The financial hub faces uncharted waters in Trump era.
Singapore is definitely a difficult market to crystal-ball right now. On one hand, you have the sudden economic decline, rumours of China’s unhappiness with the city state, the possible falling out of favour with America’s new President-elect, uncertainties about the next lap and a fairly new and inexperienced team helming the country. On the other hand, Singapore’s resilience over the last 50 years is evidence of its ability to transform and adapt quickly to changes. Along with its strong national reserves (ranking 11th in the world), this small but significant country is able to punch above its weight and pull out surprises which defies conventional expectations.
WHERE THE MARKET IS NOW
The Singapore property in Q3 2016 experienced a 1.5% fall, its 12th consecutive quarter of decline. While many attribute the fall to the 8 rounds of severe cooling measures implemented since Sep 2009, it might be interesting to note that the decline only started in Feb 2013 after round 6 in Jan 2013 (Additional Buyer Stamp Duty (ABSD) and restricting loan for second property to 50% margin).
In other words, the first 6 rounds of cooling measures that included Seller Stamp Duties and loan restrictions on second or more properties had little effect on the market. In Jun 2013, round 7 which implemented a Total Debt Servicing Ratio (TDSR) of 60% further suppressed the market, making it near impossible for investors to buy beyond their loan servicing ability.
Some may deem the cooling measures have finally hit the spot and we heartily agree. After all, ask any investor about the cooling measures and both ABSD and TDSR will quickly come to mind. However, we think that the controlled fall that the government would have preferred has somewhat taken a life of its own along with the global economic challenges that Singapore now faces.
THE CHALLENGES
Traditionally, Singapore is a close ally of the United States due to its geographical location as a port where East meets West and its seeming leadership in ASEAN. For the same reasons, China has always held us at arm’s length maintaining a cordial, while distant, relationship. The recent aggressive investments by China into ASEAN and the recent US presidential election outcome are poised to change all that.[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5,6,7,8″ ihc_mb_template=”1″ ]
As China extends into ASEAN, Singapore’s regional importance is being eroded to some extent. Its continual support of US-centric polices has created a somewhat tense relationship with China, which is instead investing in its neighbours such as Malaysia and Indonesia. While some might say it is just the Chinese media’s hype to garner more viewership, it is well known that the Chinese media is the central government’s informal mouthpiece, expressing that which they cannot officially comment.
To complicate matters further, the results of the recent US presidential election is going to pose a challenge for Singapore. Firstly, President-elect Trump has all but buried the Trans Pacific Partnership (TPP) deal. The quick rebound of the US stock market and the certain interest rate rise will mean that the USD is likely to go on a bull run in the short term.
While the present economic situation in Singapore does not allow the SGD to appreciate, the interbank rates and hence mortgage rates are sure to head north. This would result in a potentially weaker SGD with higher interest rates. While Singaporeans are only affected by the former, foreign investors will likely cringe at the thought of SGD weakening as Foreign Direct Investment inflow is over 20% of Singapore’s Gross Domestic Product (GDP).
The Singapore economy too, is certainly not at its brightest moment. The government understandably would prefer property prices to fall in order to become more competitive internationally as it faces greater challenges from its neighbours and the world at large.
The latest GDP numbers are at its weakest since 2009 and the forecast for 2016 is being slashed to as low as 1.3%. Manufacturing and Wholesale/ Retail Trade are the two key pillars of Singapore’s economy and over the years, both have seen significant decline. While Business Services used to make up the deficit, it too faces headwinds signalling that the siege has penetrated the core economy of Singapore. The service sector employs over 72% of the Singapore workforce. Its decline will mean layoffs and reduced rental demand. It is no surprise that most economists have hence forecasted a long-drawn drought for Singapore.
One of the most significant challenges that Singapore now faces is the lack of domestic growth. In its effort to adapt itself quickly to global changes, Singapore has resorted to importing foreign talents and in the process neglected cultivating local capability. Its recent venture into integrated resorts and casinos has also altered the labour composition which further weakened its core capabilities. Hence, when external demand falters, it becomes vulnerable. For property, the over reliance on foreign investors and foreign tenants instead of local affordability and demand is now one of the biggest threats to house prices.
Putting all that together, a loss of geographical advantage, regional leadership and delicate relationships with the world’s first and second largest economies may present a long term economic challenge. The rising interest rate, coupled with the high probability of a weaker SGD and weakening rental demand means that property investors will have to hunker down for some challenging times ahead.
WILL THERE BE SURPRISES?
Given Singapore’s history of resilience, its significant national reserves on hand and its international standing, Singapore will remain definitely viable and key to the region especially as a business hub. However, its property market is quite another story. How would the government deal with a free falling property market should that scenario play out?
For a start, the cooling measures can always be removed to stimulate demand. However, such a steroid-like move might only temporarily spike the market and would not hold should the demand fundamentals remain weak. Lowering the Nominal Effective Exchange Rate (NEER) band for SGD to further weaken the currency is another key option. While this might disadvantage existing investors, it will stimulate new foreign demand especially if there is also a relaxation of rules for foreign investors. Allowing for a larger foreign workforce and admitting new citizens will also create greater demand for housing. However, these options are not without social, political and economic implications, and must be carefully thought through and applied.
The truth is, the government would be happy to let property prices fall to increase the country’s competitiveness. Unless business conditions improve, there is no incentive for them to reverse the situation. Singapore, in the meantime, will have to reinvent itself and find new catalysts for growth. This will take time and while its track record should inspire confidence, the new cadre of leadership does present untested risks.
WHAT SHOULD I BUY?
The core central region (CCR) would be our choice given the magnitude of the fall in prices and exposure to foreign purchasers. Also River Valley, Newton, Tanglin, Upper Bukit Timah and similar areas where there is strong exposure to mid-tier foreigners who might have holding power issues. The weak rental conditions and weakening SGD alongside rising interest rates may motivate foreign owners to seek quick exits and hence present opportunities. However, investors are well advised to seek a significant discount from valuation to buffer against risks which have yet to manifest.
In a declining market, investors should avoid catching a falling knife. Instead, wait for signs of new upward economic momentum as competitiveness improves. Given that our next general election will be held in 2020, figuring out when to buy might not be as rocket science as you think.
DAN TOH is Founder and CEO of RunningStream International Pte Ltd
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