Monday, September 28, 2009

Jumping onto the Property Bandwagon....

Aztech, a mid-size electronics manufacturing company listed on the SGX, announced yesterday that it will diversify into property development. The electronics manufacturing sector is a tough one to survive in, margins are always falling and you got to keep on innovating and competing to stay afloat. Investing its funds in some development work to create the next iPod or try to be the next Cisco is always tough because there is no guarantee of success and there are hundreds of Chinese firms waiting to copy their products. Instead of doing the hardwork, Aztech figured it can make some easy money developing property. The Singaporean apetite for property seems insatiable. Aztech gives this reason for entering the property business:

Aztech is not the only company that believes this. The others are bookstore chain Popular Holdings, wet market operator Heeton Holdings and jeweller Aspial.

This story just gives me flashback of so many other stories. A month ago I chatted with a barber who was cutting my hair. His barber shop was newly opened and he already had 3 other shops in the eastern part of Singapore. He told me about his exit strategy if he can't get enough customers for the new shop to overcome the high rent- he could sublet part of the shop or return to shop if he can't make money. He went on to tell me that making money by cutting hair is hard work - he would have to cut their hair of 400 people per month just to pay the rent. The big easy money is made selling shops. He made more money selling his 1st shop which he bought for $40K and sold for $800K than he made all the heads of hair he ever cut.

So why do all the hardwork of cutting hair, making electronics widgets and designing jewelry when you can just sell property and make money? Won't the demand and price of property keep going up as the population expands? The money for purchasing residential property ultimately comes from the household income of the family that purchases it. How high prices can go depends on how much loan they are willing to take and their ability to service that loan. Sustainable price increase occurs in tandem with the rise in income. Price of property cannot rise faster than household income in the long run- it is not sustainable because families have to keep piling up more debt and this stops when they can't service it or when people start defaulting on their loans. Rising property prices also deter foreigners from coming here as they would have to keep cough out a large fraction of their income to pay for rent or service their housing loans.

We all want to be the smart ones owning property that rise in value as the wave of foreign immigrants come to push the prices up to the stratosphere. This is the big easy money that companies like Aztech dream about. ..forget about the hardwork of innovating and manufacturing. This dream has a flip side. Remember Dubai? When its economy weakened and many property loans became negative equity, foreigners simply walked out and left - leaving the banks and real estate companies saddled with billions in bad debts[Link]. Cars, also bought on loan, were abandoned at the airport....credit card bills left unpaid. I think there is an important lesson here for Singapore.

25 comments:

Anonymous said...

We are becoming a nation of property speculators. The question is: how long can this last? Is it a sustainable economic model? Sometimes I wonder if the property bubble will burst and we will be mired in a decade ling recession like Japan. But at least Japan's manufacturing and technology sector is strong...

skeptic said...

bubble bubble,
lots of trouble,

Anonymous said...

Doesn't matter bubble or not, technology strong or not, most important is political stability and social peace.

If this can be achieved and assured, then how bad or how good things are can't tell right? And it looks OK right?

What more can a govt ask?

Lim Leng Hiong said...

"If this can be achieved and assured, then how bad or how good things are can't tell right? And it looks OK right?"

Assured?

"What more can a govt ask?"

A government can ask:

1. What can we do to ensure a victory for another election?

2. What can we do to resolve the important issues so that the citizens will continue to give us their support and cooperation?

3. What can we do to prevent our policies from becoming our own worst enemy?

4. What else did we miss??? How the hell could we have missed THAT!!?!?

All valid questions, hahahaha...

Ng Teng Fong said...

Everyone is thinking that "if that geylang king guy can propel himself into the Singapore richest 40 within 2 decades, how hard can it be for a genius like me?"

I remembered a decade and a half ago most listed companies have a property arm, and everyone is raking it in. Then the balloon busted, and one by one decided to "divest and focus on core business".

Guess history is repeating itself, once again.

Anonymous said...

"anon 9.22 : Doesn't matter bubble or not, technology strong or not, most important is political stability and social peace."




In a dictatorship, political stability and social peace are illusory.

David Teo said...

Vote wisely for a government that will take care of its citizens. And tell your 10 close friends.

Ender said...

Anon 9:22

"Doesn't matter bubble or not, technology strong or not, most important is political stability and social peace.

If this can be achieved and assured, then how bad or how good hings are can't tell right? And it looks OK right?

What more can a govt ask?"

Political stability and social peace can only be achieved if the right policies are in place and that the populace felt that they are fairly treated and the leaders they elected are competent ones that will take their welfare at heart.

It is not to be taken for granted.

If the policies fail or proves to be of detriment to the country and that the leaders set themselves above the concerns of citizens, then the stability will be under threat. We all do not wish to reach that stage as everyone loses.

Hence before the problem goes out of hand, Cassandras should arise to warn of the dangers.

And this rising property market could prove to be a timebomb. Everything will look rosy until the market turn and the recent buyers experience negative equity. The resulting impact to the economy will be unimaginable.

Alan Wong said...

Who are the ones to benefit most from property speculation and yet have minimum risk among the following groups ?

1) Govt agencies such as Singapore Land Authority, IRAS, JTC, HDB, URA, etc.
2) Developers such as Capitaland, Mapletree, Commercial Trust,
3) Banks, lawyers and housing agents
4) Investors including speculators

IMHO, I really think our Govt is the real culprit behind all these speculation? Don't you agree that the recent measures to curb speculation is only a slap on the wrist?

Do you think our Govt will really care if the man in the street will be the most affected in this vicious cycle of greed and wealth creation ?

As an example, when our revenue from all the various tax collection are inadequate, the Govt did not hesitate to increase GST even to the extent of building a big surplus and since then the GST rate is left as it is without any adjustment.

In any typical businessmen, the biggest component of business costs is rental and when rental goes up, the cost of everything goes up. Just look in the past at how rental rates for commercial & industrial has been increasing, then suddenly one will realize that our govt agencies like JTC & the whole list of GLC is the biggest culprit in the increase of business costs?

Transport costs such as petrol & diesel, taxi, bus & SMRT taxi fares have all increased across the board and what exactly has our Govt done to curb such costs increases ?

In summary, one will realise that our Govt is the one that really benefits from taxes from such increased costs and speculation ? So in short, do you really think our Govt will really step in to rein in such costs ?

http://vonhayek.blogspot.com/ said...

We are in trouble.

If one sector made scandalous profits compared to the rest, the best brain flock there.

Now, most of our smartest people perceive no hope in science, engineering and true manufacturing.

They are driven into financial engineering and property hoping to be a rent seeker.

Currently, I can feel that engineering a respected profession elsewhere is being mocked here as a sunset industry.

Soon, we will no longer a producer and will go into demise.

Look at what Japan, one of strongest industrial power now after the property bubble.

PAP tries to think we can be HK kicking even after engineering die out. They are day dreaming. HK is special case whereby folks there are able blackmail favors from China.

Anonymous said...

Where was the location of his first barber shop and when did he purchase it? The 20x gain is quite incredible.

Anonymous said...

In summary, one will realise that our Govt is the one that really benefits from taxes from such increased costs and speculation ? So in short, do you really think our Govt will really step in to rein in such costs ?

When governments also engage in business, whose interests would come first? The country/citizen's or the profits of their own business? Thats why governments should never be in business. It will only lead to tyranny and slavery.

Anonymous said...

Very soon we will have companies of all shapes and sizes just doing nothing else but building houses and factories.

Must be the new economic model that no one else has thought of and only the most talented team of people knows how it works.

LuckySingaporean said...

Anon 13:05,

I remember he mention it was a shophouse type set up where they can stay upstairs.

But 20x is no surprise given 30 yrs yrs ago a 5 room flat in marine parade costs 40K now it is 600K.

I take that the barber might have embellished his gains but I surpose it was quite huge for him and he was proud to have made the money.

Anonymous said...

Property make money...Yes.

But if one takes loans from banks, then it is a complete different story.(when the interests rate rises)

If a Technology company can chip in, I think the problem has reach bubble level, but don't worry as this few months we have the important Forum where leaders from all over the world will be here...can't look too lousy with poor GDP?

Next two years may be different, I think

Onlooker said...

Bubbles, bubbles, bubbles.




Pop goes the weasel.

Aztech action ~= Electronic and manufacturing in decline.

What to do? it happened......

Fievel said...

I wouldn't buy their shares that's for sure!

Anonymous said...

Well... Ignorance is bliss. I do hope these people who believe all is well and everything can only get better stay cheerful when they wake up from telly tubby land.
What can i say, there got to be some suckers for capitalism or in our case socialism right?

Anonymous said...

Your article mirrors my sentiments exactly. I can see us creating our own "uniquely singapore" version of a sub-prime crisis.

Property has become the single biggest wealth generator and retirement plan for singaporeans. If this bubble pops, I think many will die cock stand, cry till no more tears.

I would be very interested to see how the PAP is going to "calibrate" us out of this fix.

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DanielXX said...

Another IPC. Gongkia go into construction materials and property. Soon Michael Mun will lose all his moolah.

Fievel said...

With election coming this year or the next, if I were PAP I wouldn't want to "calibrate" too much on the downside for property prices, even if it means artificially supporting the prices through a choke on supply of public housing.

Reason is simple, the people who are pleased with the asset inflation are mostly the ones with the voting power. The ones who are displeased about it, are the first time property owners-wannabe and they make up a smaller slice of the voting pie, ranging from 24 to 35 yrs old, so I really wouldn't be too worried by them, nor their incessant outcries in the cyberworld.

But that's IF I WERE PAP. I'm sure our leaders reside on much higher moral grounds than me. Right.

Anonymous said...

Rest assured many people are confident the property bubble will only grow bigger and nothing like making a pile before it burst.

If it does go 'kaput', bye bye to your hard-saved CPF money. And the Government will tell you, it is not their fault. You people like to blow bubbles, you have to live with it when you lose your pants.

Whatever money they took from you when they sold the land or HDB flats to you 'at subsidised market price' are safely stashed away with GIC/Temasek for further investments.

The only consolation is they will tell you is, bless you to live to a ripe old age and continue to slog for retirement until you expire, retirement unfulfilled.

Ghost said...

Bad timing for them. They jump in now, by the time their buildings are done it'll be 1 or 2 years later. By then, the market could be in the toilet

Anonymous said...

Yes watch out for the year 2011 when property will tank...based on experts' assessments.

I have looked into the report my boss passed to me.

Anyone can verify?