Published December 27, 2008

From The Desk of

The story of three slumps

The current downturn bears little resemblance to those of 1998 and 2001

Chris Fossick
Managing director, head of SE Asia,
Jones Lang LaSalle

HOW does the current property market slump compare with the earlier ones in 1998 and 2001?

Sitting here at my desk, looking out over the huge Marina Bay building site that will grow into Singapore's first integrated resort, it doesn't look much like a market in a downturn. But, we are currently experiencing some very special market conditions that started 18 months ago with the sub-prime issue in the US. It has had a knock-on effect across the global economy that few at the time anticipated.

To make some sense of it all, I find myself thinking about how very different from 1998 and 2001 this current situation is. In 1998, the turmoil came from some parts of Asia, as a result of weak fundamentals such as inadequate regulatory oversight, and overexposure to foreign exchange risks. There were also two further events - the dotcom failure in 2000 and Sars in 2003 - that derailed the recovery and shut down tourism, dampening consumers' confidence in Asia until 2005. As a consequence of this sequence of events that started in 1997, a number of the Asian markets underwent a substantial structural revamp, harried on and supported by the developed economies.

Today, thanks to these economic storms, the Asian economy is in much better shape than in 1998.

However, the current downturn is more serious than we've seen before. Credit - a key tool in the business world - is at the centre of the crisis. As the credit markets froze earlier this year, consumption in the developed markets shifted to low gear and this is affecting the global economy. With debt availability low, businesses find it difficult to continue functioning as before. Even a growing company is stymied without investment.

So, coming back to Singapore, it showed itself to be strong in 1998 and has continued to use the experiences of the last 10 years to advance its economic and financial structure even further. It is now better positioned to manage this global slowdown. And, more importantly, to come out of it faster and stronger.

For example, Singapore has been very successful in attracting foreign direct investment (FDI), with an estimated $348 billion in 2007, compared to $165 billion in 1998 in (estimated real value terms). This is a direct endorsement of the business-friendly measures that Singapore has put in place. These have ranged from the removal of capital gains tax through to the signing of tax treaties with 50 countries that allow companies based here to reduce taxes in dividends, interest and royalties.

The property market here benefited from this investment influx. The value of property investment in Singapore has increased from $15 billion in 1997 to $43 billion by 2007 (estimated real value terms) - almost a 290 per cent increase.

Part of this property investment has come from Reits. The Monetary Authority of Singapore's issuance of the guidelines for property trusts in 1999 opened the door for Singapore to become the Asian Reit hub it is today. There are now 20 Reits listed on the Singapore Exchange built from a variety of properties across Asia.

The formation of the Reit market has made this chunky and illiquid investment class accessible to a larger pool of retail investors and improved the transparency of this market - a key determinant in attracting foreign investments that has provided more liquidity.

One of the most striking changes from 1998 is that, despite its size, Singapore has increased its resident population from 3.6 million in 2005 to 4.6 million today.

With the enlarged population, the proportion of non-Singaporeans has also increased by 5 percentage points to 25 per cent. It is with no surprise that the volume and demand for new residential launches has similarly jumped.

In 2007, there were over 13,000 units launched and sold - 25 per cent more than the 10,000 units launched in the 1996 peak. Demand, spurred by a relaxation in government policy on foreign ownership of residential properties in Singapore, increased some 64 per cent over the same period.

There is much talk about the health of the property market in Singapore at the moment, but looking at the figures, our market today is in a more robust state than in 1998. Vacancy rates are much lower, with grade A office vacancy at 1.8 per cent today, against 14.4 per cent 10 years ago. This indicates a very tight market.

In the residential sector, we see the same strong story, with capital values in the prime market still 57 per cent higher than in 1998 and affordability improving. So those who see themselves in Singapore for the long term and missed the last market rise, now have an opportunity to enter the market.

As the global economy continues to struggle, Singapore is still likely to feel the pinch. However, the pro-business mindset and innovative attitude of its government are two crucial ingredients that will support the economy - and the property market - through the downswing.

We all know that there will be a turning point in the current cycle. Perhaps when buyers and sellers of physical assets finally agree on price expectations, or liquidity returns to the market as credit conditions revert to normal. Or perhaps a change in people's sentiment could cause the turnaround. Whichever it is, Singapore has worked hard on managing its economic fundamentals and infrastructure, to be ready to capitalise swiftly on any positive economic moves. Certainly, the Marina Bay Sands coming to life outside my window will be ready to take advantage of the upswing.