Saturday, November 19, 2011

El-Erian on the Global Economic Uncertainty

The Anatomy of Global Economic Uncertainty


NEWPORT BEACH – The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead.

The United States is having difficulties returning its economy to the path of high growth and vigorous job creation. Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system. In the eurozone, financial crises have forced out two governments, replacing elected representative with appointed technocrats charged with restoring order. Concern about the institutional integrity of the eurozone – key to the architecture of modern Europe – continues to mount.

This uncertainty extends beyond countries and regions. Those looking around the next corner also worry about the stability of an international economic order in which the difficulties faced by the system’s Western core are gradually eroding global public goods.

It is no coincidence that all of this is happening simultaneously. Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.

Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.
Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive. Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.

The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation.” The objective is not to account for everything, but rather to pinpoint a small number of variables than can explain key factors, albeit neither perfectly nor fully.

Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.

The first relates to balance sheets. Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.

Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.
A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression,” under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors.

De-leveraging is closely linked to the second variable – namely, economic growth. Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.

Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.
But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased.

 Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth,” which, most critically, involves greater “social justice.”
Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust. Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?

Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labor, between current and future generations, and between the financial sector and the real economy.

This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both America and Europe to point to a debilitating “lack of leadership,” which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes, and governance systems.

Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical. The longer they fail to adjust, the greater the risks.

Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of  When Markets Collide.

Project Syndicate


My Thots....
El Elrian coined the term "New Normal" at a time of great uncertainty during the GFC, so as to help his PIMCO believers see the "new paradigm". Many like myself, took to the refreshing manner and the simplicity with which he made the volatilities and uncertainties look manageable.
But, his "New Normal" of  low growth and low low interest rates were perhaps an inducement to encourage investments in fixed income bonds and the likes.
PIMCO under Gross and El Elrian did many right calls, but  missed some too (especially on US Treasuries in the previous Qs, this year).
So opportunities can be missed too, even called wrongly, by the fixed income experts in times of great uncertainties.
It just go to show how unpredictable the politicos are, when put together;  and in the EU, there are 27, with 17 in the Eurozone!!

Friday, November 18, 2011

Lucas Papademos

Analysis: Lenders seen swallowing Greece's 80 bln euro demand
  Ben Harding
ATHENS | Thu Nov 17, 2011 5:24am EST

ATHENS (Reuters) - Greece needs 10 times more aid in January than the 8 billion euros it is scrambling to secure by next month. International lenders are likely to grit their teeth and pay both bills to prevent a messy default that could take down Italy as well.Greece says lenders will need to frontload their proposed 130 billion euro bailout for Athens with an initial 80 billion euros because of the vast sums needed to cut private sector debt without destroying Greek banks in the process.

European leaders say Greece has consistently failed to sell state assets, chase tax evaders and slash the public sector as promised, prompting the exasperated leaders of France and Germany to openly suggest last month Athens might quit the euro.

"While they may well want to threaten Greece, when push comes to shove, euro zone governments may opt to put off disorderly default ... and the Greek government is aware of that," said Ben May at Capital Economics.

Finance Minister Evangelos Venizelos is frank about Greece's urgent need for a big slice of the second bailout -- even before its lenders from the European Union, International Monetary Fund and European Central Bank have signed off on the release of the prior loan, needed by mid-December.

"The next loan tranche ... is not like the sixth tranche of 8 billion euros but more than 80 billion euros in total," he told parliament on Tuesday, adding Greece would need it by early February at the latest.

New prime minister Lucas Papademos, a respected former European Central Bank vice-president, has made the bailout, agreed in Brussels last month, his coalition's top priority.

But while euro zone lenders appear to have the whip hand as the clock runs down, the trauma of a Greek default would still be too painful for the rest of the common currency area.

Though Greece, with 360 billion euros of debt, is a far smaller systemic risk than Italy, any withholding of financial aid would shatter an assumption that the euro zone will support any member in trouble.
Italian bond yields have burst through the psychologically key 7 percent barrier as political turmoil has stoked fears it lacks the means or will to fund its 1.8 trillion euro debt pile.

"Maybe the effect of Greece leaving the euro zone is priced in ... but the likelihood that Italy would then default has increased, so it becomes even more expensive to save Italy," said Christian Schulz, Senior Economist at Berenberg Bank in London.

Diego Iscaro, at IHS Global Insight in London, said he expected Paris and Berlin to grumble but ultimately to agree to the large tranche since Europe's EFSF bailout fund lacks the firepower to save Italy, making a Greek firewall more important.

"I think Athens' position is stronger than many on the outside realize."

One risk is that Greece's feuding parties use Papademos to secure the massive first installment of a new bailout program, then once his three-month mandate expires, revert to politics as usual. Since they will have had most of the money in one dollop, some may feel the remainder is not worth all the political pain.

Still, Athens can ill afford to slacken the pace of austerity as it will see little of the 80 billion euros before it flies out the door again.

Thirty billion will go to recapitalize Greek banks in order to absorb losses on a key pillar of the deal -- an agreement between banks, the EU and Greece to halve Athens' 200 billion euro debt to private sector bondholders.

To secure this private sector involvement (PSI), a further 30 billion euros will go to bondholders to sweeten the haircut, with one suggestion that they receive 30 percent of the discounted bonds in cash.
Greece said earlier on Thursday it had begun negotiations with banks to thrash out the swap of existing bonds for longer maturing, discounted paper.

Charles Dallara, head of the Institute of International Finance (IIF), which represents the banks, said before meeting Papademos in Athens on Wednesday that there was limited flexibility on the plan's terms to ensure it remained voluntary.

Adding urgency to the PSI negotiations is a tentative target for fresh parliamentary elections on February 19.

Only 20 billion euros of the 80 billion estimated by Venizelos will flow into state coffers and what it will be used for is unclear, reflecting the embryonic state of the PSI talks.

Five billion euros will go toward clearing debts to suppliers who have kept the country running, leaving the remaining 15 billion euros to pay for bond redemptions.

That war chest could be swallowed whole by a 14.5 billion euro bond which matures on March 20, according to Reuters data.

Creditors on the three-year issue are unlikely to accept any significant haircut or extension of its maturity this close to redemption, analysts said, particularly since the hit to net present value would be all the greater.

Neither Greece's finance ministry nor the country's debt agency would comment on what debt it would target with the 'spare' 15 billion euros.

In all, Greece has still to repay 8.7 billion euros up to the end of this year and 22.4 billion euros from January to end-March, Reuters data shows.

Athens estimates the PSI deal will save it 4.5 billion euros a year in interest repayments, but analysts say even that will not prevent a further default down the line, since Greek debt would still be at an "unsustainable" 120 percent of GDP by 2020.

"We would not be surprised to see further debt restructurings down the line," says Capital Economics' May.

"Greece could continue to play ball if it feels that the costs of defaulting are greater than the benefits, but in our view, at some point, Greece will feel it needs to restructure its debt again because it's simply too costly."


My Thots...

The greatest uncertainty in Greece is that of political risks.
Lucas Papademos will deliver but can he stay after Feb?
Will Antonis Samara honour the agreements that Greece under Papademos made with the Troika, should he be elected?

Mario Monti

Italy's PM unveils anti-crisis plan
Posted: 17 November 2011 2230 hrs

ROME: New Italian Prime Minister Mario Monti said on Thursday that the future of the euro also depended on Italy, during his first speech in parliament in which he unveiled a plan to tackle the crisis.

"The future of the euro also depends on what Italy will do in the next few weeks," he said, adding that his new technocratic cabinet would implement "austerity measures" which would be balanced by "growth and equity".
The former European commissioner said Europe was living through "the most difficult years since the second world war" and warned that the European project "could not survive the collapse of the monetary union".

He said Italy must stop being considered Europe's "weak link", otherwise "we risk becoming partner to a model we have not helped build", and which could instead be built by countries "who do not want a strong Italy".

However, he added: "We don't consider the European obligations to have been imposed by external forces. It's not a case of them on one side and us on the other. We are Europe."

"We need measures to make the economy less fossilised, help new industries to grow, improve public services and favour youth and female employment."

Monti, whose economic programme had been hotly awaited by global leaders, said he intends to overhaul the labour market and pensions system, which has "unjustified privileges for certain sectors".

Both are measures the European Union has called for and their inclusion in the announced reforms is expected to reassure markets.

Monti also said he hoped to reduce labour tax and look into re-weighting estate tax, adding that the absence of property tax on main households since it was abolished under the former Silvio Berlusconi government was an Italian "anomaly".
"If we fail, if we don't carry out the necessary reforms, we will also be subjected to much harsher conditions," he warned.

The premier, who took over from the ousted billionaire Berlusconi on Wednesday, said the "absence of growth cancelled out sacrifices" and promised to respect Italy's timetable to balance its budget by 2013 and reduce its debt.

Monti's speech was well received, and the Senate speaker had to intervene and call on members of parliament to listen rather than applaud wildly.

- AFP/al


My Thots....
Not yet the full Monty.
So far so good, for Italy under Monti.

Thursday, November 17, 2011

Iron Ore Swaps

Published November 17, 2011
BOC unit plans iron ore swaps business

(SHANGHAI) A unit of the Bank of China (BOC), one of the country's top four banks, is planning to kick off an iron ore swaps business next year in a bid to tap growing demand for hedging from steel mills and traders, two sources familiar with the matter said.

The entry of a major bank from the world's top iron ore buyer could bolster liquidity of the nascent swaps market, and signal a further warming to derivatives in China's state- dominated steel sector as prices of the main raw material become more volatile.

BOC International (BOCI), the investment banking arm of the state-owned bank, aims to provide brokerage services, proprietary trading of iron ore swaps as well as physical trading.

'The bank plans to start an iron ore swaps business in the first half of next year, with the aim of providing hedging services for domestic players first,' said one of the sources. 'It also plans to apply for clearing membership in the Singapore Exchange (SGX) next year.'

BOCI was approved as a clearing member of CME Group in March. The CME and SGX both offer clearing of iron ore swaps, with the bulk of globally traded volumes cleared on the SGX.

The source said that BOCI has also applied for category two membership on the London Metal Exchange (LME), which would give it access to all types of LME business except ring trading.
A spokeswoman for BOCI said that she could not immediately comment.

Demand for iron ore derivatives has swelled in recent years given a shift away from annual contracts for the commodity, with a growing number of investment banks and traders venturing into the sector.

The move by BOC is the latest sign that Beijing is moving onto the global stage as it looks to play a greater role in setting world prices for the raw materials that power its fast-growing economy.

Earlier this year, Chinese regulators allowed three of the country's futures brokerage firms to prepare to participate on overseas commodity exchanges.

The overseas foray by BOC and other brokerage firms will help overcome the advantage that foreign banks currently have in helping Chinese firms hedge overseas.

But growing demand from Chinese firms for hedging could also see Beijing accelerate the pace of opening domestic commodity exchanges, the world's largest by traded volume, to foreign players.

'The market certainly needs the big liquidity boost coming from China to make this a market where you can genuinely hedge physical risk,' said an iron ore swaps broker in Singapore.

'If it happens, it shows a bit of softening in China's stance on derivatives,' he said.

Last year's breakdown of a 40-year-old system of pricing iron ore annually in favour of a more flexible quarterly scheme encouraged some Chinese mills to consider hedging risks via swaps, although many remained wary.

Baosteel Group, China's second-biggest steelmaker, in September warned Chinese mills to exercise caution in trading swaps, saying that global miners were able to influence index reference prices used in swaps.

Launched in May 2008, iron ore swaps are cash- settled contracts that allow steelmakers and traders to hedge price risks.

The volume of globally traded swaps soared to an all-time high above nine million tonnes in October, with SGX clearing a record 7.5 million tonnes, as prices gyrated wildly.

Iron ore gained 25 per cent in the past 12 trading days, after sliding nearly 31 per cent in October when Chinese mills cut purchases of iron ore as lower steel prices reflected weaker demand.
Iron ore rose nearly 6 per cent to US$146.30 a tonne on Tuesday, according to the Steel Index. -- Reuters


My Thots....

Potential game changer.

Reits- Corporate Governance

The following is a very timely article by BT's Wong Wei Kwong, dated 15/11/2011 entitled   "Don't let Reits be the next wave of governance lapses ."

SINGAPORE boasts of a thriving real estate investment trust or Reit sector, but recent events have served another reminder that beneath the glowing surface, there are some key fundamental concerns.

K-Reit Asia, last week, pushed through its plan to buy 87.5 per cent of Ocean Financial Centre (OFC), and raise some $976 million through a rights issue to fund part of the cost. It had earlier announced that it would pay some $1.57 billion to buy parent company Keppel Land's entire stake in the OFC office building. Keppel Land will see a net gain of about $492.7 million from the sale.

 Put before shareholders for their approval at an extraordinary general meeting (EGM), the proposal ran into howls of protest. Shareholders questioned the stiff price and timing of the deal, at a time when the economy is facing a slowdown. Shareholders noted that while the prime Grade A office building in Raffles Place has a tenure of 999 years with 850 years remaining on the lease, KepLand is selling its stake with only a 99-year lease. Others questioned why K-Reit is paying its manager (which is owned by KepLand) an acquisition fee - even though it is buying the asset from its parent company.There were also rumblings about the independence of the manager.
In a nutshell, the EGM brought to the fore two key issues relating to Reits here that corporate governance advocates have been highlighting for some time:
This isn't the first time - and probably it won't be the last - that issues like these arise at a Reit. For some time now, there has been growing disquiet among corporate watchers about weaknesses in the corporate governance structures in Singapore Reits.

Earlier this year, a review of Asia-Pacific Reit markets by the CFA Institute produced less-than-assuring results. Looking at the governance of Reits in Singapore, Australia, Hong Kong and Japan, the institute in its report called strongly for Reit managers to be independent. In the current most common scenario, the Reit sponsor wholly owns the Reit manager, and also holds a large stake in the Reit.

And even before the latest K-Reit development, cases of sponsors selling properties to Reits have triggered concerns about conflict of interest, and unitholders have often questioned the purchase of these assets and how they were priced. The CFA Institute said that to better protect ordinary unitholders, most directors on the boards of Reit managers should be independent of management, sponsors and substantial unitholders.  This should be made law, rather than just a best-practice guide.
There is also the need to have more transparent structures to pay Reit managers and to tie these more closely to performance, and indeed to require all Reits to hold annual meetings for unitholders.

Reits are often presented as defensive plays, and given their yield structures, there is some truth in this. But it would be unfortunate if investors buy into Reits for their relative safety just to have their interests as minorities undermined by weak corporate governance structures. If nothing is done, the Reit sector could be where the next wave of governance lapses emerge, and that would be a pity for a sector that has done quite well so far.



My Thots......

A stitch in time saves  nine!!

Corporate Governance
Corporate Governance is an evolving process which needs the participation of all------- manager of the Reit, the Board of the Reit, majority shareholders (aka Sponsors), retail/minority Reit investors, not  forgetting SGX and MAS; which encouraged and fostered the ecosystem for the growth of this important asset class.
In the Sg context, Reits can and must evolve into a class of shares in which conservative investors can look forward to regular recurrent dividends payouts (DPUs, DCFs) with relatively low risks and be de-risked from untimely "wants" for cash calls.
 Note: I call it a "want" and not a "need", as it is often the sponsor/majority shareholder whom is the chief beneficiary and decides on the timing for the call. A well concieved Reit with good Reit-able tenants have the luxury of choosing the timing for acquisitions; it is the sponsor who needs to cash out at opportune situations.

Why Reits ?
The raison det're for Reits for the Sponsor/majority shareholders is that it allows monetisation of their assets and serve as a vehicle for recyling the monies; in short, as the last and most important component of the asset recycling model.
The raison det're for Reits for the minority/retail shareholders is that it serves as a defensive investment choice for regular DPUs, given that the Reits tenants are supposedly chosen to give safe recurrent incomes with locked in leases.
For the Asset recycling model to work, the Sponsors must not forget the investors at the end of the food-chain.
Hence, the Reit must acquire properties with good location, which have a stabilised portfolio of proven tenants (in terms of ability to pay),  with a stabilised mix of tenants able to provide that mix of regular recurrent income net of operating expenses and interest charges which can then translate into accretive DPUs.
That said, it implies a period of incubation at the sponsor level, so that the rental profiles in terms of tenant mix, WALE, cost of borrowing  and operating expenses are all quite stablilised.
As  OFC is only 80%  rented out at passing rentals of SGD 9psf with the remaining 20% subject to the uncertainty of the current Office rental mkts (buffeted by the woes of the Eurozone crisis), rental support is an artificiality ------- it is  certainly not real as the tenants are not captured yet and  is an attempt to  substitute  for (get around)  the uncertainties with an explicit guarantee by the majority shareholders (aka Sponsors). One may ask, what if the returns that sponsor was seeking did not materialise, so that the sponsor herself falters and fails,  and will be unable to cough out the guaranteed rental supports ?
Regulators may want to look at the validity and the use of such "Rental supports". How do they know that the sponsor will remain viable to  keep their promissory "Rental supports"?  What if the weaker sponsored Reits, also want a piece of this kind of  "Rental supports" options/actions? 
The issue is that the Sponsors themselves may have hidden agenda and entirely different motivations for unloading the property assets at such a time, completely unaligned to the Reit  biz model.

Kepland, as the prime beneficiary could be trying to lock in the price of OFC before the downturn and eyeing the cash from the monetisation of  OFC for certain "prizes" that they want to capture in a mkt downturn---- in other words, Kepland is trading and timing the buy and sell of property assets which IMHO, is fair as it is in the biz of developing and trading of such properties.

But, for the KReit management and KReit Board,  which is in the biz of finding  a good tenant mix and locking in good rents and rental periods so as to get positive recurrent incomes with positive reversionary outcomes, buying or selling property assets should not be happening in such uncertain periods.

Yes, KReit can cite need for growth, but growth must be from acquisitions of properties that are accretive DPU-wise and whose incomes have truly stabilised.
In this case, KReit is getting itself involved in trading of property assets risks ; as well as risks in the volatilities associated with rentals rates, borrowing costs, as well as risks of a possible rise in gearing (falling property values or NAVs may risk downgrades in debt ratings due to increased gearing;  causing a rise in borrowing costs).

Growth should be according to the schedule guided, well in advance-----OFC was not due to be offloaded by Kepland until end 2012 or early 2013------ so that investors do not get nasty surprises for cash calls; cash which they can use for buying juicy assets at low low prices in these crisis driven environment.

For KReit minority shareholders (as distint from the sponsors who have a  stake in OFC, the choice is between an meagre accretive 2% increase in Proforma DPU vs having to cough out 17/20 of cash for the rights issue.
3 cash calls in 3-4 yrs is an awful record for KReit, and the pliant Board is not taking good care of minority shareholder interests. The worry is in MBFC Tower 3. Will there be another cash call?

Does that mean that minority shareholders should just sell their shares and park the money in others?
To answer this Q, we come full circle, back to the issue of evolving Corporate Governance---- reporters, shareholders, corporate governance watchdogs------ by speaking up , helps to influence and shape opinions and policies in the Reit investment ecosystem.
The number of available safe haven defensive plays in the Sg mkt are few and far between.
Reits can be and should be such an asset class.

Minority Shareholders must speak up, so that the Sponsors (whether TAL for Ascott Reit or Kepland for KReit etc)  realise that such practises are contrary to the practise of good corporate governance; and in doing so,  help effect a change.

Make the Reits you own rise to better standards of Corporate Governance.
I used to subscribe to the thinking of sell and buy another asset/share, if you disagree with management.
But lately, I have another view------Don't just take the easy route of selling, which will in the end limit the number of types of shares of the different assets classes available for investments on the SGX----Speak up and stand up for better Corporate Governance.

Inherently, Kreit and most of the Temasek linked Reits vehicles have very good sponsors (Keppel Corp, FNN, Capitaland etc) and a robust biz model. But, as with every situation when the majority shareholders have complete dominance, minority rights can get overlooked and if undefended, trampled.
Complacency creeps in and the laxity can fester into a downward loop.

This BT article has done good by creating awareness of the Corporate Governance issues and make the regulating bodies be mindful of the possibilities of  the next wave of potential problems.

Bigger Issue
Hence, the issue here, is not really the quality of Kreit, as one may argue that Kepcorp and even Temasek will come in to help even if Kepland should inexplicably fail (which is unthinkable to many given Kepland's pristine record).
The issue is about fostering an environment, an ecosystem,  that is conducive to the evolving Reit class in Sg.
Yes, in terms of size, with 23 listed Reits and mkt cap of SGD 34b, SgX listed Reits has got the heft, but Corporate Governance is a process, more correctly an evolving process and as minority shareholders, we must support, speak up and stand up --- for it is only when we do so,  that the media, NGO watchdogs and regulatory bodies will sit up, listen and act!!

Wednesday, November 16, 2011



Buffet Watch

Warren Buffet Watch


My Thots.....
1st taboo on  Utilities/Infrastructure stocks with high Capex broken; with BNSF buy.
2nd taboo, on Tech stocks broken with IBM buy.

Foreign Property Buyers

The Straits Times
Nov 16, 2011
The case for curbs on foreign property buyers

Entry of foreigners into mass-market homes bears careful watching

By Esther Teo

SOME Singaporeans are clearly worried that the growing numbers of foreigners buying private homes are driving prices ever higher - and out of the reach of some local buyers.

This concern has been heightened by a fairly new trend for foreigners to buy mass-market homes, a segment in which they had previously taken little interest.

These, of course, are the same homes that many upgraders aspire to buy.

Are restrictions on foreigners' purchase of private homes, proposed by some, warranted?

First, consider the figures. In the first eight months of this year, one in three buyers of non-landed private residential properties was a non-Singaporean.

Among buyers of private homes - excluding landed property which is more regulated - the proportion of foreigners, including permanent residents (PRs), is creeping up. Last year, it was 28 per cent.

Foreigners are also increasingly turning to new developments. A recent Business Times report showed that foreigners, excluding PRs, bought 843 uncompleted private homes from developers in the third quarter, up nearly 20 per cent from 703 homes in the previous quarter. Their share of the total number of uncompleted private homes sold by developers rose from 16.3 per cent in the second quarter to 20.1 per cent in the third quarter.

Foreigners, excluding PRs, accounted for 16 per cent of all private home purchases in the first half of the year, up from 12 per cent last year.

Perhaps the biggest worry for many Singaporeans is the fact that foreigners are now encroaching on the mass-market segment.

Foreigners' share of homes sold at price tags of under $1 million - taken as a proxy definition of a mass-market home - rose to 28 per cent in the first nine months of this year. It was 19 per cent in 2009 and 22 per cent last year, according to caveats lodged with the Urban Redevelopment Authority.

At recent launches of mass-market developments such as Parc Vera in Hougang, foreigners and PRs made up about 20 per cent of sales, compared to below 10 per cent a few years ago.

In the past, foreigners largely went for expensive homes in districts nine, 10 and 11, and this had minimal impact on the average Singaporean, said Dennis Wee Group director Chris Koh. However, they are now making a splash in the suburban leasehold mass market, he noted.

Faced with such statistics, it is little wonder that some attribute the surge in private home prices to record highs - up 18 per cent last year and a further 6 per cent in the first nine months of this year - to purchases by foreigners.

Amid this concern, some experts like Chesterton Suntec International research head Colin Tan have suggested that curbs on foreigners buying private residential properties could temper the rapid rises in prices.

To a certain extent, foreigners already face curbs on property purchases. Foreigners can buy landed homes only in Sentosa Cove. If they are PRs, they may buy some types of landed housing elsewhere, but only with approval.

The sale of resale Housing Board flats is also restricted to Singaporeans and PRs who meet certain criteria.

But the market for private condominiums is largely open to foreigners, who invest in this market on a level playing field with citizens.

Those who call for curbs point out that Singapore's real estate sector is vulnerable to speculative capital flows.

With interest rates set to stay low for the next couple of years, the plentiful funds washing around the market seeking better returns could well cause price volatility if there are no curbs, they argue.

Last month, MP Christopher de Souza (Holland-Bukit Timah GRC) suggested restrictions on foreigners buying homes. He cited Australia, which has rules that limit foreigners to buying only new properties, which they can subsequently sell only to Australians.

Singapore, like other open economies such as Hong Kong and Britain, does not restrict foreigners from purchasing private condos and apartments.

Others have suggested less onerous financing-related measures such as caps on the number of mortgages foreigners can take out or reducing further for them alone the proportion of a property's value they may borrow.

Dennis Wee's Mr Koh suggested one way would be to introduce a capital gains tax for foreigners who make gains from selling private property here. Or simply keep or impose an additional sellers' stamp duty on foreigners who sell within a stipulated period, he said.

Another suggestion from Knight Frank group managing director Danny Yeo is to differentiate between those who have a stake here and those who do not.

Long-term residents, such as PRs and foreigners working here, should not be subject to restrictions as they also need a home in Singapore. But the purchases of foreigners who do not live or work here could be subject to curbs, he said.

But as National Development Minister Khaw Boon Wan noted last month, it is important to ensure that housing policy shifts do not unwittingly harm the economy and society. Rising prices also cannot be attributed solely to foreign purchases. There are many factors at play, such as low interest rates and Singapore's strong economic fundamentals, he emphasised.

In any case, foreigners are already subject to the same anti-speculation measures as locals - including a sellers' stamp duty of up to 16 per cent. This has creamed off some speculative froth, with prices moderating for the past eight consecutive quarters - inching up just 1.3 per cent in the three months to Sept 30.

Taken together, the case for more curbs on foreign purchases is mixed. A further surge in demand from foreigners can raise prices beyond the reach of locals.

At the same time, any measure that curbs demand in one segment risks cooling down the entire market, especially with a slowing economy.

There may be a case for more calibrated measures: for example, to dampen demand for mass-market homes from foreigners who do not live or work in Singapore.

But the timing and extent of any such move are critical. For now, the trend of foreigners buying into mass-market homes is certainly one that bears careful watching.


My Thots....

Delicate balancing act needed.
IMHO, given the open nature of our economy and society, we are unlikely to go the Aussie way.
U cannot have employment and immigration policies that promote openness and yet, have housing policies that run counter to those.
But, upgraders aspirations will put political pressures on the policymakers.

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