Introduction

October began with some really bad news for the entire world, and ended with the worst stock market crash in three decades. At the time of writing this report in early November, the stock market is still battling to stay ‘head above water’.

After two consecutive quarters of shrinking growth, Singapore is now officially in a technical recession. As it is, the domestic economy contracted by 0.5% in the third quarter (Q3) of 2008 year-on-year. The last time the island city was in a similar fix was 2002.

The Ministry of Trade and Industry (MTI) has lowered its expectation on full year growth of 2008 to 3% and cautioned that Singapore export might drop drastically, due to the rising unemployment and slumping home prices in the United States.

The Monetary Authority of Singapore (MAS) has eased its monetary policy in early October to combat slowing growth. To boost export, the MAS shifted Singapore dollar to a neutral stance, making it cheaper in relation to other major currencies and thereby making domestic exports competitive. However, the flip side is that import of daily essentials, such as food stuff, will be more expensive, making life tougher for the man-in-the-street.

On the real estate front, the private property segment was among the first to show the open-wound sustained from the stock market fall earlier. Prices of private homes fell by 1.8% in Q3 2008 – the first decline in prices in four-and-a-half years, officially ending the property boom that started in 2004. In fact, since Q2 2008, private property prices had been deadlocked within very narrow range, but they finally caved in after the buyers started to play the ‘missing-in-action’ (MIA) game.

All said, it is quite certain that we are in for an economic tailspin.

(A) The big picture of the larger economy

[A.1] Foreclosure crisis in US nowhere near end

Despite the US$700 billion rescue package to prevent banks in the US from going under, there has been no help from the US government to prevent foreclosure of homes. Since July 2008, the rate of foreclosures has been more than 2,700 homes a day.

According to the Mortgage Bankers Association in the US, more than four million homeowners throughout the US with a mortgage are at least one month late in their mortgage repayment. This is more than three times the total number of houses we have in Singapore.

A record 500,000 homes had entered the foreclosure process. For at least a year, no experts have correctly predicted the dire straits that the American homeowners are in today.

[A.2] Falling home prices see no reprieve

The home prices in the US have crashed, to put it mildly. The National Association of Realtors (NAR) said that in September 2008 alone, the median home price in the US dropped a further 9% from a year ago to US$191,600, and is down 17% from the peak in July 2006.

Almost a quarter of the total homeowners in the US with a mortgage are staring at negative equity, and the percentage of homes with negative equity is expected to rise to 28% by the same month next year.

According to research by Freddie Mac, about 36% of mortgage delinquencies were caused by loss of income or unemployment in 2006. But in 2008, that number has risen to 45% as the unemployment rate has ticked up to a five-year high of 6.1%.

The massive job losses in October 2008 would make the situation worse as more delinquencies might follow suit before Santa comes calling in December.

[A.3] No way to escape hard landing for Singapore

Alluding to the current crisis, an International Monetary Fund (IMF) study pointed out that economic downturns caused by failures of financial institutions such as banks and insurers are often more severe, and tend to last much longer.

Most economists expect the economic downturn in Singapore to drag for at least nine months in 2009 if not longer. Some even predicted that the crisis in the US will last through 2010.

And as far as Singapore is concerned, its trade revenue is about 2.5 times of its GDP; and given its openness (and thus vulnerability) to global economy and its export-orientation, it cannot escape the repercussions of external shock.

Domestically, the danger of contagion has started to show, beginning with the tighter credit and higher costs of borrowing which have started to eat into corporate earnings and curtailed capital spending. Even companies with strong balance sheets are watching their cash flows carefully. Consumer consumption which grew 10.5% last year may come down to a fraction of that figure in the next couple of years.

The consequences will be slower wage growth, lower consumer spending, cautious job market, plunging stock prices, and deflation of asset prices. Especially dangerous is the higher refinancing costs and declining home values which may put home owners at greater risk of negative equity.

[A.4] More companies in Singapore default on payments

Credit rating agency Dun and Bradstreet (Singapore) said more businesses are falling behind in making payments. Apart from construction, more local businesses in other sectors will fall into the high-risk pocket this year and next. The riskiest industry appears to be retail, where more than half of them are expected to fall behind in payments in 2009.

Based on monthly payment data collected from an average of 4,000 to 5,000 firms based here, D&B says 22.2% of them have a high risk of not meeting payments this year, up from 19.77% last year. And with MTI lowering the growth forecasts for this year to about 3%, the proportion of high-risk firms may rise to almost 30%.

With the recent shake-up in the global financial market, the aggressive SME (small and medium enterprises) banking and collateral-free term loans that the banks were dishing out in 2006-2007 period would be a thing of the past.

[A.5] Retail spending in Singapore down for third consecutive month

According to the Retail Sales Index released by the Department of Statistics (DOS) in mid October 2008, retail spending was down 5.8% from July 2008. For the third straight month in August, demand for cars and recreational goods dropped amid the country's first recession since 2002.

Sales declined across the board from their July takings, with falls ranging from 3.6% to 20.4%.

A recent Straits Times survey of 62 tenants in six Orchard Road malls found retail revenues having plunged by as much as 30% from late September to mid October 2008, coinciding with bank failures, stock market routs and increased fears over the global financial turmoil.

[A.6] Even the once-revered REITs are now in trouble

Real estate investment trusts (REITs), once touted as the safer investment in income-producing properties and a good substitute for direct investment of physical properties are now on shaky ground due to over-gearing in relation to their ‘suddenly depleted’ asset values (resulting from the recent stock market crash). The recent ‘roller coaster ride’ in their share prices had accentuated the risks of REITs.

CMT puts works at three malls on hold

Due to high construction costs, Capitamall Trust (CMT) had, at the eleventh hour, pulled the plug on the upgrading plans for some of its properties.

The largest real estate trust in Singapore has reportedly said that it would not sacrifice liquidity for new projects. For now, enhancement programs that have not started at three malls - Funan DigitaLife Mall, Tampines Mall and Jurong Entertainment Centre (JEC) - have been put off.

This may have saved the largest REIT in Singapore $170 million in potential renovation costs. But the consequent loss of rental income from JEC for the following months (all JEC tenants had vacated before CMT decided to put the renovation work on hold) may negate the savings.

CMT said it had secured refinancing for $187.5 million and $80 million of loans due in December 2008 and May 2009 respectively; and is negotiating refinancing for $673.7 million due in August 2009. It is confident that funding would be secured.

Worries of downgrading of credit rating

In the meantime, credit rating agencies have turned more pessimistic on two other real estate investment trusts (REITs) in Singapore: Frasers Commercial Trust (FCT) and MacarthurCook Industrial REIT (MI-Reit).

FCT, which was rated BB, was downgraded by Standard & Poor’s (S&P) Ratings Services from positive to developing, on concerns over the $70 million it owed to the Commonwealth Bank of Australia, which will be due on 22 November 2008.  Moreover, there are an additional $400 million and $150 million which would be due in July and December 2009 respectively.

S&P said that FCT had not finalised its refinancing plans to the level of certainty.

Separately, Moody's Investors Service yesterday placed MI-Reit's Baa3 corporate family rating on review for a possible downgrade. The review also recognised refinancing risks facing MI-Reit. Likewise, MI-Reit has $201 million or 91% of its total debt falling due next April, which is not covered by available committed facilities.

This sums up the desperate state many REITs are in right now.

Prepared by Sam Gian – Independent Real Estate Sales Trainer