Singapore: Building Up To A 2007 Collapse?

Left unchecked, developers' en bloc excesses could lead to a property
bubble burst

by Andy Mukherjee

Singapore's housing market, dead for five years, is suddenly gripped by
frenzy.

Developers are falling over each other to buy older condominiums en bloc
from their individual owners only to tear them down and build anew.

So far this year, such collective purchases have amounted to $6 billion,
three times the figure for all of last year.

The builders reckon that when the new apartments are ready there will be
buyers who will compensate them for the higher prices paid for the land
because they, in turn, will have tenants willing to pay high rents.

For now, it's all going according to the script.

But if the excesses continue unabated, a collapse may occur, perhaps as
early as next year.

The en-bloc madness is contributing to a shortage of apartments available
for rent: The vacancy ratio shows that the market is at its tightest since
the first quarter of 2001.

Tenants looking to renew their apartment leases in the past few months
have been asked to pay 20 per cent to 50 per cent more by landlords.
Homeowners feel confident amid the booming economy that they will be able
to pass on their high - and rising - mortgage costs to tenants.

The Singapore economy probably will expand near the top end of the
Government's forecast of 6.5 per cent to 7.5 per cent growth this year,
compared with 6.4 per cent last year.

Job creation this year may come in at 125,000, beating last year's
113,000, which was the highest since the Asian financial crisis of 1997,
says Mr Jimmy Koh, head of treasury research at United Overseas Bank in
Singapore.

With the local labour force near full employment, more new jobs mean more
foreign workers looking for places to live.

All of this is fuelling optimism among property owners. Two years ago, it
was the landlord who wanted to lock in a tenant at a fixed price; now it's
the tenant's turn to seek that assurance.

What was a slow and steady increase in rents until just a few months ago -
the Urban Redevelopment Authority's rental index for non-landed property
rose a reasonable 8 per cent between March 2004 and June 2006 - is
suddenly at a fast gallop.

Perhaps, the acceleration is just the last-lap effect.

With the United States economy on the cusp of a slowdown, the property
boom in Singapore may not have much further to go, especially if cracks
appear in the rental market. By this time next year, a lot of new, empty
apartments may be scattered around the city.

Nine out of 10 local households live in their own houses, typically a
Housing Development Board flat. Fewer than 22,000 Singaporean families
rent private condominiums and mansions.

Rents and prices of 231,000 private dwelling units and apartments are thus
almost entirely supported by expatriate families living in Singapore.

For locals, the biggest costs are food, transportation and communication;
for foreign-born bankers, fund managers, traders and consultants, it's
the rent.

A few years ago, researchers at Singapore's Department of Statistics found
that costs for shelter accounted for 40 per cent of household expenditure
for foreigners living in Singapore, compared with just 16 per cent for
the top 20 per cent income-earners among local Singaporean households.

Rising rental costs, therefore, do not lead to a general discontent among
the island's 3.5 million locals; their impact is limited to the 800,000 or
so foreigners.

The presence of foreigners in Singapore is directly linked to the health
of the world economy. After the 911 terror attacks, many global companies
scaled back operations in Singapore and recalled or fired employees. The
property market tumbled for the next several years.

Now, it's the recovery that appears excessive.

Developers are paying $1,000 to $1,300 for every square foot of plot ratio
for en bloc condominium purchases in top areas. Two years ago, prime
locations went for as little as $650 a square foot.

Most property companies in the city "have bought at least one or two
sites", says Mr Jeremy Lake, executive director for investment properties
at real-estate brokerage CB Richard Ellis in Singapore.

According to Mr Lake, land prices have been driven by developers looking
for choice residential development sites, particularly for high-end and
the so-called lifestyle projects.

As a small, open and export-dependent economy, Singapore swims and sinks
with the global tide. In their excitement to corner prime locations,
developers seem to be taking for granted that the global economy in 2007
will be as good as 2006.

In the fourth quarter of 2000, a lot of people in Singapore had felt the
same way about 2001.

(The writer is a Bloomberg News columnist. The opinions expressed are his
own.)

How To Ride The Property Wave...

...in the same issue of 'Today', Valerie Law shed some light on REITs as well. REITs are Real Estate Investment Trusts, which have the advantage of letting you take part in the estate boom in areas around the globe, without physically investing there in form of buying an apartment or house. Thus, your investment is more liquide and you can pull out any time, if necessary.

I see REITs as an interesting investment vehicle especially for us foreigners, who aren't easily allowed to buy real estate in certain asia countries.The estate boom is nevertheless quite obvious and for people to take part in it, there are rarely other options:

How To Ride The Property Wave
Different instruments have different risks, considerations
by Valerie Law valerie@newstoday.com.sg

REAL estate and investments linked to it are becoming more valued as ways to diversify one's portfolio, given the asset class' negative or low correlation with general equities.

While a vast majority of Singaporeans own their own homes, representing anything from 40 per cent to 80 per cent of their net worth, personal residences do not fit into the traditional definition of an investment asset.

For an asset to be considered an investment, it must meet two criteria:
The asset must have a tangible value that can be exchanged for cash, and the only reason for holding the asset is to generate a gain, earn cash flow or both. Since we live in our homes, this does not satisfy the second condition, said investment director Victor Wong of local financial advisory firm Financial Alliance.

However, buying physical property involves high capital investment, which can run into millions. This puts the asset class out of reach of most retail investors, said Mr John Snowden, head of property securities at Colonial First State Investments.

"Investors are also likely to face the problem of liquidity as the property market is a lot less liquid than the property securities market,"
he said.

The more accessible investment classes derived from real estate would be listed property stocks, real estate investment trusts (Reits) or property unit trusts.

A listed property company, due to its involvement in different stages of a property - from developing, managing, buying and selling to renting out - tends to bear higher risk if its development projects fail or market sentiment turns sour upon completion of the project.

"Property stocks tend to be involved in development activities that entail higher risks and returns (than Reits)," said Professor Ong Seow Eng at the Real Estate Department of the National University of Singapore.

A Reit is a publicly traded entity that is engaged in owning, managing and enhancing investment-grade real estate. Reits in Singapore invest and own properties, and earn from their disposal, rental or both.

The primary difference between a Reit and a listed real-estate company is that the latter distributes the majority of its income - up to 90 per cent in Singapore - to its investors.

Reits are also not subject to corporate tax on their net profit if they distribute at least 90 per cent of their income, while their unit holders are not taxed on the distribution income that they receive from the trusts.

The differences do not stop there. Property trusts have to satisfy other requirements set forth by regulators, such as maintaining a debt-to-asset ratio at 35 per cent.

Of the two investments, property stocks are probably more volatile, mirroring the economic cycle, said Mr Wong.

"Reits are becoming popular now as income-yielding securities. However, the Reits market is still young in Singapore and it remains to be seen whether the current Reits reflect adequate risk premium as investors chase such securities for yield," he said. "Even for an aggressive investor, I reckon property (stocks) and Reits should not make up more than 20 per cent of his/her equity portfolio."

Typically, stocks are the first to move in any bull market so when the property market is expected to do well, property stocks are usually the first to run up, noted Prof Ong. Reits being income-driven stocks will lag a little behind property stocks.

Nevertheless, expectations of future increases in cash flow from rents, and expectation of future increases in property prices will drive Reit prices up as well, he said.

However, Reits should be viewed as income-generating instruments rather than capital gain plays, said Prof Ong.

"Many investors who had witnessed a strong move in Reit stock prices over the past year should recognise that Reits are fundamentally income oriented stocks, especially as interest rates move up and Reit yields become compressed," he said.

Merely buying a single listed property company or a Reit to form the bulk of this asset class does not necessarily provide for geographic or property type diversifications, Mr Wong said. The solution would be to buy into property funds, since many investors today are unlikely to have enough time and expertise to shop around for different types of real estate in different parts of the world.

Mr Snowden concurred: "Although some Reits do offer some form of exposure across segments, they are still very much focused on specific segments and do not offer the kind of diversification - across market segments and countries - that investing in a fund can bring."

Having Only One Income Stream Is Not Enough...

...found this interesting article in Singapore's 'Today' newspaper last week. It's written from a Singaporean perspective, but the validity is truely global.

It goes in the same direction as "Retire young, retire rich"; that it's best to not (only) have a salary, but let your (and other people's) money work for you - thus earning rent, interest, dividends and having value appreciation of your assets as 'other' streams of income.

In this way you can reach true financial freedom and independance from any employer or nasty boss. This concept is especially important for us Nomads, no? ;-)

Having Only One Income Stream Is Not Enough
by Valerie Law valerie@newstoday.com.sg

Dr Clemen Chiang is the chief executive of Freely Business School, the first private school in Singapore to offer an options diploma course. Dr Chiang shares about ways to create multiple income streams.

Why should a person have multiple streams of income and how popular is this concept in Singapore and Asia?

I believe it is a very popular concept. In a typical household, fathers were the sole bread-winners in the past. Nowadays, both the husband and wife work.

Sometimes, even the combined income is still not sufficient. Having multiple income streams is critical in today's landscape because of uncertainties in the world. In 2000, there was the dotcom crash; in 2001 the terrorist attacks; then in 2003, the Sars crisis hit Singapore's economy very hard.

Today, there are also job uncertainties due to China's and India's emergence.

Creating a secondary source of income does not necessarily require you to migrate. You can be mobile yet remain in the same country - that is the essence of creating multiple sources of income.

Why do you believe in using options trading to create the first alternative source of income?

It is a question of seed capital - how much money you have today. Say your starting capital is small - less than $10,000, there are not much things you can do to build a business.

So you shift your focus to investment instruments by asking: "Which instruments will grow the seed capital from a small sum to a big sum?"

If your capital is small, you should focus on one instrument first - options. In the United States, there are 3,000 option-able stocks out of 30,000 tradable stocks, and these options come from the very best companies.

Options allow you to trade when the market moves up, down or sideways.

When you reach your target, you may then take that lump sum cash to invest in real estate in Singapore as another source of income.

How feasible is it for an employed adult to have multiple sources of income in Singapore, given that today's jobs may require long hours?

The employee must know how to mange his/her time, and passion to create multiple sources of income. Nobody is stopping you from investing your own money.

Most individuals have the traditional mindset towards income generation, thinking you must appear physically at a place at fixed hours. For me, earning an alternative source of income means being mobile, keeping in touch with the latest products and technology, and becoming a self directed investor.

For investing and trading, you do not have to appear physically somewhere.
You can make money using the Internet, and you do not need to face suppliers or competitors. You just need to face yourself.

So how much time do we need to get to half a million dollars?

There are three variables:

1. How much seed capital do you have?

2. What is the lump sum amount you wish to have?

3. What is the performance target for your capital each month?

Let us use an example based on the principle of compound interest:
Starting with US$5,000 ($7,900) and earning 10 per cent return per month on your seed capital.

It will take 58 months or less than five years to reach a million dollars.
But you must be committed - it is a marathon. You may need to commit 30 minutes per night at first, and later choose to become full time traders.

Retire young, retire rich...

Recently I was surprised about its clarity of content, when I stumbled about this book in a book store. Retire young, retire rich.

It's very compact and an easy read, yet Robert T. Kiyosaki gives useful views on how everyone can retire young and rich. It's all a matter of your context.

The core problem is that our 'old fashioned' education systems teaches us solutions from the industrial age. Financial knowledge is mainly transferred from parents to their children. Of course our parents mainly don't have the solutions to the ever-faster changing economic cycles of today's fast-paced life in the information society. They can hardly use a computer. That means, people become poorer and poorer, cause they struggle in the deadly cycle of learning at school, getting good grades, study to get some degree and get a well-paid job for life. What is well-paid anyway, if your government is taking 50% of your hard-earned money as taxes? Your money is taxed many times, as you pay GST/VAT and other taxes on top of income tax you paid already.

You still save money or pay-off the mortgage for your house? Is that a valuable asset? Or more another liability? Do you still believe in job security? Remember: there is no spoon!

Multiply your output! Give up your lousy paid job and create your own business and let OPM (Other peoples money) work for you. Accumulate lower taxed assets. Get the government to fund your investments. Establish a Cash Flow that works for you. And most important: Get out of the rat race early, before it's too late! Use your time better.

It gives me pimples when I remember my former boss, who was a prime example of the rat race. He lost everything in the asian stock crisis in 1998, pays alimony to his wife for his first-marriage-kids, pays of the mortgage for his self-used house and plans to work until he falls dead on the floor. His health (and weight) is playing yo-yo with him, even though he gave up alcohol and struggles to cut down on smoking. Has anyone seen permanent rings under ones eyes? ;-)

Guess what - my old company had a history of sudden deaths, with managers up to CEO level dying of heart-strokes already in their late 40s - they literally worked their a**e* off....