Singapore Real Estate Market Review - August 2008

Traditionally, July is a time for reflection. And when profit-making organisations are concerned, it is the time to balance the book and see whether the ultimate objective of business was met (or how much catching-up needs to be done). For the real estate sales industry, it is no different.  Many official data is made available in mid-July to help all concerned parties in their performance analysis for the first half of the year.

July 2008 ushered in a mixture of both uplifting as well as dampening news, as the larger global economy is still on tenterhooks. The situation in the global financial market is extremely fluid, and volatility seems to be the order of the day in the stock markets all around the world. At times, it appeared like the entire stock market was going to crash land; but other times, it rallied like the sub-prime problems never existed in the first place.

It seems a foregone conclusion that the world economy is turning bad; but at this moment, it is still anybody’s guess as to the extent of the damage the on-going financial crisis has inflicted on the economy. The world is still bracing itself for some really bad news that might redefine the world order and the ultimate Who’s Who list. We just have to adopt an open mind that ‘anything is possible’.

While the Singapore economy and the domestic real estate market fundamental remain resilient and generally sound, due to the openness, thus vulnerability, of the Singapore’s economy to the larger global environment, external events continue to dictate the market behaviours in the island city – be it the stock market movements or the buying behaviours in the new spanking show flats.

In order for me to provide a meaningful explanation of the current market situation it is worthwhile to look at the summary of the external events in July 2008.

After a GDP growth of 1% in the first quarter, the US government is set to announce another growth of 2% in the second quarter. Thus, a recession under the most common definition – two straight quarters of declining GDP – did not occur in the first half of 2008 – contrary to what many had deduced.

However, other qualitative indicators are showing damning evidence that all is not well for the US economy. Home prices are holding on to a slippery rope with a pair of sweaty palms, unemployment rate is growing like a genie freshly out of the bottle, and the stock market is rocking like a fishing boat caught in the perfect storm.

All these signs are pointing towards a strange situation whereby the US economy might be gaining fat but losing muscle.

In fact, the non-profit National Bureau of Economic Research (NBER) had said that the US has been 'sliding into a recession' since January 2008. NBER uses a different gauge to monitor the health of the economy. It looks for 'a significant decline in economic activity spread across the economy, lasting more than a few months'.

Those gauges include GDP, incomes, employment, industrial output and retail and manufacturing sales, and most of those gauges have been especially weak in recent months and some are in outright decline.

The US has suffered six straight months of job losses when it lost 62,000 jobs in June 2008. The number of unemployed people in the US now stands at 8.5 million. At the same time last year, seven million people were unemployed.

So far this year, a total of 438,000 jobs were lost – an average of 73,000 a month. Most of the jobs were lost in the following sectors, including construction, manufacturing, financial services and retailing. The small gain in education, health, leisure, hospitality, and the government sectors was not sufficient to compensate for the greater losses.

The Institute for Supply Management's index showed that the service sector, which has been a growth engine in recent years, fell to 48.2 in June from 51.7 in May. A reading below 50 signals activity is shrinking, while a reading above that suggests activity is expanding.

Furthermore, more write-downs by financial institutions in the US are expected in the coming weeks and many of them are expected to report greater losses. All these will drain the system of much needed capital. With less capital to go around, banks would be more weary of lending and ultimately it will impact on economic growth.

• [A.2.1] US billion-dollar bankruptcies highest since 2003

The ongoing US economic troubles have caused more firms with a billion dollar or more in assets to go bust. So far this year, a total of seven such companies have folded compared to only one in 2007.

And economists fear that more bankruptcy suits will follow as firms continue to reel in this difficult time.

• [A.2.2] Sales of existing US homes decline to 10-year low

The volume for resale homes in the US dropped 2.6% in June to 4.86 million, the lowest in 10 years. And the number of unoccupied homes stood at 18.6 million.

With unemployment rate rising to hit over 5% in the second quarter, coupled with low consumer confidence and the mortgage crisis that looked like a bad itch that just would not go away, the US residential property market looks likely to be in the doldrums for some time to come at least until 2009 or 2010.

Economists are mostly in agreement that the US Fed will most likely maintain the interest rate at the current 2%.

Although there is a valid case for the Fed to increase the interest rate to beat down the menacing inflation, other tougher challenges may present a more pressing demand for the rate to remain at status quo.

Firstly, the economy is still fighting against the more dreaded situation, i.e. recession.  A higher cost of using money might tip the sinking boat the wrong way.

Next, the tight credit situation and the on-going housing crisis, which has so far inflicted almost every other household in the US, call for a pair of steady hands to balance the delicate situation.

Last but not least, the easing of energy prices in recent weeks may be able to bring the much needed respite on inflationary pressure.

As the US dollar begins to strengthen, the price of oil drops as investors moved their funds away from oil. The dollar traded at US$1.5688 to the euro recently, while against the yen, it appreciated 0.4% to 107.84 yen.

Since 11 July 2008, oil has fallen 16% and when asked if this will cause OPEC to cut down on production volume, an OPEC official said that it would be most highly unlikely. The top priority would be to ensure that supply could meet demand.
[A.5] IMF pessimistic about US housing crisis

The IMF has warned that there is no end in sight to the US housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth. And it stood by its April forecast of about US$1 trillion (S$1.36 trillion) in losses stemming from the US sub-prime mortgage crisis as foreclosures will continue to rise.

In this regards, it is worthwhile to look at the performance of Merrill Lynch which Singapore’s Temasek has recently injected more funds in bid to rescue the bank.

• [A.5.1] Merrill Lynch’s woes far from over

As expected, Merill Lynch's problem seems to be getting worst. Barely two weeks after announcing a second-quarter loss of US$4.9 billion and a US$9 billion write-downs, it has now said that it will take another huge write-down of US$5.7 billion for the third quarter. It also said that it will raise a further US$8.5 billion by issuing new stocks as well as selling a huge slice of its debt portfolio. In this regard, it has agreed to sell US$30.6 billion of collateralised debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just US$6.7billion, or about 22 US cents on the dollar.

Merrill has lost US$19.2 billion in the past year alone and suffered over US$40 billion of write-downs. And it seems there is no end in sight for the beleaguered bank's troubles.

• [A.5.2] Singapore Temasek playing Santa Claus

Back in December 2007 Merrill had sold to Temasek some US$4.4 billion at US$48 a share but with a caveat that it would compensate Temasek should the share price fall.

After the months of free-fall in Merrill’s share prices, the US banking giant now had to compensate Temasek to a tune of US$2.5 billion which was taken out from the US$8.5 billion that Merrill had succeeded in raising in its latest share issue. Fortunately though, Temasek has agreed to plough back the US$2.5 billion into Merrill. The latest purchase will put Temasek’s share of Merrill to more than 10%.

Analysts said that for Temasek it is a sound strategic move to gain access into the US financial market and it is an opportunity that is not going to be repeated. For the long-term, this investment might just prove to be a very good one.

In an apparent move to cater to the volatility in the financial market, the Monetary Authority of Singapore (MAS) will allow more banks to access its standing facility. Despite the authorities’ denial that something ‘isn’t right’ in the financial market, such a forward planning does suggest that the financial market is not without some unusual challenges. Officially, the MAS explained that the standing facility is to strengthen Singapore's financial system as well as improve liquidity.

The Standing Facility allows banks to place excess funds with or borrow from MAS against Singapore Government Securities (SGS) collateral. It is currently open to the 11 primary dealer banks - the most active banks in the Singapore dollar money market, and non-primary dealer banks could access the facility through them. It will now extend the facility to all banks that are using the MEPS+ (MAS Electronic Payment System), which is a national interbank payment system that allows participants to make immediate settlement of funds and SGS transactions.

Economic activity continues to expand in Singapore despite all the uncertainty that prevails around the world. The overall expansion in May 2008 was driven by higher lending to businesses and consumers.

According to MAS data, bank lending for the month of May was at a record $256.9 billion, or 26.1% compared to the same month a year ago.  And month-on-month, loans growth gathered momentum to reach 2.3%, a pick-up from April's indifferent 0.6% growth, due mainly to increased lending to the transport, storage and communication sector.

Despite the strong growth in the bank lending however, the MAS is unlikely to change its tight monetary to fight inflation. For example, the supply of money in the domestic economy actually dipped 1.2% to $314.5 billion at the end of May.

Central banks in most of Asia have been urged to tighten monetary policy, either by raising interest rates or allowing currencies to strengthen, to prevent runaway inflation.

• [A.7.1] Singapore capital markets raised $76b in net funds last year

The Singapore capital markets, where debts or equity securities are traded in either the stock market, bond market or the money market, had their good run for the money last year, raising $22.7 billion in the whole of 2007.

But the outlook for 2008 is not so rosy due to the global credit crisis. In the first quarter of 2008, the total net funds raised, including both the private and public sectors’ were only $14 billion. At that rate, total capital raised this year will never be able to match last year’s figure.

Net funds, including the private and public sectors', totalled just over $14 billion in the first quarter of this year, compared with last year's total of $75.6 billion [and the $40 billion raised in 2006].

However, the total assets handled by fund managers in Singapore grew 32% to $1.17 trillion last year, bolstered by a doubling in assets held by hedge funds. One reason is because Asia-Pacific continues to be a key driver of growth for the industry.

• [A.7.2] More home owners owing more than $1m

Another factor contributing to higher lending by banks, even though the number of first time home loan borrowers dropped, is the two-fold increase in the number of borrowers who owe more than a $1 million on their home loans. The number of such millionaire borrowers has doubled to 8,280 in April 2008, from 4,695 in May last year.

The property boom of 2007 and that higher transaction number of luxury apartments have contributed to the increase in loan quantum of individuals.

The good news from Credit Bureau is that the number of home buyers getting into problems continues to fall. In April 2008, 4,102 borrowers were delinquent or 1.42 %, down from 2.10 % in May last year.

However, with the weakening of the global economy and the uncertainties it brought, firms in Singapore are now more reluctant to hire as readily as last year. Herein lies the danger.

Singapore's jobless rate rose to 2.3% in the second quarter of the year compared to 2% in the first three months of the year.

The smaller percentage rise suggests that the labour market is still tight but is now proceeding at a more sustainable rate. This slight fall may indeed lessen inflationary pressure brought about the high costs of labour.

In general, while large scale retrenchments are unlikely to occur, the jobless rate may continue to rise in the coming months due to the uncertainties in the global economy.

The consumer price index (CPI) for June 2008 rose 7.5% compared to the same month last year. The index has been driven by a hefty rise in housing which rose 13.4% due to higher electricity tariffs, and higher food prices.

The high oil price has translated to a more costly transport and communication costs with that sector rising 5.1%. Meanwhile, healthcare too was getting pricier.

Analysts said that with this latest data, the government's projection of 5-6 per cent inflation rate for the full year will most likely be revised upwards to a more plausible 6.5%.

• [A.9.1] Condo land falling below building costs

Due to the breath-taking inflation, construction costs have now overtaken the land cost for some 99-year condo sites.

And with unit sale price set to drop further, developers may have no choice but to bid even lower for land to maintain their dwindling profit margin. However, whether the government is inclined to lower the prices of state land for sale remains t be seen.

Currently, developers are still bidding around the $200 psf to $250 psf price range for most mass-market condo sites. At this level, the break-even cost is around $650-$700 psf. 

For medium-quality condominiums, the construction costs range from $260 psf to $320 psf in Q1 2008, and prices have risen further to $280 to $350 psf for Q2 2008. Construction costs are estimated to have risen 20% to 25% for Q4 2007 compared with the corresponding period in 2006 for average medium quality condominiums.

• [A.9.2] Government defers projects worth $1.7b

To ease inflationary pressure on the construction sector, which has been suffering from 20% to 30% inflation in the past year, the Singapore government has decided to shelf a total of $4.7 billion of public sector projects until 2010 and beyond. This includes the deferment of $1.7 billion worth of projects which the government has recently announced.

The move will allow construction resources to be used to ensure the timely delivery of big projects such as the integrated resorts, Marina Bay Financial Centre and the Downtown MRT line. Most should be finished by late next year.

This year alone, about $23 to $27 billion of construction projects are expected in Singapore, compared to $24.5 billion last year.

• [A.9.3] Singapore is getting dearer each year for expatriates

In a latest survey by Mercer, Singapore has been ranked as the 13th most expensive city for expatriates, and the fifth in Asia. This year's 13th ranking followed a 14th ranking last year.  In 2006 it was ranked 17th and the previous year it was at 34.

The survey which covers 143 cities on six continents, measures the comparative cost of more than 200 items in each location, including housing, transport, food, clothing, household goods and entertainment. Singapore's relatively high rank is attributed to the appreciation of the Sing dollar and the inflow of foreign talents into the country which has resulted in the increased demand for transport and housing.