Monday, October 28, 2013

Hong Kong Home Prices to Drop as Barclays Joins UBS, Merrill

Barclays Plc joined UBS AG (UBSN) and Bank of America Corp. in forecasting a Hong Kong property slump, predicting home prices will fall at least 30 percent by the end of 2015 as income growth stalls and supply increases.
A “downward spiral of home prices is likely” as developers and homeowners adjust expectations, analysts Paul Louie and Zita Qin wrote in a report today. They assigned a “negative” rating to the Hong Kong property sector and said office prices will drop 20 percent.
Barclays’s forecast exceeds the predictions of a series of brokerages that have downgraded Hong Kong property this month and implies the biggest plunge in prices since 1998. Hong Kong home prices more than doubled since the start of 2009 on record-low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions.
“The magnitude of the fall is underestimated,” the Barclays analysts wrote.
The analysts are advising investors to sell eight of the 14 Hong Kong property companies they cover, including Sun Hung Kai Properties Ltd. (16), the city’s second-biggest builder, Swire Properties Ltd., New World Development Ltd. and Wharf Holdings Ltd.
Cheung Kong Holdings Ltd. (1), controlled by Li Ka-shing, Asia’s richest man, and Hang Lung Properties Ltd., which made more than 50 percent of its revenue outside Hong Kong in the first half, are the only two property stocks Barclays recommends investors buy.

‘Bad Things’

The Hang Seng Property Index, which tracks nine of the biggest developers listed in the city, including Sun Hung Kai and Cheung Kong, has declined about 13 percent since peaking in January. It rose 0.8 percent at the close of trading in Hong Kong today.
“For prices to drop that much, you’ll need to have many bad things happening at the same time,” said Wong Leung-sing, a research director at realtor Centaline Property Agency Ltd., referring to Barclays’s forecast. “Judging from buyers’ reaction to the new projects this month, we haven’t seen that kind of sentiment.”
A new project developed by New World and Wheelock & Co. in the Kowloon West area, on Oct. 26 sold all 185 units within seven hours after they were put on the market, Sing Tao Daily reported yesterday, citing the developers. The units were sold at average prices of HK$22,000 ($2,837) to HK$24,000 per square foot, the report said.
New World is still seeing “strong demand” from homebuyers and has no plans to cut prices at its projects significantly this year, Executive Director Adrian Cheng said in an interview on Oct. 21.

Slowing Sales

Buyers from mainland China, which accounted for as much as a quarter of home sales in Hong Kong at the peak in the fourth quarter of 2011, fell to 8 percent in the second quarter this year, according to Centaline. Hong Kong imposed an extra tax on home purchases by companies and non-residents in October 2012.
Developers in the first half sold 4,300 residential units, the fewest since the second half of 2008, after the government in February doubled stamp duty taxes on property transactions over HK$2 million.
To make up for the first half’s slowing sales, developers will need to cut prices to attract buyers, according to the Barclays analysts.

Previous Peak

Prices will come under pressure as household incomes and residential rents peak, while housing supply is set to increase, the analysts said. Hong Kong’s average household income was little changed in the second quarter, while rents are “starting to hit the income ceiling,” they said.
Chief ExecutiveLeung Chun-ying, who has pledged to increase land supply since coming to office in July 2012, said in January the private sector may sell 67,000 homes in the next three to four years. Hong Kong developers completed 48,936 homes from 2008 to 2013, the lowest in any five-year period since data became available in 1985.
Hong Kong home prices last year surpassed a previous peak in 1997 and are now the world’s highest, according to realtor Savills Plc, after having more than doubled since 2009. They have fallen about 2.7 percent since rising to a record in March, according to an index compiled by Centaline, the city’s biggest realtor by the number of agent.

Prices Triple

The city’s last major home-price crash started in October 1997 and lasted six years. Prices fell almost 50 percent in the next 12 months after former Chief Executive Tung Chee-hwa announced plans to add as many as 85,000 housing units in response to a doubling of real estate prices over the previous two years, and as the Asian financial crisis dampened confidence. They declined more than 60 percent to a trough in 2003 and have more than tripled since then.
Raymond Ngai of Bank of America’s Merrill Lynch unit and UBS’s Eva Lee are among analysts who over the past month have forecast home prices in the city will drop as much as 25 percent as demand wanes because of government curbs and the expectation of rising interest rates.
Since 2010, Hong Kong has introduced a raft of measures, including extra property transaction taxes and tighter mortgage-lending requirements, to damp prices and avert a housing bubble. Total residential transactions in the first half fell to the lowest since 1996, according to data available on the Land Registry’s website.
(Source: Bloomberg)

Clearances stuck, Hindalco may be staring at coal shortages

Hindalco Industries Ltd , Aditya Birla Group ’s flagship firm, may soon face a severe coal shortage that is likely to hurt profitability and increase debt.
The firm’s sole captive mine will run out of supply in the next 3-4 years, and prospects of getting fast clearances for the four new coalfields allocated to Hindalco after 2005, too, have dimmed with the Central Bureau of Investigation’s (CBI) probe on allocations, analysts said.
“In a way, all the coal blocks are under scrutiny. In such a situation, I don’t see any government official wishing to take the risk of giving clearances,” said one metal analyst, not wanting to be named. “There is other opposition such as that from the tribal affairs ministry for Hindalco’s Mahan coal block; this could get stronger.”
Coal is crucial for Hindalco as it is on the course of an ambitious expansion for aluminium in India. Production of this white alloy is energy intensive, roughly 6-7 tonnes of coal are needed to fuel power plants to produce 1 tonne of aluminium.
If the new coalfields are not approved, it would mean Hindalco will have to buy more coal at market-determined prices and also import it, which will prove expensive as its plants are not near the coast, making logistics a costly affair.
Hindalco’s existing smelters in Hirakud in Odisha and Renukoot in Uttar Pradesh produce 542,000 tonnes of aluminium, the second highest in India. The company also produces copper at other locations.
The company can’t comment on how it is handling its problem of fuel security and the status of the CBI probe due to its upcoming board meeting for the July-September results on 12 November, a Hindalco spokesperson said.
Hindalco gets about 3 million tonnes (mt) of coal from Talabira I coal mine in Odisha that was allocated to it in 1994. This mine, which fuels the power plant on which its existing aluminium smelters runs, has coal supplies that will last only for 3-4 years, analysts said. Talabira II and Talabira III coalfields, also in Odisha, are facing CBI’s first information report (FIR) that was filed on October 15 questioning the manner in which they were allocated. CBI has also filed an FIR naming Aditya Birla Group chairman Kumar Mangalam Birla.
Birla and Hindalco have been booked for criminal conspiracy and that in 2005 they colluded with public servants to get a share of the Talabira II coalfield that was earmarked only for government-owned companies, a CBI official said, requesting anonymity.
The federal agency also filed an FIR against the former coal secretary P.C. Parakh on 15 October.
Hindalco’s other coalfield, Tubed in Jharkhand, which is awaiting forest and environment clearances, was issued a show-cause notice by the CBI last year as part of the same investigation. Hindalco, on its part, has denied any wrongdoing.
The Mahan coal mine in Madhya Pradesh, most crucial for Hindalco, is awaiting a much-delayed stage-two clearance, and in August, Hindalco’s management said a clearance is likely to come by December.
The company has started trial production at its Mahan aluminium smelter, but if the clearance for the mine does not come by December, full-scale commercial production will be in doubt, analysts said.
“Hindalco has a shortage of coal and coal is a big input for its profitability,” said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd, a brokerage. “For the long term, this is a serious problem.”
Arora said Hindalco’s units and are expected to “keep trudging along with less profitability” if captive coal supply doesn’t improve.
“Owing to slow progress and inadequate availability of captive coal at the Mahan and Aditya smelters, we expect both these smelters to operate at subdued return ratios,” a 11 October report from brokerage Espirito Santo Securities India Pvt. Ltd said.
“We think Hindalco’s cost of production will remain high in the range of $1,950-$2,100 a tonne until their associated coal blocks become operational,” said the report written by Ritesh Shah and Anshuman Atri.
To compound the problem, metal premiums are seen falling due to excess aluminium capacities coming up in India (359,000 tonnes each of Mahan and Aditya smelters and 325,000 tonnes of Balco) and a likely warehouseing norm tweak at the London Metal Exchange (LME) that could boost world-wide supply of the metal, the analysts added.
LME, which sets a global benchmark for metal traders, has proposed easing of its warehousing norms so that more aluminium is freely available and the long queues to take physical deliveries of the metal are shortened, according to a report by the Financial Times.
Aluminium producers fear this move will increase supply of the metal, pushing down prices.
Hindalco’s consolidated debt is set to increase over Rs.75 billion (Rs.7,500 crore) by the end of the fiscal year to March as Hindalco is still in the midst of expansion and expected to incur a further Rs.90 billion (Rs.9,000 crore) in capex in 2013-14, Espirito Santo’sreport added.
Hindalco has already scaled down its expansion plans.
In August, after the declaration of its June-quarter results, the company announced it is re-evaluating its investment strategy with respect to the Aditya refinery and Jharkhand aluminium projects, “in view of the delays in getting various regulatory approvals and the current uncertain economic development”.
(Source: Live mint)

Maruti shelves diesel engine plant expansion

Maruti Suzuki India Ltd has shelved an expansion of its first diesel engine factory, indicating that consumer preference for diesel-powered automobiles may be ending as the fuel slowly loses its price advantage over petrol.
India’s top auto maker initially planned to increase capacity at its Gurgaon plant on the outskirts of Delhi to 300,000 diesel engines a year from the current 150,000 at a cost of Rs.1,700 crore. It will not longer do so because demand for diesel vehicles have been falling, according to three people familiar with the development, who declined to be named.
While the first phase of the engine unit at Gurgaon plant has been commissioned, the second phase has been shelved due to an unexpected fall in demand for diesel cars due to a narrowing price differential between petrol and diesel prices,” said a top company official directly involved in the matter.
The government in February partially freed diesel prices, and retailers have been increasing the price of the fuel by at least Rs.0.50 every month, narrowing the price difference with petrol to Rs.24 a litre from Rs.30 in February. Many buyers had preferred diesel automobiles after the government freed petrol prices in June 2010, but kept diesel prices much lower.
The economic downturn that saw growth slump to 5% in the year to March, the slowest pace in a decade, has also hurt demand for cars.
“We won’t need the expansion for sure,” Maruti chairman R.C. Bhargava said. “The growth in diesel car sales has come down. Everything has to do with the state of the economy.”
Besides making diesel engines at its Gurgaon factory, Maruti also bought them from Fiat India and Suzuki Powertrain India Ltd, which it merged into itself in the financial year ended March 2012.
Experts see the latest development as a fallout of the partial deregulation of diesel.
“I see logic in the argument that sales of diesel cars have gone down due to the narrowing price difference between petrol and diesel. Having said that, I think diesel would remain attractive to the consumers as its price is going to remain on a lower side as I don’t see a strong political will that could link it to global crude prices,” said Anil Sharma, senior analyst, IHS Automotive, a sector consultancy.
The share of diesel automobiles in overall passenger vehicle sales fell to 42% between April and August from a high of 51% in the year-ago period. Maruti Suzuki has five models—Ritz, Swift, DZire, Ertiga and SX4—with diesel and petrol variants. Of these, the diesel versions accounted for 90% of Maruti’s sales in 2011-12.
Accroding to its capital expenditure (capex) plan for 2013-14, Maruti Suzuki wanted to invest Rs.3,500 crore on a third vehicle assembly line at Manesar plant, a diesel engine plant in Gurgaon, and at its forthcoming research and development (R&D) centre in Rohtak, all in Haryana.
The move will not have an impact on its capital expenditure plan, said another executive, the second of the three cited above.
“The capex plan remains on track. In fact, we will invest another Rs.3,000 crore on new product development and R&D in 2014-15,” he said. “So, the remaining investment of the diesel engine plant gets carried forward to the next year.”
Maruti’s capital investment plans for the next financial year is yet to be determined, a company spokesman said in an emailed response.
Maruti can produce 300,000 diesel engines a year at Suzuki Powertrain and buy another 100,000 from Fiat India. At the end of October, it will be able to manufacture another 150,000 engines a year at the Gurgaon plant.
The firm expects to sell 375,000 diesel vehicles in the year to March, out of which 60,000 will be fitted with engines from the new factory.
(Source: :Livemint)

Wave of private equity money flows into shipping

The shipping industry has endured its worst crisis in 25 years. But there are some signs it may be navigating its way out of choppy waters – not least a surge in the amount of “smart” money from private equity flowing into the sector.
The record influx of funds so far this year is seen by many as a watershed after five years of weathering the storm that caused several ship operators and owners to collapse during the economic downturn.
Dagfinn Lunde, head of shipping at DVB, says the German bank has probably been the most active on private equity deals in the sector, providing the senior debt in various deals involving 45 buyout groups since 2010.
He says typically these deals involve a private equity fund providing about 80 per cent of the equity to buy a ship, with the shipowner providing the rest. “That is new in the last three years. This year has been the most active, it is [spreading] like wildfire,” he says.
Until the financial crisis most shipowners could borrow enough from banks to cover $7 out of $10 towards the cost of buying new ships. But banks are now unlikely to lend much more than half – even to shipowners with very strong balance sheets – meaning they need to come up with more money, according to Urs Dur, managing director of Clarkson Capital Markets.
Private equity has been drawn to the sector as asset valuations for both new-build and second-hand ships have hit rock-bottom.
As a highly-fragmented industry with few large players, the need for capital could hardly have been greater. Traditional lenders such as Germany’s Commerzbank and HSH Nordbank and the UK’s Lloyds and Royal Bank of Scotland are either exiting the market or looking to reduce exposure, stung by heavy losses on loans made before the downturn.
Ship owners looking for fresh funds have found private equity groups willing to listen as they struggle to allocate capital in their more traditional markets.
Oaktree Capital Management, for example, last year took a large stake in Floatel, which owns and operates offshore construction support vessels, and injected equity into General Maritime, a crude and petroleum product tanker company.
Other groups are investing directly in ships. This summer Carlyle committed more than $100m to InterLink Maritime, allowing it to order ten bulk carrier ships, while in September Apollo Global Management committed to a joint venture with German freight line Rickmers Group to invest up to $500m initially in second hand ships.
Before that York Capital linked up with New York-listed Costamare, a container ship owner, in another $500m joint venture. “The reason they are here is high expectations about returns as they are entering at the low-part of the cycle,” says Greg Zikos, chief financial officer of Costamare.
These expectations have so far this year attracted more than $2.7bn, a quarter of the total investment in ships led by private equity since 2008, according to data compiled by Marine Money, a US-based consultancy.
Bankers and analysts say the money has targeted specific “hot” sectors of the market, especially product tankers, which carry refined products, and vessels to carry liquefied petroleum gas and liquefied natural gas. There has also been a renewal of orders for dry bulk carriers.
On top of the $11.2bn invested in ships and indirectly in shipowners since the start of 2008, private equity groups have also been investing in terminals, ship charterers and shipping containers. In August, KKR led $580m in funding for a specialist shipping bank.
The rush to invest in a distressed sector has been welcome for those shipowners struggling to stay afloat, but it has also reawakened fears of overcapacity.
Halvor Sveen, who is setting up Maritime & Merchant, a boutique shipping bank in Norway, says a move of less than one percentage point in global economic output “would make a huge difference to the industry . . . I am highly optimistic that global production is on the increase but the structural overcapacity in the sector going back decades is a source of concern.”
I am highly optimistic that global production is on the increase but the structural overcapacity in the sector going back decades is a source of concern
- Halvor Sveen
Although the sums invested in private equity are large, they continue to be dwarfed by conventional funding. Marine Money estimates that banks continue to provide up to $250bn a year in debt finance to shipowners, limiting the potential for private equity alone to stoke a bubble.
Mr Lunde at DVB estimates that with just under $300bn in new build orders alone on the books, there is an equity funding requirement of $120bn. “Private equity might come in with $3bn to $4bn [annually] so that is still very little.”
But the presence of the “new” money has been noted. At a shipping industry conference in New York this summer a Greek shipowner, whose family had been in the industry for generations, took one look at the audience dotted with private equity executives, before asking the organiser: “Where are all the shipowners?”
His question was only part in jest, says Jim Lawrence, chairman of Marine Money, who organised the conference. Private equity executives not only look different – the Greek shipowner was shocked by the number of dark suits facing him – they act differently.
Whereas traditional shipowners tend to hold vessels for at least 20 years, private equity groups hope to turn a quick profit by listing companies or selling their vessels once charter rates and ship valuations recover.
Some private equity groups are also already looking for the exit as charter rates in some shipping markets show tentative signs of recovery along with the value of ships.

Tata’s JLR unit targets ultra-rich

Jaguar Land Rover will build its largest and most expensive Range Rover as the British luxury carmaker looks to continue leveraging strong sales growth in emerging markets.
The company’s first long-wheelbase sport utility vehicle for two decades marks a significant move to cater to wealthy, chauffeur-driven customers in places such as China, Russia and the Middle East – key growth markets for the resurgent brand. 
The ultra-rich in China and other emerging markets have become crucial targets for global luxury carmakers hungry for growth outside of Europe and the US, with manufacturers such as Mercedes, Audi and BMW developing longer, more luxurious limousine-style variants of their western models.
Boasting airline-style seats with inbuilt muscle massagers, leather tables and a champagne chiller, the car is expected to cost more than £130,000, about twice the price of an entry-level Range Rover.
JLR, which has been revitalised since being bought by India’s Tata Motors in 2008, has almost doubled its global sales in the past three years thanks mainly to demand outside its traditional British, US and European markets.
The launch of the car, which will be built from lightweight aluminium at JLR’s factory in Solihull in the West Midlands, comes six weeks after the company unveiled a concept Jaguar SUV in a move seen further expanding its portfolio targeting emerging markets.
Newly-minted millionaires in developing countries such as China and India have turbocharged the global luxury market and forced some manufacturers to shift their focus from high-performance models to more luxurious and opulent features.
BMW, Mercedes and Audi all offer extended versions of their flagship sedan models in China, offering extra legroom in the rear seats for owners who are typically ferried round by chauffeurs.
The shifting market demands have prompted luxury carmakers to move into segments typically dominated by rivals and dilute their traditional branding areas.
The extended Range Rover puts JLR in a limousine market traditionally controlled by the likes of Rolls-Royce and Bentley, while the trend towards SUVs has seen traditional sports car brands such as Porsche and Lamborghini tackle a segment previously reserved for the likes of Land Rover.
Phil Popham, JLR group marketing director, said: “With the addition of the Range Rover long wheelbase to our portfolio of luxury SUVs, customers can now choose a vehicle that offers superior levels of interior space and comfort to compete in a market dominated by saloon cars up until this point.”
The new Range Rover will be officially unveiled at the Los Angeles and Guangzhou motor shows at the end of November and go on sale in March next year.

Friday, October 25, 2013

Google signs cross-media advertising deal with Publicis

Google has signed its biggest cross-media advertising deal with MediaVest, part of Publicis, highlighting the rapid shift of ad budgets to digital media such as YouTube videos, websites and mobile apps.
MediaVest, whose clients include Coca-Cola, Honda and Walmart, has committed to spending tens of millions of dollars over the next year to buy advertising on YouTube as well as Google’s web and mobile networks, according to a person familiar with the matter. Google will also help MediaVest measure the effectiveness of ads and create new digital campaigns. The partnership is nonexclusive.  
“For years, the digital world has been asking for the dollars and laying out a case for why,” Brian Terkelsen, chief executive of MediaVest, said.
“This is a moment in time where we are beginning to see a new level of transparency, a new level of partnership and a new appreciation of the size of the prize that is available,” he added.
While consumers are already spending more and more of their time with digital media, advertising spending has lagged behind in this shift. Deals such as this show how marketers are catching up, with potentially negative implications for traditional television – the heavyweight of the advertising business that still attracts $205bn in ad spending annually.
Some advertising executives now expect that TV ad spending could plateau after years of growth, since the audience for digital video now has reached sufficient scale that marketers are significantly boosting their ad spending in that area, as well as sorting out new techniques to measure the return on such campaigns.
“In many ways, the deal confirms the tremendous momentum that we have on YouTube and the importance of online video to brand marketers,” Torrence Boone, Google’s managing director of agency business development said.
Mr Boone pointed to a recent campaign from Unilever’s Dove soap brand as an example of how marketers can tap Google’s combination of marketing on YouTube, display ads on the web and mobile as the nexus of their marketing initiatives. With its “Real Beauty Sketches” campaign, Dove hired a forensic artist to draw sketches of women in attempts to convince them of their real beauty. The campaign, which included television, print and other online ads, has attracted more than 160m global views and garnered several industry awards.
Laura Desmond, the chief executive of Starcom MediaVest Group, which includes MediaVest, has directed the group to spend more than half of its billings on digital media by 2014. In April, the group struck an advertising deal with Twitter worth hundreds of millions of dollars over several years.
Sir Martin Sorrell, chief executive of WPP , said in recent weeks that his advertising group is expected to spend about $2.5bn with Google this year, about double what it spends with Viacom, CBS and Disney individually.

Thursday, October 24, 2013

Market underestimating commodity bust hangover

The end of the 10-year commodity super-cycle was never going to be a picnic for companies that supply miners with dump trucks, excavators and other heavy equipment. But Caterpillar's woes suggest both the industry and analysts are underestimating the severity of the slump.
  The sector leader's shares fell more than 6 percent after it missed consensus earnings estimates for the fourth quarter in a row. Yet Caterpillar and its rivals are still trading at valuation multiples that imply a recovery soon. That's wrongheaded.
  After a decade of digging new pits as fast as they could, big mining companies are locked in austerity mode. Billions of dollars' worth of projects have been cut or put on ice. Recently installed bosses at BHP Billiton, Rio Tinto and Anglo American have been hacking back capital spending plans to appease shareholders after the excesses of the boom years. Glencore Xstrata Chief Executive Ivan Glasenberg has also been wielding the knife. There are some exceptions - Rio Tinto is pressing ahead with a multi-billion dollar ore expansion in Australia's Pilbara. But in general miners are focused more on boosting productivity than digging new holes.
  The new tendency to buy less and sweat existing assets more has given machinery makers a nasty hangover. Caterpillar said new orders in its resources business, its highest-margin segment, remained "very low," despite an overall increase in global mining output. Sales of replacement parts, which typically act as an earnings buffer in downturns, also fell short - a trend Caterpillar attributed in part to miners delaying routine maintenance.
  Eventually, increased demand for raw materials along with the current dearth of new orders should mean a rebound in equipment demand. But investors already seem to think a recovery is around the corner: shares of Caterpillar and rivals Metso and Joy Global trade between 12 and 14 times forward twelve-month earnings, according to Reuters data. That's up from 6 to 8 times in the middle of last year.
  Such moves might make sense towards the end a typical cyclical blip when earnings are low. Judging by Caterpillar's latest disappointment, though, and a forecast of basically flat sales next year, the industry looks set to be nursing a severe headache for some time to come.
  - Caterpillar, the world's biggest maker of dump trucks and excavating equipment for the mining and construction sectors, posted a lower-than-expected profit of $946 million, or $1.45 a share on Oct. 23. That's down from $1.7 billion, or $2.54 a share, a year earlier. Analysts on average expected earnings of $1.66 a share, according to Thomson Reuters I/B/E/S.
  - The equipment maker also cut its full-year forecast, and said it expected 2014 sales to be essentially flat. Caterpillar's shares fell as much as 6.7 percent in afternoon trading. The shares have fallen nearly 30 percent since February 2012.
(Source: Reuters)

Tuesday, October 22, 2013

The next generation demands sustainable, innovative business : SAP Executive

Christina Marule owns a spaza shop - the equivalent of a corner store - in rural South Africa. Five years ago she was forced to keep her young son out of school while she traveled to the nearest market, a half day's trip away, to purchase products to sell in her store. Today, she manages inventory via text message from a mobile device. Her son is back in the classroom.
  Her story is one of personal determination, but also of real progress.
  Fueled by innovation and the determined ambition of a whole new generation, stories like this are transforming business models and entire value chains. To the world's future leaders, sustainable behavior is as much about educating Christina's son as it is about protecting the world's supply of drinkable water. It's up to today's leaders to connect those dots.
  In a recent survey 84 percent of Millennials (the generation born between 1980 and 1993) said they care more about making a positive difference than workplace recognition. These young professionals are the very same consumers who care more about purpose than packaging or price. They are concerned, creative and impatient for opportunities to make a difference. Their terms are crystal clear: innovate business models around making the world run better and improving people's lives - or be left behind by those that do.
  During the recent annual meeting of the Clinton Global Initiative, I joined some distinguished panelists to talk about the world's resource crisis. Many statistics are simply beyond dispute.
  Today, the United Nations reports that 870 million people worldwide are undernourished. More than 10 percent of the world's population can't access a safe water supply and more than 2 billion people lack adequate sanitation. While we discuss these challenges, the world's population is on course to grow from today's 7 billion to more than 9 billion by 2050. Despite these and other compelling figures, many organizations still believe that sustainability is little more than an appendix in the annual report.
The reality is that sustainable practices are the foundation of business models that will win, grow and scale.
Think about what's happening in the automobile industry with connected cars. Leading manufacturers understand that consumer interest has shifted from sexy to smart. It doesn't matter to Millennials that they can drive zero to sixty in five seconds if they can't afford the fuel and their joy rides hurt the planet. Interconnected mobility is the new value proposition, offering young drivers fuel efficiency, real-time information, social networking and pro-rated insurance in a single product. Fulfilling this promise requires collaboration across industries, co-innovating to responsibly meet consumer demand.
  It's true for business processes, too.
  Danone, the world's largest yogurt maker, has more than 100,000 employees on five continents. The company now uses carbon emissions as a proxy for inefficiency across its supply chain. With advanced technology, they automatically capture and analyze emissions data across the manufacturing process. As they conserve energy, they improve business results and build greater brand loyalty among purpose-driven consumers.
  Saving the world, it turns out, is a winning business strategy.
  Andrew Liveris, chairman and chief executive officer of Dow Chemical Company, says that the world's largest companies have the responsibility to lead this transformation. He's absolutely right and has built Dow into a case study with high standards across his global supply chain. Other companies are following suit on the Ariba Business Network - a virtual supply chain that tracks compliance and measures businesses worldwide on their performance.
At SAP, we bet big on the power of transparent data and network-driven behavior. Today, any employee can monitor the company's performance on carbon emissions, women in management or business travel. Skipping a flight when a video-conference will do makes a difference, so every employee has the power to move the needle.
  These measures lie at the core of our ability to continue transforming our company. That's why when we report our annual business performance, we integrate our sustainability performance. Our shareholders appreciate that engaged employees and operating income are inherently linked (for every 1 percent reduction in employee turnover, SAP saves 62 million euros). If we involve people in the decisions that companies make, the change will be more significant than we ever imagined. This is the epitome of sustainability.
  Engagement begins and ends with serving customers like Christina Marule.
  Seven of the ten fastest growing economies in the world are in Africa. Mobile technology is core to reaching those emerging markets. A mobile application was what Christina needed to ensure her son was educated and to initiate herself into the modern economy.
  Studies have shown that introducing 10 new mobile telephones per 100 people in the developing world can add between .5 to 1 percent to a country's GDP growth rate.
  Christina's story is being played out over and over again in Africa - and in Asia, Europe and America. Christina's son and millions like him will grow up in a better-run world and one day will have the opportunity to live out their own winning dreams.
  Many of my fellow boomers are despondent, thinking we'll leave younger generations a world worse off than the one we inherited. Guess what? They won't let us! They were raised with too many tools that allow them to reverse the trends. Mobility. Big data. Social networks. Let's take inspiration from our heirs and co-innovate with young dreamers to create a new era of responsible growth that protects the planet and benefits everyone.
(By - Bill McDermott is co-CEO of SAP)

Monday, October 21, 2013

Could US Issues Lead Investors to Emerging Markets? - Marc Mobius

The US government had been shuttered for more than two weeks, and investors around the world, including those in emerging markets, have been watching the impasse and beginning to plan in the event of a default of US government debt. Late Wednesday, the US Congress agreed to a short-term extension of the debt ceiling until February and set the stage for the government to reopen. However, a definitive, long-term solution to the nation’s debt issues was still not reached and we could see a repeat of the political dysfunction.
The debt ceiling is the limit on the total amount of debt that the US Department of the Treasury can issue to the public and to federal agencies. That ceiling had been hit, and the US borrowing authority would have lapsed on October 17 unless action was taken to increase it. If Congressional lawmakers failed to raise the debt ceiling, the US could, for the first time in history, have faced a default on its obligations– including to international investors such as China and Japan. According to the Congressional Budget Office, the country would likely have run out of money to pay all of its bills, including benefits, salaries and interest, before month-end, if a deal was not struck this week.
While the immediate threat of default has passed, the US fiscal problems have been tabled, not resolved. Of course, a major US debt shock would impact markets around the world, but I think it would be temporary. As is the case in all such market crises, I believe there should be opportunities for some and losses looming for others.
In my opinion, it is very unlikely that the US would default on its foreign debt in particular. First, there could be extra funds in the government budget which could be found to meet current interest payments. In addition, government leaders of both parties would be reluctant to allow that to happen because it would end the ability of the US to borrow at low rates. There is an additional US national security issue: by having the US dollar as the world’s main reserve currency and its main trading currency, the US global reach and security is enhanced with the ability to restrict and monitor international money flows and facilitate sanctions against countries.
If the US government faces a future debt crisis (default), the immediate response would likely be high volatility in markets around the world. However, I believe predictions of a “meltdown” are probably exaggerated since the world today is highly diversified. Even though the major global currency is the US dollar, many transactions are carried out in euro and increasingly in China’s renminbi. I also think these continued issues in the US could likely change investment allocations around the world, with less emphasis on holding US dollars and more diversification into other currencies as well as other assets. Global trade could change, with more trade being settled in other currencies such as the euro and RMB. In addition, precious metals and other rare collectables could rise in USD value.  
From my point of view, the problems the US is now facing with its budget and the discussion of the (very unlikely) possibility of the default could be an inadvertent positive for some emerging market countries over the long term because outflows from US Treasuries could go into other markets. It could incentivize investors who are heavily invested in US debt and the US market generally to have second thoughts about putting too many of their eggs in an uncertain US basket and lead them to diversify their investments more globally. Such a portfolio could include greater allocations to emerging markets. The US has a high debt-to-GDP ratio1, slow growth and limited foreign reserves. In contrast, relative to the US, emerging markets generally have much lower debt to GDP ratios, more foreign exchange reserves and much higher GDP growth rates. 
When incorporating the entire universe of emerging market stocks and not just index representations, emerging markets now represent 35% of the world’s market capitalization2.
As the late Sir John Templeton once said, “to avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify3.”
(Source: Franklin Templeton's website - Marc Mobius's Blog)

BIITS Replacing BRICs as Emerging Markets No Longer Blanket Buy

Emerging markets risk shattering into BIITS.
Investors in these markets are becoming more discerning about where they put their money, shying away from countries such as Brazil, India (SENSEX), Indonesia, Turkey and South Africa. Behind the discrimination is a new-found focus on current-account deficits and structural weaknesses exposed by the likelihood of less stimulus from the Federal Reserve and cooling demand in China, according to economists from HSBC Holdings Plc, JPMorgan Chase & Co. and International Strategy & Investment Group LLC.
That’s a break from the past four years, when emerging markets mainly moved in tandem, seen as either a blanket buy or sell, with little regard to their individual circumstances. Such a mindset was epitomized by the popularity of the BRIC acronym coined for Brazil (IBOV), Russia, India and China to reflect their potential as future economic powerhouses.
“Investors will be far more choosy among emerging markets than they’ve been in the past,” said Donald Straszheim, head of China research at New York-based ISI. “There will be a natural inclination to seek out the ones that are the best positioned.”
Mexico, the Czech Republic and South Korea are among the still-attractive countries because they are less reliant on foreign finance or took advantage of easy money from Fed stimulus to strengthen their economies.

Surprise Decision

The Fed’s surprise decision in September to continue its asset purchases provided emerging markets with a respite, as sales of their currencies abated. The reprieve will be only temporary though, according to Michael Shaoul, chairman of New York-based Marketfield Asset Management LLC, which manages about $17 billion.
Some of these nations will see further capital outflows in the next three to six months as investors start to “break it down between good EMs and bad EMs,” he said. His firm is betting against emerging-market equities and bonds, including those of Brazil and India.
“I don’t think the bear market in EMs has bottomed,” he said. “There is a real selling opportunity.”
The theme of differentiation is gaining ground as the International Monetary Fund warns that growth in emerging and developing countries is the weakest since 2009. The Washington-based lender cut its forecast on Oct. 8 to show them expanding 4.5 percent this year, down from a July prediction of 5 percent.

Fed Signal

Since the start of May -- the month the Fed signaled it may consider paring its $85 billion in monthly bond purchases -- the Indonesian rupiah has fallen 11 percent against the dollar and the Indian rupee declined 12 percent, with the Turkish lira dropping 9 percent and Brazilian real losing 8 percent. By contrast, the Mexican peso has lost 5 percent, the South Korean won has risen 3.8 percent and the Czech koruna climbed 3.5 percent.
The worst may not be over for the BIITS, if the past is any guide. The Brazilian real lost 51 percent in 2001-02, the Indonesian rupiah plunged 86 percent in 1997-98 and India’s rupee fell 42 percent during 1990-92. In 2000-01, the Turkish lira declined 68 percent and the South African rand depreciated 52 percent.
Many emerging markets also used up a lot of their defenses fighting the global financial crisis in 2008, said Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., the manager of the world’s biggest bond fund.

Old Habits

While Mexico is “doing the right thing,” he said, Brazil is “back to its old habits” and Turkey “denies it has a problem.”
As these differences become more apparent, people now want “to buy the best of breed,” said Marc Chandler, the New York-based chief currency strategist at Brown Brothers Harriman & Co., which has about $3.4 trillion in assets under custody and administration.
“The Mexico story is attractive and more compelling than some of the others in the region,” while “the BIITS list might be the more-troubled emerging markets.”
At the same time, developing-economy stocks and currencies may have been oversold and many will be able to recover as investors reacquire a taste for risk, according to Jeff Chowdhry, head of emerging-market equities at London-based F&C Asset Management Plc, which oversees about $150 billion.

Investment Opportunities

“The terrible five could do pretty well because they’ll have improvements in the currencies and stock markets,” he said. “From our perspective, we’re finding the most opportunities in those economies, with the exception of South Africa.”
Investors are taking a closer look as the Washington-based Institute of International Finance predicts that private capital flows into emerging markets will fall $153 billion to $1.1 trillion in 2013 and slide another $33 billion next year.
“The basic story for EM right now is we’re going through an adjustment,” Bruce Kasman, chief economist at JPMorgan Chase, said in an Oct. 11 panel discussion at the IIF. “There were excesses that were created. It’s going to take a while to work this out, and I don’t think we should expect EM to come back to anything like we were used to.”
Behind the palpitations are slower growth in China compared with the mid-2000s and signs U.S. monetary policy may be reaching a turning point, according to Stephen King, chief economist at HSBC in London.

Low-Rate Environment

Previously, China’s double-digit expansion prompted investors to bet it would serve as a magnet for the products and commodities of other emerging markets, he said. In addition, a low-interest-rate environment in developed countries led capital to seek higher returns elsewhere, masking or even encouraging fault-lines such as widening current-account deficits, weak productivity, a small share of investment relative to domestic consumption and delays in infrastructure improvements.
“After the financial crisis, the magic asset was mostly to be found in emerging markets and money poured in,” King said during the Oct. 11 IIF panel discussion. It was “often with no regard to whether the underlying quality of growth in the emerging-market world was necessarily particularly good.”
A “return to reality” now is setting in, said Erik Nielsen, global chief economist at UniCredit SpA in London. The key concern with the BIITS is related to their “reliance on short-term foreign financing, particularly as global trade grows very slowly and we are moving towards some sort of monetary normalization.”

Brazil Slump

Brazil has suffered a slump in the real after relying on credit-led consumption, which failed to boost productivity and returned the country’s current account to a deficit of about 3 percent of gross domestic product.
Indonesia is hampered by inflation close to a four-year high and a record current-account shortfall. India is held back by cooling growth, elevated inflation, inadequate roads and other infrastructure, and distorted regulations. Standard & Poor’s in September reiterated it may downgrade the country’s credit rating to junk on risks including budget and current-account imbalances.
Turkey and South Africa now have current-account gaps bigger than 6 percent of GDP. Russia is hobbled by weaker global demand for its exports of oil, natural gas and metals and is growing at the slowest pace since a 2009 contraction.

Export Diversification

The Czech Republic, South Korea and Mexico are among nations that look better positioned to accommodate Fed-inspired higher interest rates, according to Goldman Sachs Group Inc. economists last month. Mexico’s current-account shortfall is 1 percent of GDP, and South Korea enjoys a surplus, which the Bank of Korea forecasts will reach a record this year as the country benefits from its drive toward export diversification.
S&P maintained its positive outlook for Mexico’s credit ratings this month on the prospect that President Enrique Pena Nieto’s economic programs will boost growth. He has proposed breaking a 75-year state monopoly on oil drilling, a plan that may unleash an energy-production boom and is attracting foreign investor interest in the country.
“What you will see is a lot more differentiation,” Marco Annunziata, a former IMF official and now chief economist at General Electric Co., said during the IIF discussion. “What’s important is to distinguish between one emerging market and another.”

‘Negative Spillover’

Policy makers already are tuning in. “Without doubt some decisions major advanced economies are taking have influence on other countries,” European Central Bank Executive Board member Joerg Asmussen said in an interview. Over the last few months, “the negative spillover effects were strongest in countries with a big current-account deficit and a delay in domestic reforms.”
The shake-up is prompting emerging-market leaders to urge that countries begin preparing for the Fed’s eventual moves.
“You can’t all have the same monetary policy, but we do need to have a much better conversation and a greater predictability of responses,” Singapore Finance Minister Tharman Shanmugaratnam said in Washington on Oct. 10.
It’s not all bad news. The Fed’s decision not to taper in September has given emerging markets more space to put their houses in order. Following Vice Chairman Janet Yellen’s nomination to replace Chairman Ben S. Bernanke, officials from South Korea to India expressed hope the central bank will consider the ripple effects when it pares stimulus.
China’s economy also expanded in July-September for the first time in three quarters, and Kasman noted that a pickup in growth in the developed economies may help provide an offsetting lift for the rest of the world.

‘Stress Test’

The market fallout after the Fed’s tapering signal in May nevertheless served as a “stress test” for these countries, which now know “where their weaknesses lie,” Naoyuki Shinohara, deputy managing director at the IMF in Washington, said in an interview.
Among those taking heed are Indonesia Finance Minister Chatib Basri, who said on Oct. 11 in Washington that he will deepen efforts to boost his nation’s productivity. “In bad times, you can start pushing for structural reforms” because there’s less political resistance, he said.
Some officials in developing nations say investors aren’t focusing enough on the details.
“The problem emerging markets have at times like this is getting the story, the truth, about fundamentals out,” Indian central bank Governor Raghuram Rajan said at a panel discussion in Washington this month.
Colombia is prepared for more differentiation, Finance Minister Mauricio Cardenas said in an interview. The country is “one of the best of the class,” he said, because of accelerating growth, contained inflation, a recent overhaul of payroll taxes and a current-account gap that is more than covered by foreign direct investment.
“The world won’t offer emerging markets the favorable conditions we’ve had,” Cardenas said. “The tailwinds that had pushed us along will need to be replaced with more power from our own engines.”
(Source: Bloomberg)

Thursday, October 17, 2013

SKF disappoints with sales growth

SKF, a bellwether for industry worldwide, disappointed investors with its sales growth and guidance for the rest of the year, suggesting that the promised recovery in global manufacturing could be weaker than expected.
The Swedish maker of ball bearings reported sales volumes up 2.2 per cent in the third quarter compared with a year earlier but that dashed expectations among analysts for a rise of 4 per cent. 
The Gothenburg-based group said it expected demand and its manufacturing level in the current quarter to be unchanged from the previous three months, a further disappointment to those expecting the industrial recovery to speed up. 
“There is an increasing appetite in the market for the past three months to chase early cycle names, such as SKF, for recovery, but today’s disappointing results and guidance of unchanged demand and manufacturing level [is on the] cautious side, suggesting to us that recovery is not at the rate the market has hoped for,” Natalia Mamaeva, analyst at Citi, wrote in a note.
SKF is one of the first industrial companies to report third-quarter earnings and as its products are used in 40 different industries it is watched closely as an early indicator of how demand and production are fluctuating.
Tom Johnstone, SKF’s chief executive, noted an improvement in sales in its automotive business but weaker than expected performance in its industrial arm.
After citing “a positive development” in aerospace, renewable energy and railways, he added: “We see some lack of traction in a number of other industrial markets – not getting worse but not getting better yet either.”
Sales growth was strongest in local currencies in Latin America and the Middle East and Africa. Sales rose by 5 per cent in Asia, 1 per cent in Europe and fell by 2 per cent in North America.
Shares in SKF fell by 4.8 per cent to SKr171.80 as it reported third-quarter sales of SKr15.6bn and flat operating profit of SKr1.9bn. The Swedish company announced last month it would pay $1.25bn for Kaydon, a US diversified manufacturer of products such as shock absorbers and bearings.
Analysts had been cautiously optimistic for a strong end to the year. JPMorgan’s global industrial production index rose to 51.8 per cent in September after a bigger rise in August to 51.6 per cent. Anything above 50 per cent indicates expansion. “After a midyear soft patch, global industrial production is accelerating through the third quarter,” Andreas Willi, analyst at JPMorgan, wrote before SKF’s results.

Nestle Posts Nine-Month Sales Growth Below Full-Year Goal

Nestle SA (NESN), the world’s biggest food company, reported nine-month sales that were below its full-year target rate, highlighting the difficult environment faced by the makers of consumer products.
Revenue gained 4.4 percent excluding acquisitions, divestments and currency swings, the Vevey, Switzerland-based maker of Crunch chocolate bars and Carnation evaporated milk said today in a statement. The median estimate of 14 analysts surveyed by Bloomberg was for growth of 4.5 percent.
Food companies are grappling with an economic slowdown in emerging markets and ongoing weakness in Europe, which led Nestle to report the smallest gain in pricing for the first nine months of any year since 2003. Unilever (UNA) said last month revenue growth weakened in the third quarter as emerging markets slowed. Danone cut its full-year forecast yesterday after a product-safety scare and regulatory problems in China weighed on infant formula sales.
“After the ‘excitement’ of Unilever’s reduced third-quarter sales guidance, Danone’s third-quarter sales miss and full-year profit warning, and Nestle’s disappointing year-to-date performance, third-quarter sales were solid (and somewhat dull), which is probably all that Nestle’s shareholders were hoping for,” Andrew Wood, an analyst at Sanford C. Bernstein & Co., said by e-mail.

‘Right Time’

The stock has gained 4 percent this year, compared with a 3.1 percent drop in the Amsterdam-traded shares of Unilever. Danone has gained 3.9 percent.
“Today’s challenging environment is the right time for us to further reinforce the fundamentals of our business,” Chief Executive Officer Paul Bulcke said in the statement, enumerating innovation, distribution and consumer engagement. The company reiterated it expects full-year organic growth of about 5 percent and improvement in underlying earnings per share and the operating margin based on constant currencies.
The volume of goods sold increased 3 percent, matching the analyst estimate, and an improvement from the 2.7 percent uptick in the first half of the year. Pricing added 1.4 percentage points to growth, compared with the 1.5 percent analyst estimate.

Sales Acceleration

In contrast to Unilever, Nestle said nine-month sales growth accelerated to 5.6 percent in Asia, Oceania and Africa zone from the first half’s 5 percent pace. That implies a 6.8 percent gain in the third quarter, according to Warren Ackerman, an analyst at Societe Generale. The growth was helped by gains above 10 percent in Africa, Indonesia, the Middle East and India, Nestle said.
“This is the acceleration that the market was looking for,” Ackerman said.
Organic sales growth for the Asia, Oceania and Africa zone was 5.6 percent, accelerating from the 5 percent pace of the first half.
Separately, Nestle spokesman Robin Tickle declined to comment on a report in Repubblica today that said the food company made an offer to buy Ferrero SpA, the Italian chocolate maker that makes Nutella hazelnut spread. The talks are at a preliminary stage, according to the article, which didn’t say how it got the information. A spokesman for Ferrero called the report “groundless” and said the company isn’t for sale.
(Source: Bloomberg)

Wednesday, October 16, 2013

Singapore Shows Asia How To Crack Down on Housing Bubble

Singapore, the city-state that banned chewing gum to curb litter, is showing the rest of Asia how to cool a housing bubble.
The government this year ramped up efforts to bring down property prices that surged to a record, adopting some of its strictest measures, including a cap on debt at 60 percent of a borrower’s income, higher stamp duties on home purchases and an increase in real-estate taxes. The combination and timing of the curbs is the most comprehensive among governments battling housing bubbles, according to Vishnu Varathan, an economist at Mizuho Bank Ltd.
The curbs are proving more successful than in Hong Kong and China where policy makers have experimented with a variety of initiatives to temper soaring housing markets. Home prices in Singapore have gained 33 percent since 2009, while they have more than doubled in Hong Kong in the period.
“The government has enacted all these measures quite early,” Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian Pte, the securities unit of Southeast Asia’s third-largest lender, United Overseas Bank Ltd. (UOB), said. “They want to contain a bubble from reaching levels where it brings down the whole system.”
Home prices in Singapore had the slowest growth in six quarters in the three months ended Sept. 30. Sales declined and mortgage growth fell to 13 percent in July from 18 percent two years ago.
The city-state, on an island off the southern tip of the Malay Peninsula, began introducing curbs four years ago after home prices climbed 25 percent in the two years to 2008. The government of Prime Minister Lee Hsien Loong intensified efforts as prices jumped a further 40 percent, driven by low interest rates, demand from local Singaporeans to upgrade from government to private housing, as well as buyers from China and Southeast Asia.

Tighter Lending

The gains led to Singapore being ranked the most-expensive city to buy a luxury home in Asia after Hong Kong by property broker Knight Frank LLP in a wealth report in March. Shanghai was ranked third and Beijing fourth in the report as of the fourth quarter of 2012.
The average price of a new 1,000-square-foot condominium is between S$1 million ($799,000) and S$1.2 million, according to London-based broker Savills Plc. (SVS) In Hong Kong, where prices have more than doubled since early 2009, the average for a similar size apartment is between HK$8.1 million ($1.04 million) and HK$12.8 million, according to Midland Holdings Ltd., the city’s biggest realtor.

Payments Capped

In Singapore, the government raised the minimum down-payment on second-home purchases, brought in new taxes for foreign and corporate buyers, and added a stamp duty for all residential properties. The Monetary Authority of Singapore said June 28 that home loans should not exceed a total debt-servicing ratio of 60 percent. In August, the central bank then cut the maximum period for new loans to buy public housing, where about 80 percent of Singaporeans live, by five years to 25 years. Mortgage payments were capped at 30 percent of gross monthly incomes, down from 35 percent, according to the Housing & Development Board.
“The loan measures are more lethal than the other measures,” said David Neubronner, national director of residential project sales in Singapore at broker Jones Lang LaSalle Inc. (JLL) “Home prices will remain flat for the next six to nine months.”
The restrictions are already deterring potential buyers such as Jeremy Ong, a Singaporean dentist, who was prepared to spend S$2 million to buy an apartment.
“The latest loan measures are tough and interest rates are going to go up,” said Ong, 32, who had been looking for a three-bedroom apartment near the upscale Orchard shopping district. “I planned to take a loan for 80 percent of the home value, but I’m not sure with the new rules how much I’ll get since I also have a car loan.”

Sales Drop

While an index of private-residential property prices rose to a record 216.2 points in the quarter ended Sept. 30, the 0.4 percent increase was the smallest since the first quarter of 2012, according to preliminary figures from the Urban Redevelopment Authority on Oct. 1.
Apartment prices fell 0.5 percent in prime districts in the third quarter, more than the 0.2 percent decline in the previous three months, the URA data on Oct. 1 showed.
The city’s private home sales slid 52 percent to 1,246 in September from a year earlier, the authority said today.

Developer ‘Headwinds’

Neubronner estimates private new home sales this year could drop to 15,000 units from 22,197 units in 2012.
“This is what the regulator wants; the key objective is to moderate the loan growth and price correction with the measures put in place,” said Linda Lee, Singapore-based senior vice president of deposits and secured lending at DBS Group Holdings Ltd., Southeast Asia’s largest lender. “They also want the consumer to be more prudent when applying for loans so they can control the overall debt in the country.”
The slowdown is beginning to hurt developers. CapitaLand Ltd. (FSSTI) and City Developments Ltd., Singapore’s two-biggest homebuilders, said in the past three months they expect “headwinds” in the city’s property market because of the latest measures.
Developers’ profit margins for recent residential project sales dropped to 11 percent from 22 percent six months earlier, Standard Chartered Plc analysts, led by Regina Lim, said in a note to clients on Sept. 18. Net profit margins could fall to less than 10 percent over the next 12 months, the report showed.
CapitaLand said in July it sold 139 residential units in the island-state in the three months ended June 30, 31 percent fewer than in the same period last year. City Developments (CIT) said Aug. 6 it expects the volume of private residential sales to decline and prices to moderate in the mass market segment due to a tightening of bank borrowings.

Slower Growth

“Sales of homes will be lower and the effects on mortgage lending in terms of slower loan growth will continue to be felt over the next few quarters,” said Ken Ang, an analyst at Phillip Securities Pte in Singapore.
Mortgage rates also are rising. Borrowing costs in Singapore, which doesn’t set interest rates to manage monetary policy, are driven by global rates, especially those in the U.S., where bond yields have been rising in the last year as economic growth picks up and the Federal Reserve considers tapering stimulus.
A “vast majority” of mortgage loans in Singapore have a floating rate, which means households will face higher monthly repayments when interest rates “normalize,” the MAS said in July, referring to expectations that rates will start rising.

Borrowers’ Risks

MAS estimates that between 5 percent and 10 percent of borrowers could be over-leveraged on their property purchases with total debt service payments exceeding 60 percent of their income. A 3-percentage-point increase in mortgage rates would boost the proportion of borrowers at risk by as much as 15 percent, according to the MAS.
The average 25-to-30-year floating-mortgage rate has risen to 1.3 percent from about 0.9 percent a year ago, said Keff Hui, a director at Mortgage Supermart Pte, a Singapore-based mortgage brokerage.
That’s a risk Ong, the dentist, says he wants to avoid.
“I’m worried about servicing the loan as interest rates start rising,” he said. “I’m hoping that property prices will come down to more affordable levels.”

Home Ownership

Under its first prime minister, Lee Kuan Yew, the city was transformed from a colonial backwater during its independence in 1965 into one of Asia’s most prosperous nations. One of Lee’s key policies was public housing, building modern apartments where 82 percent of Singaporeans now live, according to the Housing & Development Board’s website.
The home ownership rate for resident households was at 90.1 percent in 2012, up from 58.8 percent in 1980, according to government data. Lee stepped down as prime minister in 1990 and left the cabinet as minister mentor in 2011.
Singapore isn’t alone in struggling to come up with measures to stem property price gains, though the island-state that banned the sale of chewing gum in 1992, has proven more determined. The government in 2004 eased some of the ban on gum sales.

Hong Kong

Hong Kong’s government, in February doubled the stamp duty on all properties above HK$2 million and raised the minimum mortgage down-payment requirements on all non-residential properties.
A shortage of supply -- from 2008 to 2012 Hong Kong developers completed the fewest number of units in any five-year period since the government began keeping records in 1985, while regular land sales were halted in 2004 -- ongoing demand from mainland Chinese, as well as less stringent mortgage rules than in Singapore, have seen prices steadily increase. They are up about 5 percent this year, according to an index compiled by Centaline Property Agency Ltd.
“Obviously, the tighter housing supply situation means Hong Kong has fewer tools to fight gains in home prices compared with Singapore,” said Hong Kong-based Buggle Lau, chief analyst at Midland Holdings Ltd. (1200)
The city’s curbs are starting to show some effects. There were about 11,000 home transactions in the third quarter, the lowest since the government’s Land Registry began making the data available in 1996. Residential prices will fall 15 percent to 20 percent in 2014 and are expected to decline 5 percent this year, according to UBS AG.

Chinese Demand

Demand for homes in China remains unbowed even after the government in March stepped up a campaign targeting cities with excessive price gains and tightening home-purchase limits. Prices in September climbed the most this year from a year earlier, according to private data from SouFun Ltd., as the government has been less inclined to add to the measures and provincial cities, which rely on land sales for revenue, don’t have many incentives to implement them wholeheartedly.
While some may find Singapore’s property rules “draconian,” authorities should be pre-emptive and proactive, said Varathan at Mizuho Bank.
“It’s commendable,” Singapore-based Varathan said. “These are prudential measures to make sure that you don’t get an Asian version of the mortgage crisis in the U.S.”
(Source: Bloomberg)