Monday, March 5, 2012


Article 1---- NYT article
Article 2 ----- Santiago Times article
Article 3---- Digital Journal article

Read the 3 articles and U have 3 different slants on the same subject.
If U check up the NYT article, U will realise the journalists were from ICIJ. Dig further and U realise the initiative is by Center for Public Integrity, a US based and funded organisation. For the NYT article, Chile is seen as the Good Guys and China & Russia, the bad guys.
The article by Santiago Times is more neutral and is probably the work of a Greenpeace activist.
The issues in the article by the Digital Journal is clouded by the EEZ dispute (see below).

By all accounts, there is a drastic depletion in the Trachurus Murphi  (let’s call CJM for Chilean Jack Mackerel for simplicity) stock. The NYT article, however, exaggerates the severity. It claims  “ Stocks have dropped from an estimated 30 million metric (mil m) tons to less than a tenth of that in two decades.” That is simply untrue; biomass stocks probably reached a peak of approx. 8mil mtons.
The article by Santiago Times points to Chile as the main offender. With Green Peace as the NGO involved, the figures and facts cited  look more believable.

Undeniably, there is a problem with the drastic depletion.

Who and what are the vested interests and how did all these come about?
Let’s investigate.
Jack mackerel shows a clear pattern of movement towards the open sea outside the EEZ, with reproductive purposes, to then return and remain for the most part close to the coast for trophic (feeding) purposes. There are actually distinct species of jack mackerel in the North and the Centre south of Chile. But as the situation is critical, the scientists have chosen to lump the 2 together and consider as one specie for the sake of research and conservation. CJM are pelagic fishes meaning they live in the region of the oceans off the coast and the ocean floor.
Due to their feeding and spawning patterns, there is seasonality--- with the Centre-south having peak catches between April-July and the North having peaks at March.
Chile stands to gain most from any efforts to set up a fishery. Much of the recorded research are done by the Chileans ( funded 67 research projects and 2 large monitoring programs) on the CJM. In terms of catch proportions, Chile takes up more than 86% of all catch. Chilean landings reached a national maximum of 4.4 million tons(max  96% of total catch) in 1995. So clearly, from a standpoint of vested interests Chile benefited most from any efforts to set up a fishery with quota limits to prevent depletion.
Jack mackerel exploitation by Chilean went beyond the first 100 nautical miles (n.m.) in 1992 and, the incidence of catches recorded between the 100 n.m. and 200 n.m. area was higher than 30%. In 2002 - 2003 this extended to catches recorded outside the EEZ, including even up to 700 n.m. off the coast. Hence U can see that as availability decreased the Chileans were moving out further and in bigger ships. EEZ limit is 200nm according to the UN Law of the Sea.

What is SPRFMO?
The Chilean Monitoring programs use hydro acoustic studies to map the biomass.
As the T Murphi is considered a “Straddling stock”---meaning it migrates from the EEZ to the international waters---- the fishery set up for the CJM must by definition include both the EEZ and international waters.
So to sum up SPRFMO is needed as CJM spatial area involves international waters (territorial water stops at 12 nm), far beyond the EEZ, which is beyond Chilean jurisdiction.

Region included is in the shape of a T with the top of the horizontal T at the coast of Chile and the length of the T extending to NZ with the base up to Tasmania. The exact latitudes and longitudes are defined in the Convention documents.
The T Murphi is considered non-highly migratory----i.e. it migrates and straddles a large spatial area --- but that area is still possible to be mapped and conserved as a fishery. Hence the setup of the SPFRMO is a 1st step towards the conservation efforts.

There are a series of steps in setting up the SPRFMO:-
1) Signature and ratification
2) Period of Accession
3) Entry into force

The Convention shall enter into force 30 days after the date of the receipt by the Depositary of the 8th instrument of ratification, accession, acceptance or approval .

NZ (Auckland) was chosen as the Depositary and the venue for the 1st meeting held in Nov 2009.

Since then the SWG (Scientific Working Group) has had a series of 10 meetings in various places from Colombia, Vanuatu, Auckland, Santiago etc to thrash out the details.

Two key area of conservation efforts -----the T Murphi (CJM) and Vulnerable Marine Ecosystems (VMEs) as a result of Bottom Fishing  ( Benthic Impact Assessments)---- were targeted at.

The Good News is that the Final Report has been published  on 3rd Feb 2012 and the Conference adopted the present document as its final report on all matters within its mandate and decided to transmit the report to the Commission. Surprisingly, this important fact and good news is not followed up and publicised by the same reporters who covered and sensationalise the earlier story just before the SPRFMO meeting kicked off on 29 Jan 2012 and ended on 3rd Feb 2012.
Barring any last minute hiccups, most of the details especially wrt SWG have been worked out. The next stage will be the setup of “the Commission” with the aim of implementing the measures agreed with secretariat setup, budgeting, manpower etc.

Note that the EEZ itself is in dispute ; yet, to be resolved between Chile and Peru.
By taking sides with Chile, the NYT article loses objectivity. The T Murphi Fishery is in disarray and badly in need for repair of stocks i.e. conservation efforts. Confusing the Peruvian Anchovy Fishery with the T Murphi Fishery does no good as they are quite different issues. In fact, the Peruvian Anchovy Fishery is quite ably managed by IMARPE.

Until the Commission is set up there are Interim Measures that members must comply.
Gross Tonnage
Participants are to limit the gross tonnage (GT) of vessels flying their flag to those that have been actively fishing in 2007 or 2008 or 2009 in the Convention Area, and may substitute their vessels as long as the total level of GT that was submitted by Participants to the Interim Secretariat in accordance with the 2009 Interim Measures for Trachurus fisheries, as provided for in Table 1, is not exceeded.
Participants will verify the effective presence of their vessels referred to in paragraph 8 through VMS records and catch reports.
 From 4 February 2012, participants are not to exceed the levels of total GT1 listed in Table 1.

 Catch management
The Interim Secretariat shall verify the annual catch reports submitted by the Participants against the submitted data (tow by tow in the case of trawlers, and set by set or trip by trip in the case of purse-seining fishing vessels). The Interim Secretariat shall inform the Participants of the outcome of the verification exercise and any possible discrepancies encountered.

In 2012 Participants will continue their efforts to reduce their annual catches of Trachurus species. To that end, in 2012 Participants will limit their annual catches of Trachurus species by vessels flying their flag to the order of 40% of their final annual recorded catch of that species in 2010, and taking into account paragraph 1.3.

It is recognized that Participants may elect to reduce their catches of Trachurus species in 2012 by more than 60% of its final annual recorded catch of that species in 2010, as reported to the Interim Secretariat, as specified in paragraph 12.

 Some Salient Points
1)Effects of El NinoThe migratory patterns of the T Murphi  are believed to be affected by effects of El Nino and La Nina which affects the surface temperatures of the currents and hence their migratory patterns for spawning and feeding. But, for the moment there is insufficient scientific data by the Chileans to document the effects. IFFO (Peruvian Anchovy Fishery) has very well documented data on the effects of El Nino which affects the upwelling currents along the Peruvian Coast, affecting the trophic activities of phytoplankton;  in turn affecting the biomass of anchoveta that feeds on them--- which could then affect the entire food chain. It is a great  pity that the NYT article did not even mention EL Nino which is an important factor in its report.
2) Effects of the Chilean Earthquake of 2010- It is not understood how this massive earthquake and subsequent ones in 2011 affected the marine ecosystem on the Ocean floor and the migratory patterns of the CJM. Chile seats on a faultline (plate tectonics) and in 2011 itself experience earthquakes in Jan, Feb ( many times over 4 days), Mar, Apr, Jun, July and Dec. Nearby Peru had earthquakes in Aug and Oct.
3) T Murphi (CJM) not anchoveta- Contrary to the NYT article, the conservation efforts are not for anchoveta, which are not under threat. 

4) Previous Chilean Govt Efforts at reforming Fisheries to prevent OverFishing---- Prior to the coming SPRFMO setup which will come with an ITQ system for all Global participants, we must be alerted that previous Chilean Govt Efforts has form but no spirit in its implementation---- has largely failed due to powerful lobby groups, weak enforcement and constitutional issues with implementing legislation.

5) CFG (China Fishery Group) ---- Is joining the the SPRFMO via the Russian allocation.  Note that even their ITQ allocation for Alaskan Pollock in the North Pacific is allocated via Russian ownership. CFG will have to abide by the rules and regulations agreed in the Convention and as governed by the Commission. Many confuse CFG as being a China company; in fact they fish under the Russian fleet.

6) ITQ System----- The merits of having an ITQ system is discussed in this paper by Ragnar Arnason. ITQs constitute property rights in harvest not fishing stock. Under ITQs, good management consists of setting:
 (i) the total allowable catch (TAC),
 (ii) other useful fisheries management instruments,
 (iii) the enforcement of the quota constraints, and
(iv) the supporting research at levels where their return from the fishery is maximized.

The key is when the vested interests of the fishery members who own the ITQs coincide with their collective interest to maximise their long term sustainable holdings in their ITQs.

If the fishing industry which are the ITQ holders have to conduct fisheries management themselves,
their collective incentive is to maximize the net return from the fishery vs the government as the provider of the fisheries management services----the economic return to the industry is independent of the fisheries management costs ---- and in the 1990s, Ministry of Fisheries in countries like Peru and Chile can end up subsidising the entire fishing industry and suffering a net loss on a national scale. Hence, some of the biggest headaches whereby common property (public) rights are not respected but abused and be subject to political lobbies and favouritism are removed. 

7) Olympic System---- Prior to the ITQ system Peru and Chile practises the Olympic System – whereby at the start of the season upon blowing of the whistle, all vessels rush in frenzy to scoop as much fish into their holds as possible; w/o regard for refrigeration or death of the fish. This leads to staggering wastage and overfishing, as the dead carcasses of stale fish are just thrown overboard. The frenzy makes the fishing season front loaded with short bursts and makes for poor planning and efficiency both in terms of fishing and processing. The description in the NYT about boiling blood of CJM; as a result of the Olympic system  is not off the mark. Cheating on weights and trading of the excess catch unsurprisingly was rampant---given the frenzied rush effects-- officials find it difficult to measure and monitor that the allowable catch limits and quotas are conformed.

8) Case studies of successful ITQs (or variants) ----- Iceland has successfully introduced the ITQ system for Herring and Capelin but NOT for Demerol. Even Peru, has since 2009 introduced an IVQ (variant) with considerable success----- with satellite tracking systems onboard fishing vessels and independent audit staff also onboard for proper verification and validation of processes. So IMHO, the NYT article  has been biased in trying to point the finger at CFG or China, Russia or Peru----- much of the damage in Chile has been self-inflicted due to weaknesses in the conflicted government controlled implementations. Is China interested in ITQs? ---- You bet;  as shown in this paper by Dalian Fishery University. Incidentally, CFG is a part of the ITQ system for anchoveta in Peru---- which is undergoing volatilities/fluctuation in biomass arising from the El Nino/La Nina effects.

Some obvious benefits of the ITQ system are the reduction in the number of Overall Catch Vessels and the higher efficiency of catch and higher efficiency in processing of the fish.

9) SPRFMO Commission---- This is privatised self-management by the Industry (involving 15 sovereign states ) as distinct from the government of the day (as in Chile). The merits are argued in a report put up by Icelander Arnason. Once set-up the problems of government succumbing to fettered interests will cease. SPFRMO is industry and privately led -----such privately led Fisheries with ITQs such as the Alaskan Pollock Fishery in the North Pacific, Herring and Capelin Fisheries in Iceland and the Anchoveta Fishery in Peru have proven that the SPFRMO mandates on GroundFish and T Murphi can work.
From initiation in 2006 to 2013 (likely date of implementation), the SPFRMO has held many sessions and the tough and hard slog in the consensus building and negotiation processes is coming to a close in the fruition of a Commission.  Negotiations and compromises amongst so many countries (15 states and some surrounding islands affected) are never easy. Using the media to gain mileage and skew voting is part and parcel of the process.
The key question is whether post-Chilean earthquake and post El Nino/La Nina, the T Murphi will return with larger recruitments as a result of resumption in spawning habits and further events like the above 2 that affects mortality rates will recede.
10) Factory vessel Lafayette and Fleet ----In its desire to increase efficiency and reduce wastage CFG has introduced a quantum change in the manner which fishing is done. Instead of having a supertrawler that catches fish and then return to shore. CFG has broken the fishing process into 3. The trawler/catcher vessels catch the fish. The fishes from the catcher vessels are then sucked up into the factory vessel and instantly frozen to keep the fish fresh. Reefer vessels transport the frozen catch back to shore and also bring supplies, crew and bunker to the factory vessel and the catcher vessels. In this way, the factory vessel can stay out at sea/ocean throughout the year. Crew and Fuel costs are lowered thru such an arrangement as trips are reduced. The Lafayette by design has to be large since it has to accommodate the catch of many vessels. CFG invested in a fleet of 7 catcher vessels and 5 upgraded supertrawlers (freezing capacity of 150mT/d) and the Lafayette (1500mT/d) for the purpose of securing SPRFMO ITQs in 2009. A total of more than USD 100m in capex was spend . But, depressed catches due to the El Nino and Chilean earthquakes has meant that the fleet could not justify the cash burn. Since then the vessels have been deployed to Faroe Islands and Mauritania to catch species like horse mackerel, sardines and herring .

Most of the Chinese owned and Dutch ships who were attracted to the SPRFMO, to stake their ITQs have since left because it is simply not viable to keep a fleet there when the CJM stock are so scarce. Please note that this is a prime example of aligning  vested self interest with collective interests-----Overfish and the stock depletes--- ITQs becomes worthless  and huge capex spend becomes redundant ----- Hence, there is great incentive for private holders of the ITQ system to take care of their collective interest of mantaining a sustainable stock based on the findings of the SWG (Scientific Working Group).

There are quibbles over the way the SWG arrives at its TAC (Total Allowable Catch) advisory figures.
But, this is unnecessary and futile. Due to the emergency status, the SWG uses past 5 year recruitment data furnished by Chile and assumed mortality rates to "pluck" into their models before arriving at the TAC figures/outcomes and must necessarily err on the side of safety to help bring the T Murphi levels back.

11) CFG/PARD Group ----That the Lafayette and CFG has roused the envy and the jealousy of others is no surprise.The PAH Group has eclipsed others to become the No 1 Fishing listco in the world.

Some positives:-

MSC certification ---The CFG and PAH Group is also applying for MSC Certification to ensure traceability of their catches to the Fisheries concerned----starting with Alaskan Pollock. That certification is expected to have been obtained by this year but may drag to next year. Anybody associated say with the pharmaceutical industry will know that FDA inspectors are far more stringent in granting product and facilities certification for foreign domiciled firms  than for  domestic US  firms----- they have the weight of US workers jobs and US domestic firms business on their shoulders. Similarly MSC certification for the Hongdao facilities and for the AP fishery may take longer than first expected. Once certified, CFG/PARD caught and processed Alaskan Pollock fillet should be able to sell in most  MSC conforming bizs--- e.g. Walmart, McDonalds, Long Johnsilvers, Burger King etc.

Mapping of biomass--CFG has set up a CSR committee and has engaged an expert Dr Keith Sainsbury. To augment and improve reliability CFG vessels with latest satellite tracking and sonar devices will help track biomass patterns in the SPRFMO. see empea.
Satellite monitoring as is done for the Peruvian Fishery can help improve  and augment scientifc data which the SPRFMO  has been depending on the Chilean ; as the primary and only source.
Reducing wastage --CFG/PARD Group has pioneered many ways to improve the catch ( as explained above) and fish processing industry ---- reduction in wastage  in terms of fish parts almost 99% including fish bones.
Human Consumption --The fish eating population in the Western world has been known to be picky--- preferring white fish such as cod, trout and salmon which can be filleted and have very few bones. Many of the fishes such as Alaskan Pollock and T Murphi were first used for fishmeal processing for the Salmon industry and other feedstock purposes. CFG/PARD has sought to change the game by selling them for human consumption----- even for the anchoveta!  In fact, CFG competitor TASA has come up with a fishmeal patty omega-3 burger!!
CFG and  PARD have been harvesting these previously fishmeal designated species and converting them into forms suitable for human consumption.  CFG pioneered the double hand lay fillet double frozen Alaskan Pollock (onboard  modified supertrawlers) and changed the way the westerners fished and processed the fish fillet--- in fact  modifying their eating habits---since there is now acceptance of frozen fish (formerly the Westerners only consume freshly caught AP). They also opened up the West African market for fish such as Chilean Jack Mackerel, Horse Mackerel, Herring, Sardines etc. for fish species that were formerly destined just for fishmeal.
As an industry leader its success will attract attention and one might say even envy and jealousy.

Saturday, January 14, 2012

China news

1)National Financial Work Conference

I have been following news reports of the above conference held more than a week back on the new directions that China may take in the financial sector.

Past Conferences & Outcomes

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.
The conference is held once every 5 years. A brief recount shows the signifcance.
The first conference was held in 1997, in the wake of the Asian financial crisis------  led to a plan to remove billions of dollars in bad debt from the balance sheets of the major banks.
The 2002 meeting led to hastening the reform of those banks----  resulted in the eventual overseas listing of Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
The 3rd 2007 conference led to the establishment of China Investment Corp., the country's sovereign wealth fund.
 From 2006 to 2011-------Banks's NPLs fell to 0.9 % (2011) from 7.1 % (2006);  Banks' overall CAR  increased to 12.3 & (as of Sept 30 2011)  from 7.3% (at the end of 2006).
Recent concluded 2012 Conference
One of the key outcomes of this conference could be the manner in which China policymakers will move towards allowing the free market to set interest rates.
Following three interest rate hikes in 2011, the one-year benchmark deposit rate stands at 3.5 percent, while the loan rate is 6.56 percent, yielding an interest margin of 3.06 percent. These rates are at the moment, all determined by the PBoC and are highly biased by giving a very good margin which is protective of the Big Banks.
That high margin did much to lift banks' total assets to 119 trillion yuan ($18.84 trillion) by the end of last year 2011.
How would China move towards market driven setting of interst rates?
Deposit Insurance
One proposal eyed is deposit insurance---- which would reduce potential default risks and help drive market-oriented interest rate reform for commercial banks.
Once bank interest rates can float freely on a market basis, the interest margin is expected to contract under competition, and it may shrink the bank's profits.
Bankruptcy is normal in a competitive situation, so an insurance system is necessary to protect depositors' assets.
Market forces are expected to play a more important role in fund allocation, and the government's role will be more clearly defined, Premier Wen Jiabao said on the Saturday after the end of the two-day National Financial Work Conference.

Competition would also help SMEs who are the ones suffering most under the tight monetary policies ( after the series of RRR rises last year) get cheaper loans and increase their profit margins.

2) CPI and PPI

Looking at the CPI and PPI Plots U would have noted that China's CPI growth has somewhat moderated at 4.1% yoy , a 15mth low. The PPI plot shows an even more pronounced downward sloping trend for growth, suggesting a possible inprovement in the CPI if producer input price increase continues to abate.
Overall for the year ended 2011, CPI was up 5.4% vs 2010 says NBS.
Remember the CPI target  inflation rate set by Premier Wen was 4%. Many in the local provinces are feeling the pinch of the high inflation and remains high on the agenda of policymakers.

China's CPI

China's PPI

While the overall CP growth is somewhat moderating, food prices remains a prime concern as it forms a massive 1/3 of the CPI basket. Overall Food prices were up 9.1% yoy in Dec. That rise contributed 2.8 percentage points, or more than two-thirds of the general price increase.

China's CPI  Food Components

All Graphics courtesy of China Daily
Food Prices are largely cost driven ----- dependent much on weather conditions (floods etc)  and the agricultural population. In other words supply rather than demand driven.
China policymakers must continue to have policies that favor the agricultural population and promote productivity in grain products as well as animal husbandry.
As China is at an early stage in the economic development path, food will constitute a big portion of the basket but will decline with urbanisation and accompanying income growth.

Lewis Point
Many economists believe China may have already crossed the so-called Lewis turning point, meaning that all excess rural labor has already been absorbed by urban areas and that structurally higher wages -- and inflation -- lay ahead.

Many provincial authorities have rushed to increase minimum wages, in line with central government plans to boost spending power and domestic consumption, despite warnings of tightening labor supply from factory bosses.

High Frequency Economics' Mr Weinberg, estimates non-farm workforce growth of 2-4 per cent a year.

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.

3) Forex Reserves

China's forex reserves unexpectedly declined ---- to $3.18 trillion, down $20.6 billion from the previous quarter.
In breakdown, PBoC data showed that foreign exchange reserves increased by $72.1 billion in October, but decreased by $52.9 billion and $39.76 billion respectively in November and December.

Thursday, December 22, 2011

Office Rentals

In the BT article dated Dec 22, "Office landlords sweeten deals as market weakens" by Kalpana Rashiwala, several industry experts were interviewed on the direction of Office rentals.
Jones Lang LaSalle....

predicts that the average monthly rental value for Grade A Raffles Place (excluding Marina Bay) will ease about 5.1-14.4 per cent over the next 12 months, from about $9.75 psf to $8.35-9.25 psf in Q4 2012. It also projects that the Grade A Raffles Place (including Marina Bay) office vacancy rate will rise from about 10 per cent this quarter to 12.5-13 per cent by end-2012, given a more bearish outlook on demand. Net office take-up for the same location will remain in positive territory in 2012 but weaken to 830,000 sq ft from about 1.75 million sq ft this year, according to JLL.

On the supply side, JLL notes that islandwide, between 2012 and 2015, some 5.5 million sq ft of new office space for lease (excluding strata-titled developments such as Paya Lebar Square) will be completed. Of this, some 1.3 million sq ft is already leased, leaving 4.2 million sq ft available. Adding the remaining 800,000 sq ft of the 2011 supply that has yet to be let gives a total of five million sq ft available over the next four years. This works out to 1.25 million sq ft per annum.

The historical average 20-year (1991-2010) islandwide take-up was about 1.5 million sq ft per annum.

Chris Archibold, head of markets at JLL, says:

'Given Singapore's enhanced international value proposition, one would logically expect average annual take-up numbers over the next 10 years to be higher.

'The demand numbers are hard to predict and are very much dependent on the global economy. Impact on rents is hard to gauge as it's very much dependent on demand and market sentiment. In the near term, the global outlook is likely to have a negative impact on office space take-up; however, in the medium term, Singapore is well positioned.'
So the truth is that the medium and long term outlook is difficult to predict.
However, analysts are generally bearish on the short term outlook due to the Eurozone crisis.

Knight Frank .....
They appear to be the most pessimistic.
Director (office) Robert MacDonald says:

'The first half of 2012 will almost certainly see landlords increasing incentives (rent-free periods), and additional benefits to attract tenants, such as fit-out capital contributions, will become more common.'
'...headline office rents could contract by up to 15 per cent by end-2012. All eyes are focused on the European debt crisis and the resulting economic reaction, which will have a direct impact on market sentiment in Singapore. The extent of decline will be more transparent towards the end of Q1 2012.'

BT reported increased agent commissions from one month's rental to between 1.2 months and two months' rent on a typical two or three-year lease.
Another perk , reported by BT...
"landlord of a brand new Grade A office development keen to maintain high headline rental levels in the building is said to be prepared to offer a 5-6 month rent-free period for a 2,500 square foot space - from 1-2 months half a year ago."
Mr MacDonald notes that new-build Grade A rents in Singapore are 45 per cent lower than comparable developments in Hong Kong.

CBRE .....
Executive director Moray Armstrong, says:
'Landlords will have differing reactions in a more competitive leasing environment. Some may wish to increase incentives or inducements while preserving face or signing rents, while others may just allow signing rents to adjust to the prevailing market level.'

CBRE figures show that the average monthly rental value for Grade A offices - covering the Marina Bay, Raffles Place and Marina Centre locations - has been flat in Q4 from the Q3 figure of $11.06 per square foot, translating to a full-year rise of 11.7 per cent. This follows a 22.2 per cent appreciation in 2010.

Mr Armstrong foresees Singapore office rents easing next year but does not expect any dramatic rental correction as was seen post-global financial crisis, when the average monthly Grade A rental slumped nearly 60 per cent over six quarters, from $18.80 psf at the peak in Q2 and Q3 2008 to $8 psf in Q1 2010.

'Rentals going into GFC were at artificially high levels, driven by extraordinarily low vacancy rates of sub-one per cent for over two years. This accentuated the rent correction. These conditions don't exist today; rentals are manageable and relatively competitive compared with other regional centres.'

Mr Armstrong expects office demand to remain positive in 2012. 'While there are precious few leasing requirements in the key banking sector - where the growth spurt appears to be over - we're encouraged by a number of new entrants coming into Singapore from a few sectors (such as) in the energy, commodities and consumer industries, and law firms.

'We've seen some initial signs that certain global industries are viewing Singapore favourably for expansion, partly due to uncertainty in the West arising from prospects of increasing taxes and an uncertain political landscape. Singapore could emerge a net beneficiary.'

Savills ....
Director (commercial space) Agnes Tay observes

'Tenants may want longer leases and more options for renewal as they seek greater security of space - and yet due to uncertain business conditions, they would also like some flexibility in the lease agreement that the landlord will consider taking back some of their space should they no longer need it, with an agreed compensation formula.'


My Thots.....

In the immediate near term, most experts tend to be cautious--- to be pessimistic.
CEO of KReit, Ng HL has to be very brave (or reckless? ) to call the timing and nudge Kepland to release OFC to KReit , during such a period of uncertainty.

Friday, December 16, 2011

ABSD Property Curbs

What is the intention of the Additional Buyer's Stamp Duty (ABSD) curbs ?
First, let's look at the policy measures introduced since 2010 to see the Big Picture:

Summary of policy measures in 2010 and 2011
Feb-10 ----- Introducing Sellers' Stamp Duty (SSD) on all residential properties and residential land that are bought after today and sold within 1 year from the date of purchase. Lowering LTV limit to 80% for all housing loans provided by financial institutions and regulated by the MAS

Aug-10 -----  Increased holding period for imposition of SSD from the current 1 year to 3 years. Increased minimum cash payment from 5% to 10% of valuation limit. Decreased LTV limit for housing loans granted by financial institutions from 80% to 70%

Jan-11 ----- Increased SSD period from 3 year to 4 years. Increase SSD to 16% within the first year, 12% within second year, 8% within  third year and 4% within fourth year. Lowered LTV from 70% to 60% for individual buyers and 50% for non individual buyers

Dec-11 ----- Foreigners and non individual buyers to pay additional buyers stamp duty (ABSD) of 10%. PRs owning one and buying second and subsequent property will pay ABSD of 3%. Singapore citizens owning two and buying third and subsequent property to pay 3% ABSD.
These are mainly demand-side measures---- calculated to discourage or defer real demand.
Remember that the govt also have supply-side measures----- land releases to ensure that developers can tender for plots to meet the supply spikes.
Ostensibly, the Dec 11 measures are anti-speculative since the ABSD targets additional purchase of properties beyond the 1st and it follows an incremental layering approach by the policymakers to prevent a bubble from forming in the property sector.

The only difference is that this time it discriminates  between SG citizens, PRs and foreigners with graduated deterrence's (ABSD).

Foreigner demand as a percentage of total transactions has risen from 13% last  year to 17% for 10M11. Recent data showed that foreigner buying activity had become increasingly broad based, moving into the mass and mid-end market segments, compared to the more high-end focus previously.
One way to look at the ABSD measures is to look at it as one of incremental policy layering ----- speculative  hot money from foreigners (corporate and individual) and  PRs being targeted was a logical policy outcome. Low interest costs, the high SGD and the desirability of SG as an attractive destination for HNWIs will facilitate hot money inflows which will gravitate towards properties; given the markets abhorrence for derivatives and hedge funds.

But, if the demand is genuine, that is if SG is so desirable to the HNWIs, would the measures be effective? IMHO, Yes, as it will skew foreigner demand towards the higher end sector ---- those who can afford high ABSD will be able to afford high end properties!! So the policy discourage speculation at the mid end and mass market sectors and is pro-SG citizens ( an important consideration during elections).
Foreigners from the United States, Switzerland, Liechtenstein, Norway and Iceland are exempt due to certain clauses in their free-trade deals with Singapore. However, buyers from these countries, excluding permanent residents, comprised only 1.7 per cent of all foreigner purchases of non-landed homes this year---- meaning that those most affected will be the Chinese, Indonesian and Indians.

What will the foreigners do, if they have to reside here for investment and biz reasons and cannot buy?
The answer is simple----- they will gravitate towards rental of properties!!

The other big question is one of timing----- why now?
Given the Eurozone uncertainties and the glacial pace of growth in the US, there is likely to be a period of  monetary easing (QE to be exact) and low interest rates in the West. Hot Money will flow to  Asia  eg HK, China, SG etc.....
So while the aneamic economic growth in Europe and the US slow global growth in trade terms, it will cause hot money to seek growth in faster growing Asia which has huge potential for economic growth due to domestic consumption arising from the surging population growth.
Hence, the direction of  hot money flows is not difficult to fathom----it will gravitate to where there is less controls.
SG due to its open and market friendly policies is a hot favorite.
The policymakers do not have a choice in coming up with the latest ABSD measures, if they want to slow down the rate of property price increases; given the drastic measures in HK and China.

Developers are of course "peeved" about the timing and the anti-speculative measures and are lobbying for their removal--- that is the raison detre for REDAS and it is no surprise that they do so.
Developers have come up with new tactics to keep sales going.
Latest BT update on Monday 12/12/2011, by Uma Shankari, says...

Other developers said it was 'business as usual' at their showflats, but admitted that sales were slower compared to a week ago.

For the most part, buyers are now waiting for prices to fall. Property agents noted that there was a 'steady flow' of potential buyers at showflats - but most left without buying anything.

This is even as many developers - including Far East Organization, Wing Tai Holdings and City Developments - are offering packages to offset the stiff new measures.

Far East is offering a 5 per cent relief package to affected buyers at all of its already-launched projects.

It will reimburse buyers 3 per cent of the unit price to offset the new stamp duty, and buyers will also get furniture vouchers worth 2 per cent of the flat price.

Wing Tai and City Developments are also offering relief packages at selected projects, BT understands.

But will property prices collapse 30%, as some analysts say?
That is NOT the intention of the policymakers; whom will adjust and recalibrate policies if the prices drop excessively.
IMHO, the policymakers seek a gradual incremental rate of property price rise------ not a collapse !!

Wednesday, December 14, 2011

Handing over the baton in China

According to Xinhua and reported by CNA , China will maintain property market restrictions and "prudent" monetary policies.

Many observers have their lenses zoomed in to the once-in-a-decade leadership changes.
No surprise on the "property market restrictions " as they were the fruits of  many incremental policies that finally managed to cool runaway property  prices. So any changes will be similarly targeted and incremental.

Xi Jin-Ping and Li Ke-Qiang are both groomed successors who have been given increasing exposures to policymaking and the top leadership changes should NOT be disruptive to the continuity in policymaking.

The signals sent out are therefore intended to ensure that 2 current "tenets":
-  Housing remains affordable
- Consumer prices (CPI) remain stable
remain in place even after the handing over of the baton. So it is very important that China do not give any nasty surprises here.

Monetary Policies and Fiscal Policies which has quite an impeccable record under the current leadership of Hu and Wen are likely to maintain "unswervingly " on course given the  signals sent out at the close of the annual Central Economic Work Meeting.

Let's look at the statements released after the meeting:

"the country will speed up the construction of ordinary commercial residential housing to increase the effective supply and promote the healthy development of the property market."

Since April 2010, China has imposed a raft of measures aiming to calm property prices. They include higher down payments, limits on the number of houses that people can own, the introduction of a property tax in some cities, and the construction of low-income housing.

The statement also said that :

"China will push forward the trials of property tax reform."

China introduced the property-tax trials in Shanghai and Chongqing at the beginning of the year as part of its efforts to curb skyrocketing home prices and contain asset bubbles.

Another part of the statement:

"China should appropriately handle the investment and financing, construction, operation and management of affordable housing projects, and progressively solve housing problems for low-income urban residents, newly-employed workers and migrant workers from rural areas."

The government has vowed to build 36 million units over the next five years in an effort to give more mid- and low-income households access to housing and stabilize runaway property prices, with 10 million units planned for both 2011 and 2012.

China's housing authorities said on Nov. 10 that the country has already met this year's goal of starting the construction of 10 million units.

This is what the incoming Li KeQiang said:

"The construction of affordable homes will help curb excessive price rises and fuel urbanization, which will in turn unleash consumption and investment potential and push the development of related industries,"

 VP Li Keqiang said in late November that the government should stick to its tightening measures over the property market and consolidate the regulative results it had achieved.

Hence the outcome of this meeting is no surprise.

More cities posted monthly home-price declines in October following the government's campaign to calm the property market.
In October, 34 cities in a statistical pool of 70 major cities saw declines in new home prices from September, compared with 17 in September, data with the National Bureau of Statistics showed.

This what the policymakers are trying to achieve: ----- a slowdown in the increase in home prices.
So the policymakers would not do an about turn now, when the policies are gaining traction. The policies have to be "calibrated" and the market would be monitored, the process of calibration via the feedback loop is a delicate balancing act.  However, if prices start plunging badly then policies would be adjusted incrementally

Gaming growth rates

A BT article today entitled...
"Gaming growth rates in Asia-Pac likely to moderate: S&P" by Grace Leong
says that in 2012:
- Singapore's net gaming revenue is expected to grow by 5-10% .
- Macau gross gaming revenue growth is 10-15 % .

The estimates were according to the analyst Joe Poon.
In the 1st 11 mths of 2011:
- Macau posted a 44 % jump in gross gaming revenues
- Singapore's net gaming revenues  soared 42 % to USD 5 b this year.

Regulatory uncertainties on  "junket approvals" and  "advertising" were cited as "dampers".

While Singapore's two IRs have exceeded performance expectations since their opening last year, several factors including regulatory uncertainty and projected slower growth in Singapore's economy could put a damper on local gaming growth.

Singapore's latest move to tighten advertising regulations to ensure the two casinos do not target locals, and expectations that the government may introduce more of such measures to tackle problem gambling, may crimp local gaming demand, the report said.

But the duopoly held by the two IRs until 2017 would also provide growth opportunities for them. And if the Casino Regulatory Authority were to approve junket operating licenses next year, Singapore's gaming growth rates would likely be higher than the current projected 5 per cent to 10 per cent.

Amid credit tightening measures in China, the Macau market is expected to post stronger gaming revenue growth than Singapore next year because the opening of Sands Cotai Central, a 5,800 room casino development project starting next first quarter, will likely fuel demand and boost mass market growth.

Mr Poon said he believes bad debts aren't likely to have a significant impact on the credit profiles of gaming operators in Macau, as they have limited exposure to direct lending to VIP players.

'We expect more projects will start in the next few years in Cotai, but the city could face challenges such as inadequate infrastructure, labour shortages, and a cap on the number of gaming tables,' he said.

Elsewhere in the region, countries including Japan are likely to accelerate their plans to develop licensed integrated casino resorts to spur economic growth.

'We expect operators in the region, with their improving financial capacity, to aggressively bid for casino licenses and invest billion of dollars into gaming projects,' Mr Poon said.

'We consider gaming operators to be better positioned now than they were in 2008 to accommodate risks associated with investments in new gaming developments and any moderation in gaming demand,' he said.

He cited significantly improved cash flow from existing properties, 'resulting in a better balance between cash generating assets and assets under development'.

'As many of these assets move from the construction phase to stabilised levels of cash flow generation, they should provide operators with greater capacity to accommodate any unexpected moderation in gaming revenues or capital availability,' he said.

The report did not examine the effect of emerging gaming locations on SG; such as in Japan and the new Cotai strip in Macau.

However, B/Ss are expected to improve and be resilent...
 "As many of these assets move from the construction phase to stabilised levels of cash flow generation, they should provide operators with greater capacity to accommodate any unexpected moderation in gaming revenues or capital availability"

Friday, December 9, 2011

Comments on BT's interview with KReit's CEO

Today's BT, 9th Dec has 2 Letters to the Editor that gave very good rebuttals to Ng Hsueh Ling, CEO of KReitAsia regarding the remarks she made in interviews in 2 articles on Dec 6, as reported by Jamie Lee.

The 1st article was titled " K-Reit nudged parent to get hands on OFC" and the 2nd article
"K-Reit voting prompted query from MAS"

To make the whole discourse meaningful, I excerpted from BT with minimum cropping.....

1st Article excerpts...

It was K-Reit Asia that approached its sponsor Keppel Land to snap up Ocean Financial Centre (OFC). This was to have a say in rental negotiations now underway, get tax exemption and to lower the average age of its property portfolio.

The dynamics behind the deal were revealed by K-Reit's chief executive officer Ng Hsueh Ling yesterday, even as the real estate investment trust faces criticism that the deal is too expensive at a time when the office market may soften.

Ms Ng also rejected suggestions that Keppel Land got the sweeter deal. She noted that the $1.57 billion that K-Reit paid for Keppel Land's 87.5 per cent stake in OFC is still well short of the peak.

'If you look at the historic peak of the market, the highest transaction was about $3,120 (per square foot) for a plot of land along Robinson Road. We figured that $2,380 psf is very far from the peak, and it's one of the best buildings in Singapore,' said Ms Ng.

'How do we know the bottom? And to go out and get money in a bad market, people will say 'no'.'

Ms Ng added that Keppel was not urgently looking to offload the property.

'They are in no hurry to sell,' she said. 'A lot of people have asked me who started the negotiations first. I wanted to buy OFC because I don't want it to be fully leased.'

Some 20 per cent of the space in OFC is having its rental negotiated. She wanted to fill this space with tenants who wanted long-term leases, took up large amounts of space, and had a good credit backing.

'I didn't want Keppel to fill up the extra 20 per cent because Keppel is a developer. I want to fill up with Reit-like tenants,' she said.

'I can also wait for Keppel to fill up the space but you can't control the tenants and you will have to pay for a fully valued asset. If the market goes down, sorry, you would have paid at that price.'

She remains very confident that the space will be taken up by such tenants. And despite the grim economic outlook, customers have not asked for cuts in the rent rates, with Ms Ng saying these are large firms and long-term players.

Touching on the 17-for-20 rights issue to be used to foot the bill - a move that would be dilutive for existing shareholders - Ms Ng said cash calls are inevitable in order to grow the portfolio size, especially since purchases in the office space are big.

'Now that K-Reit is large in size, the chances of going out to do another rights issue will be much lesser than when it was smaller.'

Early this year, the Reit asked the Inland Revenue Authority of Singapore (IRAS) whether all income coming from OFC could be exempted from a 17 per cent tax payment if the corporate ownership structure was changed to a limited liability partnership from a private limited structure, under which a company has to pay that amount of tax.

The property trust was told by IRAS around June that this would be possible - making it the first time an office building here has been allowed such a tax exemption under this structure. This prompted the Reit to begin serious negotiations, Ms Ng said.

With the purchase of OFC - which will not require K-Reit to spend money on asset enhancement initiatives - the average age of the properties in the portfolio will be lowered to 4.4 years, she added. 'No other Reit has that kind of age. It doesn't mean that being young alone is good. You must be young and in the right location,' she said, though she had no figures on the industry average.

As for the compensation of Reit managers, Ms Ng argued that her remuneration is based on the performance of the Reit, noting that she needs to meet targets set for the managers.

Acquisition fees paid to the manager are in the form of units that can be sold only after a year, which means that the manager has to watch the units' market performance.

Ms Ng also defended the sponsor model that Singapore Reits operate under, noting that a sponsor provides a supply of assets to refresh the Reit's portfolio.

K-Reit noted that sponsors are also aligned with the Reit as cornerstone investors, and that working under this model gives Reits access to bank funding.


 2nd Article excerpts......

K-Reit Asia had conducted the voting over the purchase of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre via a show of hands to avoid the ire of minority investors, chief executive Ng Hsueh Ling told BT yesterday.

This has prompted a query from the Monetary Authority of Singapore (MAS) - which regulates property trusts - on the proceedings of the unitholders' meeting, she revealed, though no subsequent questions have been posed since then.

About a year ago, K-Reit had gone through a similar voting process to gain unitholders' approval for an asset swap with its sponsor Keppel Land.

This had Keppel Land selling its one-third stake in Phase One of Marina Bay Financial Centre to K-Reit, while K-Reit selling Keppel Towers and the adjacent GE Tower in Tanjong Pagar to Keppel Land.

But during last year's meeting, minority unitholders were upset with the decision to have voting done by poll, arguing that this voting method would silence the unitholders since institutional investors often hold a larger block of units.

With poll voting, each share translates to one vote, whereas under a show-of-hands system, each person gets a single vote, regardless of the number of shares he holds.

This year, about 350 unitholders present at the extraordinary general meeting were given the option to vote by poll or by show of hands.

Minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present - as stipulated in the Reit's trust deed.

But the poll request, led by an institutional unitholder and supported by a few retail unitholders, did not meet the requirement.

To compound matters, K-Reit's chairman Tsui Kai Chong told unitholders there were proxy votes representing 46 million units that favoured the deal, before calling for unitholders who wanted a poll to register with the company.

The 46 million units included votes from institutional investors whom K-Reit had met to discuss the deal during its roadshow, Ms Ng noted.

'Even if every single person present at the meeting had voted against, what the chairman had in terms of the positive proxies would have (seen the deal) more than comfortably passed through the poll,' she said.

'Since people who called for the poll didn't meet the requirements, we thought, 'why should we go against the trust deed and have our discretion?' People might say, why did you use your discretion?

'I guess we could never win it,' she added.

The deal also won overwhelming support via a show of hands, with Ms Ng noting that the hands in favour were 'too many to count'. By Ms Ng's account, there were just six to seven hands raised to show disapproval of the deal.

Voting through a show of hands is a practice that the Code of Corporate Governance no longer accepts as sound governance.

This was reflected in the recent review of the Code, though the findings were announced two weeks after the deal was approved.

Click Read More to go to the Letters to the Editor

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."