseen.

Asia

Asia has witnessed sharp real estate correction led by the Asian Tigers, plus China, India and Vietnam. All these markets saw declining home and office prices and rentals, lower sales and rising vacancies. Prices are approaching fundamental values and slowing construction activity might somewhat close the estimated excess supply. But further price and rental correction are imminent. This because household and corporate demand will remain subdued in 2009 despite policy measures such as interest rate cuts and fiscal incentives as well as attractive discounts offered by realtors. Slowing or contracting consumer spending and rising job losses in most economies are hitting residential and retail markets. Slowing corporate earnings and capex, declining exports and liquidity crunch are weighing down on commercial real estate. Though banks are reducing exposure to the real estate sector, lower earnings among realtors and income pressures among consumers are raising the risk of delinquencies. Nonetheless, as the global liquidity crunch abates overtime, high growth potential and attractive returns, given rising incomes and urbanization in developing Asia, will revive domestic and foreign investor interests in Asia's real estate.

China

Unlike many global markets, the residential property market in China is showing some signs of stabilization. Significant price discounting, lower mortgage rates, incentives and overly ample credit extension are contributing to an increase in transactions and helping to reduce the existing inventory. Chinese property prices began falling in mid-2008 as anti-speculation measures and slower economic growth reduced investment. However, transactions could slow if authorities rein in lending growth in mid-2009. Commercial property has yet to show signs of recovery. The global capex retrenchment is also putting pressure on commercial property as it delays some expansion plans especially by foreign companies. Although domestic companies are somewhat less affected, a slower pace of consumption growth may weigh on both office and retail property markets.

HK

The HK real estate seems to be bubbling up again at least in terms of sales to investors as increased credit availability, and a weakening US and Hong Kong dollar, encourage investment. However, new tenants remain scarce and vacancies are on the rise, suggesting further downward pressure on prices, especially as Hong Kong’s economy, including the financial sector, continues to contract and consumption weakens.

India

Home prices in India have corrected 15% to as much as 40% in some prime areas since September 2008. The recent pick-up in demand due to discounts by realtors and mortgage rate cuts by banks will be largely outweighed by the excess supply of homes in the market. So another 15-20% price correction is underway in residential and office markets over the next 6-to-8 quarters. This is especially because bank lending standards have tightened, households face wealth erosion and slowing job market, affordability remains low and corporate sector faces liquidity pressures. Mall construction and rentals have taken a hit and so have activity and employment in the construction sector. Drying funding from foreign investors and domestic equity market is forcing the indebted real estate firms to divest shares to raise capital, hold back expansion plans, and refinance bank loans which has been helped by recent central bank measures.

Singapore

Singapore's real estate sector started moderating in Q2 2008 and home and office prices witnessed record decline of over 10% in Q1 2009 with rents also falling sharply. Another 15% to as much as 25% correction is expected in the residential sector and may be even higher in the luxury section. Woes in the financial and service sectors, negative wealth effects among households and shrinking population due to outflow of laid-off immigrants – all will weigh down on residential and retail real estate. This will be exacerbated by falling speculative investment due to tight domestic and foreign liquidity.

Vietnam

Vietnam's property prices are down over 30% in some markets with luxury section taking the biggest hit and office rentals showing steep decline. Though realtors have been cutting prices and banks are resuming lending, demand has been slow to pick up. Investors also remain reluctant to enter the market since they largely depend on foreign liquidity. The sector is unlikely to improve in 2009 and this will be exacerbated by lower investment via remittances and FDI.

Japan
Economic downside risk in Japan was highlighted when exports plummeted by 49% year-over-year in February. The steep decline in exports, a key driver of economic growth, stemmed from faltering global demand and the strong Japanese yen. Amid the dramatic drop in external trade, domestic consumption slowed in the quarter as well. The government reports that, on a year-over-year basis in February, household spending shrank 3.5% and retail sales contracted by 5.8%, the steepest decline in seven years. Imports declined 43%. Bank of Japan’s latest tankan survey in March shows that large manufacturers turned more pessimistic about business prospects, which does not bode well for industrial production or the labor market. Indeed, the unemployment rate rose to 4.4% in February, a three-year high. The excess capacity resulting from the collapse in demand and consumption has increased the risk of deflation. Headline inflation contracted by 0.1% in February. In one of the few bright spots in the Japanese economy, bank lending in Japan grew by nearly 4% year-over-year in January and February, much higher than the growth during the same months last year. Commercial land values are falling. Land prices in the three major urban areas (Greater Tokyo, Nagoya and Osaka) in January declined by 5.4% year-over-year, the first drop in four years, according to the government. The decline was more pronounced in Greater Tokyo, where the government said that prices dropped 6.1% in January. Meanwhile, the tightened lending policies adopted by banks, coupled with the difficult business environment, have pushed up the number of companies filing for bankruptcy. In the first two months of 2009, corporate bankruptcies rose 25.5% over the previous year. That helped prompt a rise in office vacancy in Tokyo’s five wards to 6.1% in March, from 4.7% at year-end 2008. Vacancies are likely to rise further as companies consolidate their space requirements. Newly constructed buildings will be hard to fill as demand dwindles. We believe that weak demand will persist this year and competition for tenants will lead to more concessions from landlords – rental discounts, longer rent-free periods and other incentives. With demand for class-A office space likely to remain soft and rents under pressure, cap rates for class-A offices will likely rise in the quarters ahead, possibly by 10-30 bps. Commercial land prices will see further downside as well. Residential land prices are also falling. Land prices in the three major urban areas declined by 3.5% in January from a year ago, according to the government, which said that the decline was a bit steeper, 4.4%, in Greater Tokyo. The volume and velocity of transactions has slowed sharply. In Tokyo, only 621 new condominium units were marketed in January with a contract ratio of 67%. The number of unsold units stood at about 4,200 units at the end of January, almost double from a year ago. As part of the national budget for fiscal year 2009, the government has included steps to rejuvenate housing demand that include tax breaks of up to 6 million yen for home buyers who move into their property in 2009 or 2010. The amount of the tax break will be lowered gradually after 2010.

REIT Markets
REIT markets in Asia posted mixed results in the first quarter. REITs gained in Hong Kong (14%) and Malaysia (5.3%), but J-REITs and S-REITs posted negative returns, as investors raised concerns about refinancing issues. Still, REITs mostly outperformed the broader equity markets, possibly because investors were attracted by the deep discounts to net asset values (NAV) and higher dividend yields.

Total Returns, REITs vs. All Equities
1Q09 / 2008 / 2007 / 2006 / 2005
REITs
Hong Kong 14.0% / -28.9% / 10.4% / 9.8% / 2.0%
Japan -4.7% / -49.0% / -2.3% / 29.7% / 13.5%
Malaysia 5.3% / -14.8% / 17.8% / N.A. / N.A.
Singapore -1.1% / -56.1% / 2.8% / 57.9% / 22.2%
All Equities
Hong Kong 0.2% / -52.4% / 40.3% / 32.6% / 11.3%
Japan -8.9% / -41.4% / -11.3% / 2.9% / 47.4%
Malaysia 1.0% / -39.7% / 43.0% / 31.4% / 1.1%
Singapore -3.7% / -50.9% / 22.1% / 33.9% / 16.1%

Indeed REIT yield premiums ranged from 569 to 940 bps above long-term government bond yields. As of the end of March, the region had 83 REITs with a total market capitalization of US$44.4 billion, which is moderately down from US$45.2 billion at end of last year. The weighted average dividend yield fell by 30 bps in the first quarter, to 8.2%.

Market Cap and Dividend Yields of Asian REITs
No. of REITs / Market Cap (US$ bil.) / Average Dividend Yield / Risk-free Rate /* Risk Premium (bps)
Japan 41 / 26.28 / 7.03% / 1.34% / 569
Singapore 21 / 9.93 / 11.40% / 2.00% / 940
Hong Kong 7 / 6.92 / 7.80% / 1.93% / 587
Malaysia 11 /1.10 / 10.80% / 1.89% / 891
Korea 3 / 0.17 / 10.60% / 4.68% / 592

Total 83 / $44.4 / 8.20% (weighted average based on market cap)

p/s photos: Zhou Weitong

Glimmer Of Recovery In HK Property Market

HK and Singapore properties went down sharply at the beginning of the crisis. Singapore is still nursing a down trending market. However things are looking up in HK. Recent property launches have attract a lot of buyers. Of course the pricing of these new developments were a bit more attractive, and we should remember that many of the buyers were from mainland China. Developers reported vigorous weekend sales as Sun Hung Kai Properties (0016) sold 400 apartments at The Latitude while Cheung Kong (0001) said all flats at Central Park Towers II were sold on Saturday.

SHKP raised prices by 3 to 5 percent after the first batch of 50 homes at The Latitude, a San Po Kong residential project, were sold on Saturday. The average price was 2 percent higher than the original price of HK$7,255 per square foot.

The developer reaped more than HK$3 billion from flat sales at The Latitude, at an average price of HK$7,400 psf. Prices ranged between HK$5,300 and HK$15,000 psf. Flats were sold at between HK$3.6 million and HK$18.5 million. A special 1,712 sq ft flat, "Sky Latitude" with a 1,294 sq ft "sky garden" was sold for HK$26.5 million. The project has five residential towers totaling 1,159 homes.

Meanwhile, Cheung Kong executive director Justin Chiu Kwok-hung said the 1,068 flats at the Tin Shui Wai project Central Parks Tower II were all sold in three days since the launch on Thursday. Chiu earlier estimated the sales to generate about HK$2 billion.

The secondary home market is expected to be fueled by the good sales in the primary market, said Centaline Property research associate director Wong Leung-sing. "Home transactions in the secondary market may jump 9.1 percent and 11.1 percent by volume and value, respectively, this month, to 6,000 deals and HK$17 billion, when compared with March," Wong said.

The value of home sales in Hong Kong soared 86.8 percent month on month to HK$25.4 billion in March to hit a nine-month high, while the number of deals rose 58.3 percent to 7,102, according to data from the Land Registry.

"Earlier-than-expected signs of stabilization of major economies lead us to believe that various governments' stimulus measures could help restore homebuyers' confidence and bring forward the inflection point of price stabilization," Goldman Sachs analyst Anthony Wu said. The research house forecast prices in the primary market will fall 5 percent and that of the secondary market will be flat this year.

UBS analyst Eric Wong also upgraded home price forecasts "as credit conditions continues to normalize, mortgage competition returns, good stock markets boost confidence, and global quantitative easing raises awareness of the need to hold real assets instead of fiat money." Wong also believes the Hong Kong homes market will rebound earlier and faster than most property markets.

p/'s photos: Priyanka Chopra

Revised Outlook For Malaysian Property

Readers of this blog will know that I have been pretty bearish on Malaysian properties, but even more so for Singapore and HK properties. The latter two have seen a 10%-15% price correction across the board. The funny thing is that Malaysian property is holding up pretty well.

Over the last few days a couple of things struck me about Malaysian properties, which have eluded me, and many property analysts. We always look at the same indicators: affordability ratios, employment trends, rental vacancies, occupancy rates, ratio of income to mortgage, etc.

Somehow there are a couple more reasons which seem to dictate the underlying strength of local property prices.

a) Open economy - The more open your economy is to free trade, the more susceptible you are to global financial turmoil. Hence explaining much of the distress in HK and Singapore economies. Theoretically speaking Malaysia should be affected just as bad, but we are not. I would like to cite this as the Shenzhen effect. Malaysia has what I would coin as the "Shenzhen effect". Its when a place can be used to produce goods and services more cost effectively. We also must remember that we are in a massive globalisation mode for the past 15 years, with the pace rising over the last 5 years. There is no way you can bring back those jobs to Singapore, HK or the US unless maybe if the Sing dollar goes to 1.5 vs the ringgit or the HKD drops to 15 HK dollar to the USD.

The key point is that when global companies decide where to cut cost or restructure, they now tend to leave Malaysia alone. You cannot cut manufacturing outright, you reduce shifts and capacity. But you can cut services and managerial headcount easily and the numbers make more sense out of places such as Singapore and HK. I give you another example, in investment banking, a senior analyst may be paid a US$300,000 package in South Korea or HK, but a similar position in the same firm in Malaysia may be paying just US$120,000. Its not all equal. And when top managers strategise on where to lop off manufacturing and investments, Malaysia will almost be the last to be chop.

Why? Multi lingual work force, relatively hard working staff (I said relatively), very cheap land cost, very cheap building and facility cost, excellent ports and road networks to ship in and out, reliable and effective air travel hubs in the country, much safer and stable politically, less risk of war or internal unrest, high degree of safety from terrorism, its Islamic yet Islamic neutral for businesses which is a highly coveted position to all, strategically, its position is important for shipping services.

b) Many have over invested in India and China, hence some operations investing may be delayed or see its capacity being shrunk there. HK and Singapore are the high value add sectors and are also highly leveraged to global financial markets, they cannot hide. Hence we cannot and should not lump Malaysia together with HK and Singapore. yes we will see some jobs lost but it should not be anywhere near the cuts we are seeing in HK and Singapore.

We always just talk about speculation in markets, but we should also look at sectors or countries that have over invested (either from domestic or foreign sources). Singapore has over invested in private bankers, same with HK. Singapore has over invested in Sentosa and the outlying real estate areas where prices are totally out of whack - we are seeing Monaco prices and the weather is too damn hot! China has many areas that have seen over investment as well.

In terms of speculation, Singapore is topping the charts with the en bloc sale, which proceeds are then geared up to speculate in the many luxury condos. Enough said. Specuation is there in Malaysian properties, in particular the high end condos - we have never been able to maintain very high prices in condos because most people still prefer houses and land. The only time we see RM1,500-3,000psf is in a bubble. The correction will be most severe in those above RM1,000psf which may see a 15%-20% drop. The RM500-999 psf may see a drop half of that. Landed properties below RM1.5m are still pretty solid and may only see a 5% drop from their peaks. Those under RM3m may see a slight ease off but it should not be major. Higher than RM3m, they are in a world of their own.

c) The stock market effect - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 any major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

I am working on a big piece on the Market Prognosis for 2009, stay tuned, will be out in a couple of days.

photos: Pace Wu Pei Ci

The Asian Response

• 10 ASEAN nations planning for a crisis fund to tap from if they face severe liquidity crunch due to global financial crisis; Fund can also be used to purchase bad assets, recapitalize troubled financial institutions and private companies; ASEAN+3, ADB, IMF will contribute to the fund while World Bank has contributed $10bn; also include plans for stand-by liquidity facilities
• In spite of limited exposure to US bank losses, risks from external funding crunch, higher borrowing costs, bank panics and deposit withdrawals are growing for banks and corporates in Korea, HK and Taiwan
• Asian central banks had been injecting liquidity into banking system and cutting rates (discount/policy rate) and/or bank reserve requirements to ease liquidity squeeze and spike in short-term rates (swap, overnight, inter-bank rates and spreads) since Sep; Some banned short-selling, guaranteeing deposits, considering fiscal stimulus; following global central bank intervention, these rates have somewhat eased in recent days
  
• Australia: $7.3bn stimulus for pensioners, middle and low-income groups, first-time home buyers; additional stimulus may follow; deposit guarantees; cut overnight cash rate to 6% from 7%, offering 6-mo/1-yr repos; Term Deposit lending facility, expanded types of collateral, loan maturity under bank lending facility as difference b/w inter-bank and overnight indexed swap rate surged; doubled swap agreement with Fed from $10bn to $20bn; banned short selling; to purchase $3.2 bn in residential-backed mortgage securities to help small lenders offer home loans
• Japan: supplementary budget for fiscal stimulus; providing unlimited dollar funds to banks at a fixed rate against pooled collateral until Jan-09 under swap agreement with Fed; eased rates under lending facility, expanded range of bonds under repos, suspended program of selling bank shares; Injecting liquidity amid spike in Yen overnight LIBOR; banks' exposure to Lehman had led to decline in stock prices and short halt in trading on Sep 15
• India: Raised cap and credit cost on external borrowing of firms; cut interest rate 100pbs to 8%; conducting 14 day Repos to help banks provide credit to MFs; allowed banks to lend to MFs against CDs; Allowed Savings bond holders to borrow from banks against govt paper; to infuse capital into commercial banks to raise CAR up to 12%; cut bank reserve ratio thrice in Oct from 9% to 6.5% (first time in 5 yrs); raised FII limit in corporate bonds; raised interest rate on non-resident deposits by 50bps following similar move in Sep; eased limits on banks to raise foreign capital, restrictions on FII equity investment; eased Liquidity Adjustment Facility; continues to sell FX reserves
• HK: to use forex reserves to guarantee bank deposits, set up a fund for banks to access capital; Cut base rate by 150bps to 2% twice in Oct to contain jump in HIBOR; providing additional liquidity to banks via 3-mo repo window, expanded acceptable collateral
• Korea: cut 7-day repo rate 75bps to 4.25% and lowered the base rate 75bps on loans to SMEs amid high commercial paper and loan refinancing costs, household debt; up to $100 bn to guarantee maturing foreign currency debt; to use forex reserves to inject $30 bn liquidity in won-dollar swap market after an initial $10bn; might buy govt bonds from the market to reduce USD shortage; temporary ban on short selling
• Taiwan: Guaranteed bank deposits; Cut discount rate on 10-day loans to 3.25% on Oct 9 (second time in 2 weeks following first cut since 2003), cut reserve ratio (first time in 8 yrs) and ratio for passbook deposits; injecting liquidity into foreign-currency interbank market; lending via repos to insurance companies w/ extended maturity up to 180 days; banned short selling; instructed 4 major funds and state-owned banks to buy shares after stock market fell to 3-yr low on Sep 15
• Indonesia: allowed commercial banks to use central bank debt and govt bonds as secondary reserves; extended FX Swap tenor to 1 month; passage of foreign currency via banks for firms; abolished limit of daily balance position; eased foreign currency min reserve req; Cut bank reserve ratio 1.58bps to 7.5%; exempted banks from mark-to-market rule, eased rules/cap for firms to buy back shares; Suspended trading on Oct 8/9 following 10% slide in stock market; banned short selling for Oct; injected over 3bn via 6-day repo; lowered overnight repo rate, adjusted rate of liquidity facility; might increase infrastructure spending, fiscal stimulus for exporting firms, households
• New Zealand: overnight Cash Rate cut 100bps to 6.5%; introduced opt-in deposit guarantee scheme; accepting (longer term) bank paper in daily market operations, ABSs from local banks for swapping foreign cash into NZ dollars
• China: Chinese banks reluctant to extend loans to foreign banks in the interbank market; reduced 1-yr lending rate (second time in 3 weeks, first since 2002) by 27bp to 6.93% and 10yr deposit rate to 3.87% and cut bank reserve requirements by 50bp to 17%; eliminated stamp duty on stock purchases with plans to buy shares in state-owned banks; to introduce short selling and margin trading to ease pressure on share prices
• Singapore: guaranteed deposits; Injecting liquidity via market operations; prepared to provide further liquidity if necessary and also to individual banks amid spike in 1-mo and 3-mo SIBOR, BEA bank run, CDS also rising; but rates have eased somewhat following central bank measures
• Malaysia: guaranteed deposits; Might inject liquidity, move interest rates if necessary; planning for an economic stabilization stimulus
  
• Pakistan: declining capital inflows/outflows in inter-bank and open market causing currency depreciation; central bank injected $100-200 bn, raised limit on investment bonds and term finance certificates under banks' statutory requirement
• Easing commodity prices, peaking of inflation, growing risks to exports, economic growth might also shift central banks' bias towards monetary easing; Taiwan, Pakistan, Vietnam had earlier intervened in stock market by narrowing trading band, introducing stabilization fund to contain volatility; India, S.Korea, Thailand, Philippines, Indonesian intervening in forex market to contain downward pressure on currency (led by capital outflows, decline in external balances)

Comments: Malaysia and Singapore are still the last to act. Hinting that their fundamentals are more solid than the rest. Safe to say that there is "no attack" on the currency so far. The difference is that Singapore was adamant in defending the strength of the Sing dollar - which could very well bite them in the back as their property side is headed for a substantive fall.

p/s photos: Haruna Yabuki

Singapore Property Outlook

Singapore property market is always very interesting. There is a high degree of speculation and much of excess liquidity would always find their way into properties there.

Thanks to its clear cut policies and very stable currency, Singapore properties attract investors from HK, Brunei, Indonesia and Malaysia as well. Hence, when it is hot, it is very hot. When it is not it can go south very quickly.

Its a very brutal market place. One that is not so dependent on "employment" as a main factor - i.e. if you have jobs, you still can make the installment payments. In Singapore, the dominant factor in properties has to be speculative element. The investors that buy 2 or 3 lots per launch. For them, the jobs factor is not in calculation but rather more important to predict the flow of capital. Prices of private homes have fallen for the first time in four-and-a-half years. This marks the end to the property boom that started since 2004.

Consultants say prices are likely to keep falling well into next year. Overall prices of private homes slipped 1.8 per cent, after flattening out in the second quarter. Consultants called it a turning point after almost a year of deadlock between buyers and sellers. Citigroup analyst Wendy Koh predicts that high-end home prices will fall by 25 per cent, the mid-end by 15 per cent and mass market by 5 to 10 per cent.

On the jobs front, Singapore has been the strongest beneficiary of hedge funds setting up shop there. Thanks to proactive measures, many hedge funds have chosen Singapore as their base. The pollution in HK has also seen some relocations from HK to Singapore. The number of expatriates, in particular from India, have also boosted inherent property demand. The events over the last few weeks would have put a halt to many of the expatriate postings. The more severe effects have been from those linked to hedge funds.

A cursory glance would reveal that more than 50% have closed shop over the last few months, no kidding. More are likely to close due to a huge loss in assets under management, poor performance and redemptions. The fact that Singapore dollar has held up the best among major currencies will only cause many of those affected by the crisis to sell Singapore property first to get cold very hard cash. I mean, who would want to sell their OZ properties now if they were a foreign investor?

The last 4 years have seen the Singapore mid-high end market being beneficiary to the enbloc sale phenomenon. Older condominiums were sold enbloc for premiums (to prevailing market prices) from 50%-100%. This freed up a loy of capital and saw much of the seller buying back into the private high end market with their windfalls. The first 3 years were very profitable for these players as they could buy and sell for a quick 30% gain after just a few months. As usual, greed takes over and you will find the same buyer now having 2-4 such properties for speculation (they'd call it investments). How fast can you scale down to protect your capital? First out best dressed.

The other related problem is the ruling that you can pay 10% deposit and nothing till the property is completed. Well, that sounded like a great idea before. Now a lot of properties will be completed in 2009 and 2010 and even 2011. If you have that, you are like holding a call option until the property is completed. The danger is that many would still be able to make the installments but would you be happy to make the payments if your property by then had sunk by 20% in value? First out best dressed again.

Evidence that more downside is to come: a blogger went to a couple of launches and was given the aggressive sales pitch. As long as you can put down 30% as deposit, they can arrange for a line of credit amounting to your yearly income. Hint, hint! You know where this is going. Its almost like maxing out your credit card on cash advance to put as down payment, something's gotta give. Desperate times call for desperate measures.

Naturally, there will be a lot of those who will come in to defend that property prices won't fall by that much, and that things are different in Singapore. I would like to remind all that we are going through a massive de-leveraging process globally. There is a huge aversion to leverage and credit, and the first asset to get de-leveraged will always be property to individual investors. But you say that Asian players are not that affected by the US subprime and CDS crisis. Really?? Asian markets have already tried to factor in the massive downswing. Asian markets have actually fallen more than the US markets dollar for dollar, and if you take in the dollar effect, the market cap loss is even higher. As you all know, Asian economies are tied very closely to their stockmarkets. Many have been able to avert the large losses as there was plenty of time to scale down your stock holdings, almost all could see the correction before it actually happened. Safe to say that the huge wipeout in market values over the last 6 months have been on institutional investors and die-hard traders only. Most of the individual investors have largely been unhurt.

Having said that, most of the rich individuals with substantial equity portfolio have seen their value being decimated. Though they may still have cash and not reached pauper status yet. Their net worth may have shrunk by 50%, just ask Lee Shin Cheng or Lim Kok Thay. Try and sell them a few Sails condo, they would wave you off as being stupid,.... unless it was at least 30% cheaper.

It is very hard to write negatively about properties, even for consultants, journalists and analysts, as most have properties of their own, and would be loathed to write anything bad about it. So, beware of those who try to mount a defensive argument.

p/s photos: Ema Fujisawa