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THE year past turned up roses in most key indicators: the GDP growth rate, job expansion, corporate profits as well as inward and offshore investment. And the headliner of the year? The long-absent property recovery arrived, to bring with it the most dramatic value appreciation seen in a decade. Adjusted for inflation, Singapore’s real estate is thought to have been the biggest gainer in the world. All of that rosiness showed in the reward premium loaded on personal incomes and the strong festive consumption, which should continue into the Chinese New Year period. We say ’should’ advisedly. Five weeks, the lead-in to the lunar celebrations on Feb 7, is a relatively short time in which to withstand buffeting when Western capital markets are still uncovering the true extent of mortgage-related horrors. What is so far known of the year ahead, for Singaporeans, is that growth forecasts are about two points off the projected final number of 8 per cent for 2007. Could they go lower?

It will depend on global behaviour in the wake of the American mortgage market collapse. The economic historian Niall Ferguson, author of The Cash Nexus, wrote in the Financial Times that the leading finance houses are coming under pressure to put the assets of other ‘novel organisms’ they have designed and invested in back on their balance sheets. He shares the view that the big banks will eventually lose some US$300 billion from sub-prime-related investments. The known writedowns, from Wall Street to Zurich, stand at about US$60 billion so far. Asian capital’s exposure is known to be limited; still less is that of Singapore banks, at least what has been acknowledged.

But capital turmoil and credit contraction in America, whose impact on Singapore is hard to predict with confidence, are coming together with inflationary pressures here which are showing little sign of easing. This is the big imponderable. Inflation, now at a 25-year high, will have to be Singaporeans’ watchword in 2008. The property sector is also cooling. If the slowing is sustained, it is both bad and good. Bad, as real estate’s multiplier effect on GDP growth is considerable; good from the standpoint of broader price stability. One saving grace which will cheer Singaporeans up is that the major Asian pacesetters - China and India certainly, but also South Korea, Japan and some Persian Gulf states - are largely spared the capital whiplash. These nations (and Singapore) are flush with funds with which to pump up growth, if need be. If inflation in China does not get out of hand, the northern region’s aggregate demand will see most of the continent through the worst of the credit and consumption crunch in the economies of the West.

Source : Straits Times - 31 Dec 2007

Projections of US$650b losses from the credit crunch tell only part of the story.

IN this season of stock taking, the picture past and future for financial markets is far from pretty. The reason? Sub-prime. If you didn’t know what sub-prime meant at the start of the year, it was hard to avoid its meaning by year end.

The big question now is what will the sub-prime crisis and ensuing credit crunch cost. In mid-July, Federal Reserve chairman Ben Bernanke told the Senate Banking Committee that estimates of losses associated with sub-prime-credit products were US$50 billion to US$100 billion. Those numbers ‘are far too low,’ Jan Hatzius, New York-based chief US economist at Goldman Sachs Group, said in a mid-November report.

Based ‘on historical default and loss patterns in different home-price environments,’ he estimates US losses will be roughly US$400 billion.

Assuming that US and European residential property prices fall 5 per cent to 10 per cent over the next year, investors in non-prime mortgages and securities linked to them - including banks, hedge funds, asset managers and mortgage insurers - stand to lose between US$350 billion and US$500 billion, according to London-based consultants Independent Strategy. Adding in expected losses from prime mortgages would lift the tally to more than US$650 billion.

Yet these loss projections tell only part of the story. The other portion relates to the impact of the losses on the willingness and ability of so-called leveraged investors, institutions that finance their activities with borrowed funds, to keep lending.

These include banks, broker-dealers, government- sponsored enterprises, savings institutions and hedge funds.

A September 2007 study by Tobias Adrian of the Federal Reserve Bank of New York and Hyun Song Shin of Princeton University, published by the New York Fed, found that leveraged investors, particularly banks and brokers, seek to maintain constant capital ratios. As such, when they lose money, they scale back lending to keep their capital ratios - assets divided by equity or risk-free capital, such as cash - from falling.

US commercial banks on average have capital ratios of 10 per cent, which means that for every US$1 of capital lost, they reduce lending by US$10. Thus, assuming that US$200 billion of the projected US$400 billion mortgage-credit loss is borne by leveraged institutions, the supply of credit will decline by US$2 trillion, Mr Hatzius said. ‘The likely mortgage-credit losses pose a significantly bigger macroeconomic risk than is generally recognised.’ Meanwhile, Independent Strategy figures that banks will have to shrink lending by 15 per cent to 20 per cent to return their capital ratios to pre-crisis levels, and hedge funds and brokers by US$18 to US$25 for every US$1 lost. ‘A 10 per cent reduction in global bank lending would damage corporate investment and consumer-spending growth, adding significantly to the risk of economic recession,’ the firm said in a Nov 15 report.

Apart from a decision to supply wads of money to relieve the logjam in global credit markets, the performance of central banks has been anything but sterling. They woke up late to the sub-prime mortgage mess, and some people still doubt that they fully grasp the risks involved - especially following the Federal Reserves’ decision to cut its federal funds rate by 25 basis points to 4.25 per cent on Dec 11, when the market was looking for more.

‘The timid move by the Fed was very disappointing and even appalling in the wake of intense financial-market turmoil,’ Chen Zhao, Montreal-based head of global strategy at BCA Research Ltd, wrote to clients on Dec 12. ‘The most troubling aspect of yesterday’s decision is that it reveals a lack of coherent strategy and focus at the Fed.’

The Fed also has been struggling to restore its credibility and retain its consumer-protection status in the face of congressional criticism that it was lax in overseeing mortgage lenders. Last week, the US central bank proposed various rules barring deceptive loan practices and making lenders responsible for determining whether borrowers can afford their mortgages.

Duh! Like the Fed never realised that some lenders might be unscrupulous, or that there were folks who couldn’t compute whether they could afford a mortgage. This from an institution whose New York district bank publishes comic books - that’s right, comic books - to explain topics such as how the banking system creates money and the meaning and purpose of monetary policy.

The situation in Europe isn’t much brighter. With banks balking at lending to one another out of fear of not being repaid - effectively turning the economy’s motor oil into sludge - Jean-Claude Trichet, head of the European Central Bank keeps talking about raising interest rates to battle inflationary pressures.

The massive injections of liquidity by the Fed, ECB and other major central banks have succeeded in lowering interbank lending rates - for now. But central bankers, especially Mr Trichet, continue to insist that these operations are separate from monetary-policy decisions. ‘Reduced stress in money markets will not deliver a cure for financial markets, which are absorbing the pain of substantial credit losses,’ wrote Bruce Kasman, chief economist at JPMorgan Chase & Co on Dec 21.

Now that we all know what sub-prime means, let’s hope it plays a less destructive role in 2008 and becomes a word we can afford to forget. If not, it may become a synonym for the next recession.

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

Source : Business Times - 31 Dec 2007

David Loh, Han Seng Juan pay $60m for Westlite in Jurong.
Morgan Stanley is not the only one investing in foreign-workers dormitories in Singapore. David Loh and Han Seng Juan - two star stockbrokers at UOB Kay Hian, who in October surprised the market when they snapped up a 99-year condo site at Kovan - recently signed a deal to buy Westlite Dormitory near IMM Building in Jurong.

The $60 million they are paying for the dormitory in Toh Guan Road East works out to about $13,300 a bed based on the 4,500 beds at the facility, which is on a site with a remaining lease of about 50 years.

The acquisition is expected to be completed in early 2008.

‘Yields are attractive and we have a diverse range of more than 100 tenants - companies in the shipbuilding, marine engineering, construction and engineering industries, minimising risks,’ said Tony Bin, CEO of Duchess Development, the majority shareholder of Duchess Dormitory Pte Ltd, which is buying Westlite Dormitory from Westlite Development.

Duchess Development is owned by Mr Loh and Mr Han, who are dubbed the ‘David and Han Team’ in stockbroking circles.

Mr Bin said: ‘Rental is paid by the companies who lease space for their foreign workers in the dormitory. The facility is now 100 per cent occupied, with leases signed on either one or two-year terms, which means there is upside.

‘ The outlook for the dormitory market is pretty strong for the next few years, with the large number of construction projects going on in Singapore and continued growth in the marine industry.’

Market watchers say that dormitory rents have shot up at least 30 per cent in the past 12 months and the trend is expected to continue into 2008 at least, given the shortage of such facilities.

Of course, dorm rents could cool if the authorities were to step up the supply of such accommodation, which industry observers reckon could be done relatively quickly.

Mr Bin would not say what returns Duchess Dormitory would make on its investment in Westlite Dormitory. But a market watcher, making back-of-the-envelope calculations, suggests that ‘by the end of the next two years, when all the leases would have been renewed, the net yield would be in the low teens’.

BT reported recently that Morgan Stanley unit Avery Strategic Investments had invested $153 million in three dormitories it bought from JTC Corp. Morgan Stanley controls 97 per cent of Avery. The rest is held by local company Averic Capital Management, which is owned by Vernon Chua and Eric Tan, Singaporeans with local property experience. The three dorms - Kian Teck at Jurong), Woodlands and Tampines are on sites with remaining leases of about 20 to 30 years. The three facilities can house a total of more than 15,000 workers.

In October, Mr Han and Mr Loh made headlines when Duchess Development subsidiary Duke Development emerged as top bidder for a 99-year leasehold condo site next to Kovan MRT Station at a state tender. Their winning bid of $290.02 million reflected a unit land price of $436.55 per square foot per plot ratio.

Duke Development’s other shareholders are construction group Lian Beng and a private equity fund managed by Centurion Investment Management, which is also controlled by Mr Han and Mr Loh.

The Kovan site is expected to be developed into a 17-storey condo with about 520 units and is slated for launch in mid-2008.

Source : Business Times - 31 Dec 2007

$18.97m deal follows share swap between Koh sibilings in January.

KOH Brothers Group and Brothers (Holdings) are terminating their deal over joint venture Construction Consortium.

The companies said separately over the weekend that Construction Consortium would become a wholly owned subsidiary of Koh Brothers.

Brothers (Holdings) agreed last Friday to sell its 46.58 per cent stake in the venture to its partner for $18.97 million. It said that the proposed disposal would strengthen its overall financial position - about $99 million of securities (including performance bonds, corporate guarantees and indemnities) that it furnished in support of Construction Consortium’s contractual and financial obligations with third parties will be assumed by Koh Brothers.

Construction Consortium undertakes building and civil engineering construction contracts for both public and private sectors and is also involved in the production of ready-mix concrete and cement as well as rental of concrete pumps.

Koh Brothers said that Construction Consortium accounted for 30.37 per cent of pre-tax profit for the year ended Dec 31, 2006.

As at Dec 15, 2007, the venture’s construction order book stood at some $848.1 million for projects in Singapore, of which $312.8 million is still to be recognised.

Koh Brothers is bullish on the sector, citing Building & Construction Authority data that actual construction demand for the first 10 months of the year reached $18.5 billion and that it is likely to carry over into 2008 and 2009.

The latest deal follows a share swap between Koh siblings in January, under which Koh Brothers aims to focus on its construction and property business in Singapore.

Koh Brothers founder and chairman Koh Tiat Meng, and his wife, acquired 6.72 per cent of the company from Mr Koh’s brother, Tiak Chye.

In return, they transferred 12.67 per cent of Brothers Holdings to him.

Mr Koh Tiak Chye also stepped down as chief executive officer and managing director of Koh Brothers and resigned as director in the company’s subsidiaries and associate companies - except for those related to Construction Consortium.

This is so that he can focus on his commitments in Brothers (Holdings), particularly the company’s real estate business in China.

Source : Business Times - 31 Dec 2007

Record 810 sales closed this year as transparency of process, immediacy of deals attracts buyers

ONE of the more striking consequences of the booming real estate market has been the sharp increase in the amount of property - residential and commercial - going under the hammer.

Auctions, which used to be associated mainly with forced sales of repossessed properties, got the thumbs-up from owners this year.

A record 810 properties were auctioned this year - 210 more than last year - while the value of sales shot from $129.54 million to $264.7 million.

‘The rising market earlier this year actually encouraged more buyers to buy at auctions because it is a transparent process and a confirmed buy,’ said Ms Mok Sze Sze, the head of auctions at Jones Lang LaSalle.

While some buyers can be intimidated by auctions - where they face a room full of potential rivals - they can yield results.

Mr Teo Jing Kok, the Singapore Land Authority’s (SLA’s) deputy director of sales, said: ‘Unlike a tender, the auction process gives individuals who may not be familiar with the real estate market the time and opportunity to adjust their bids.

‘In a tender, an amateur will have only one chance to get his bid correct and it favours those who are more experienced, for example, land developers.’

The SLA held a first-of-its-kind auction of six small residential plots aimed at individuals keen on developing their own landed homes. All six were sold at the auction last month.

The bulk of auction sales this year - 45 per cent - were in the residential sector and included good-class bungalows. Private retail units made up 21 per cent while HDB shops accounted for 17 per cent of the total.

Shophouses, while forming only 5 per cent of auction sales, reflect one of the most significant trends in real estate this year - soaring office rents.

Because rents have escalated due to tight supply, some firms have opted to buy shophouses via an auction in a bid to avoid paying exorbitant rates in prime areas, said Knight Frank’s executive director (auctions), Ms Mary Sai.

A wider variety of homes was put up for auction this year, including penthouses and high-end condominiums such as The Berth by the Cove, Marina Bay Residences and Paterson Residence. However, many failed to sell, with buyers discouraged by the price levels, said Ms Sai.

Auctions can yield bargains for canny bidders. A three-bedroom walk-up apartment in Joo Chiat Place went for $490,000 earlier this month - about $40,000 above the opening bid - but around $10,000 or more less than what such properties usually fetch, said Ms Sai.

But a 2,465 sq ft unit at Watten Estate Condominium sold for $2.4 million in an April auction, compared with the $1.73 million price tag for a similar-sized unit in the estate late last year.

There were a few bidders who were probably betting on the estate’s en-bloc potential and thus drove prices up, added Ms Sai.

Owners taking the auction plunge typically pay a charge of 1 per cent as well as the 7 per cent goods and services tax. There is also an administrative fee that can range from $500 to $1,000 to cover advertisements, printing of the property’s particulars, auction room rental and other costs.

A key benefit owners enjoy from auctions is that ‘they get their money straightaway and there is no need for any negotiation, even on sale terms’, said Ms Sai. But if the real estate sector is quiet, buyers might be thin on the ground and bids may struggle to rise above the reserve.

The cooler market over the past two months has seen few sales done at auctions but more are expected next year, especially from the mass market segment, consultants said.

Those keen to buy at auctions should arrange for a viewing beforehand and ensure they can slap down an upfront payment of 10 per cent of the sale price if their bid succeeds.

The first auction of the new year will be on Jan 10 when Knight Frank will auction off residential properties and a strip of land behind a row of houses in Balestier.

Colliers International will hold one on Jan 16, followed by DTZ on Jan 17 and Jones Lang LaSalle on Jan 29.

Source : Sunday Times - 30 Dec 2007