'Tipping point' year for property?

Less liquidity, higher wages will hit businesses hard, and property may disappoint

BUSINESS AND THE ECONOMY

Identifying the big business themes every year is in itself big business for consultants and strategists advising companies on risks and investment decisions.

Many predictions invariably fall through with unforeseen events that derail earlier forecasts.

For example, the United States Federal Reserve's unexpected comments on imminent tapering of its bond purchases sent the Singapore stock market into a tailspin in May, with funds pulling out quickly.

Or the economists in early 2013 who were offering a cautious prognosis for the Singapore economy before the tide turned in the second quarter with a sharp uptick in growth.

For 2014, one event that will take centrestage for the business scene will be the US Fed's actions on tapering. It will slowly turn off the tap of easy money starting next month, although the pace after that has not been announced.

But the mix affecting business will be leavened with local flavour: the ongoing domestic debate on the inflow of foreigners and productivity measures.

As the US Fed eases the flow of cheap money, funds could recede from markets here. Despite the rally now, the slowdown in liquidity from next month will dim its shine.

The risk, as funds exit Singapore, as they did earlier in the year, is that listed companies will find it less attractive to raise funds to expand by tapping the stock market. Initial public offerings will dry up as the amounts raised will not tempt the owners. Expanding by mergers and acquisitions will be less likely as prices will not be attractive enough to tempt sellers.

Although the Fed is committed to keeping interest rates low - while easing off on bond buying - the market is still not entirely convinced that the balancing act is possible.

For businesses in Singapore, a rise in interest rates could translate to larger debt repayments, hurting those companies which wish to invest in equipment or want to expand overseas.

Together with the policy on reducing Singapore's dependence on foreign workers, companies will find that they are shelling out more for debt as well as still footing a hefty wage bill.

In 2014, companies will have to knuckle down and produce growth through increasing sales or being more productive and keeping costs lower.

As the Fed eases its bond purchases, the greenback strengthens. The impact on regional currencies like the Thai baht and the Indonesian rupiah has been swift. Even the Singdollar was not immune, it has now weakened to $1.27 against the US dollar.

On the plus side, the weaker Singdollar will boost exports. The currency decline may translate to more investment here and may make it more attractive for foreign companies to locate their staff and offices in Singapore.

On the flip side, a weak Singdollar means prices of imported goods will rise, fuelling inflation. But imported goods is only one driver of inflation here. In any case, inflation is probably last year's story.

For investors, the search for yield - the demand for a higher return - will continue to be the theme of 2014.

Real estate investment trusts (Reits), favoured for their regular payouts above the rate of inflation, are vulnerable to higher borrowing rates and may not be able to sustain their high distribution yields.

The Fed's tapering policies will also affect property, long a firm favorite with investors.

Property may now disappoint for the first time in many years as investors hold off due to the risk of rising interest rates and higher loan repayments while government policies dampen speculative demand.

The Monetary Authority of Singapore noted in its recent Financial Stability Review that the average quarter- on-quarter change in the private residential index was 0.67 per cent for the first three quarters of this year. That moderated from 0.7 per cent for last year and 1.43 per cent in 2011.

If 2014 is the year of the tipping point for the property market, the question is the scale of the adjustment. Will private home prices plunge by 10 or even 20 per cent as some analysts have predicted, or will it be a soft landing?

The strength of the job market makes a large fall unlikely. On the other hand, the number of foreigners into Singapore is starting to slow. Meanwhile upgrader demand has been curbed partly as the resale values of HDB flats ease while stricter borrowing requirements have been introduced. A large supply of HDB and private units is due to be completed in the next few years.

In relation to falling property prices and rising borrowing costs, household debt has been flagged as an issue but it is unlikely to hog the headlines next year.

There is a risk of households being over-leveraged - an earlier estimate put this at 10 to 15 per cent of households if interest rates rise by 3 percentage points - but that may not materialise, thanks to measures from the regulators to ensure that lending remains prudent while restricting the amount of debt buyers can take on.

Singapore's banks are unlikely to find themselves in any sweet spot, given these measures plus the compliance costs of stricter banking regulations on money laundering and other activities.

Higher interest rates and tighter manpower policies are being flagged as the issues to watch come the new year.

But lurking in the background are other threats. These could include the issue of cyber security.

One recent incident involving the theft of the bank statements of 647 of Standard Chartered Bank's private banking clients raises the spectre of the unknown world of cybercrime.

The capacity to understand and deal with cyber threats is still not well entrenched.

If cyber threats unfold on a large scale with a rash of incidents, banks will have to spend valuable management time and expense in beefing up security. Companies too will not be spared as they face risks such as keeping details of their customer databases secure.

At the same time, Singapore has to be mindful of developments in the region, such as Indonesia's upcoming elections next year and continuing political turmoil in Thailand.

China continues to wield immense influence. Its ongoing reforms and moves towards a market economy will all bear watching in the year ahead.

On a brighter note, there is far more optimism on the horizon than in the past few years.

The euro zone debt crisis and worries over the US debt ceiling have faded for now, with both Europe and the US showing signs of an economic revival.

At home, Singapore will continue to benefit from its safe-haven status and the recovering global economy will be an important contributor.

But the winding-down of easy money sets the stage for a somewhat painful weaning period.

Throw in a dose of rising foreign worker levies and higher business costs, and companies should still buckle up for a rough ride.

Source: Straits Times 28th December 2013

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'Tipping point' year for property?

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