Myanmar’s Seething Property Bubble, Redux

I was shocked to learn that office space rental prices in Myanmar has zoomed past their equivalent in New York’s Manhattan

From Bloomberg: (bold mine)

Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his U.S.-based employer.

He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than $100 a square foot, compared with less than $75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.

The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations -- all unsuitable to the image of his $29 billion in revenue engineering and construction company, which he said he wasn’t authorized to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money,” Danley is still looking.

In 2011, I pointed out that Burma, which officially is known as Republic of the Union of Myanmar, has commenced to liberalize her previously closed political economy governed by military autocrats. Such structural change obviously should be a welcome development.

BUT the global yield chasing phenomenon has apparently seeped or spread into Myanmar’s economy, as evidenced by escalating the inflating property bubble as I earlier noted in June of 2012

One can sense mania when the investing public imprudently ignore risks. From the same Bloomberg article:

International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Pun said. For large-scale projects, some foreign companies bring their own workers from outside, while also using local resources available, he said.

Foreigners have been stampeding into Myanmar in the anticipation that foreigners will “no longer require a local partner to start a business in the country, and will be able to legally lease but not own property” based on a March 2012 draft foreign investment law (Wikipedia.org). 

But foreigners are prohibited to own land and immovable property (PWC).

So the massive influx of foreign investments on the non-property sectors has played a significant role in driving up Myanmar’s property prices to stratospheric heights.

Yet one would wonder how such eye-popping scale of property price inflation has been financed.

Myanmar has a dysfunctional, “outdated and debased” banking system as a result of decades of “abuse by the previous regime”. The banking system has effectively been “shunned by about 90% of the population” (CNN) where the average Burmese simply hold their savings or cash at home. 

Financial services such as loans, financial products, interbank operations and other forms of credit barely exists.

And the absence of a viable banking system and capital markets has prompted residents to turn into “real estate as a place to stash their cash” according to a Myanmar based finance analyst (Quartz). 

Myanmar is slated to open the Yangon Stock Exchange in 2015.

And because of the largely cash based nature of the transactions in the property sector, some analysts opine that the boom-bust cycle in Burma has been “overstated”.

I believe that the cash transaction segment of Myanmar’s markets sizzling hot property markets represents only part of the story. 

According to a survey conducted by an IFC report only 16% of households use the formal financial services. The other sources of loans emanates from family, friends and moneylenders [IFC: Microfinance in Myanmar Sector Assessment] So Myanmar has a huge shadow banking system which essentially eclipses the formal banking sector.

Importantly, the idea of the absence of leverage in Myanmar’s property boom may not entirely reflect on reality. 

Singapore has played a big role in providing financial services to Myanmar even when US sanctions were in place. According to Hans Vriens of the Insight Bureau Briefings, “Most overseas transactions are handled in Singapore, which acts like an off-shore banking platform for Myanmar and using the informal hundi system” 

Additionally, aside from the $2.4 billion of bilateral trade, there has been “significant business presence by Singaporean firms on Myanmar” as well as a “large Myanmar community in Singapore and a pool of Myanmar companies using Singapore as an intermediary hub to expand overseas”. 95% of Myanmar’s foreign transactions reportedly has been coursed through Singapore’s United Overseas Bank (UOB) (Asia One Business). 

So loans by the informal sector may have partly been financed by Singaporeans and or Myanmar based investors domiciled in Singapore.

This also implies that while property transactions may have mostly been executed through cash, the source of funding  may have been conducted through shadow banks, or through overseas lending via Singapore’s banks or both.

Whatever the source of transactions, one thing is clear, Myanmar’s money supply has been exploding, according to the World Bank’s Data.

Myanmar’s excessively high property prices (or property bubble) is likely either to fall from its own weight or would likely recoil from the prospects of monetary tightening as consequence to ongoing instability in the global bond markets. 

It's unfortunate that central bank's inflationism will act as spoiler to what has generally been a positive development.

Strength of Singapore Stocks Largely Depends on the US Equity Markets

The ASEAN 4 has been having an outstanding performance relative to the world. So as with ASEAN ‘developed’ economy Singapore.

From Bloomberg,

Singapore stocks have gained 13 percent in 2012 with volatility that is the lowest in Asia, luring the region’s biggest investors to a rally that trails only Denmark among developed nations.

The Singapore Straits Times Index (FSSTI) has risen 15 of the last 19 days while its 30-day implied volatility, a measure of risk derived from options prices, held below levels in Japan, Hong Kong, China, South Korea, India, Taiwan and Australia. Shares in the gauge yield 3.6 percent in dividends, compared with 3.2 percent for the MSCI Asia Pacific Index (MXAP), data compiled by Bloomberg show.

Nikko Asset Management Co. and Schroders Plc are finding bargains even after the Straits Times Index closed at its highest level of the year last week. Companies trade at 9.9 annual earnings, compared with 21 times for Denmark’s OMX Copenhagen 20 Index, the best-performing index among developed countries with a 21 percent gain. The MSCI Asia Pacific Index trades at 14 times profit, data compiled by Bloomberg show.

“Singapore equities are very, very cheap,” said Ng Soo Nam, Singapore-based chief investment officer at Nikko Asset Management, which oversees about $165 billion. “Valuations have been bashed down so much that the dividend yields are getting interesting even for Singapore banks, which are traditionally not dividend yield stocks.”

It has been true that Singapore, like her ASEAN ‘emerging’ contemporaries, has had a low beta relative to the world.

Chart from DBS Vickers.

A beta (based on CAPM) of less than 1 means that the security will be less volatile than the market (Investopedia.com)

But as caveat, past performance must not be read as future outcome as today’s conditions has been highly fluid and volatile which means correlations can shift in a finger’s snap.

As I recently pointed out, like the ASEAN-4, much of the strength of Singapore’s STI has been anchored on the US.

The bottom line is that the seemingly resilient stock markets of ASEAN, including Singapore, largely depends on the directions of the US counterparts.

All prices in the financial markets are relative: pricey issues may still become pricier, also cheap issues may become cheaper.

Contagion Risk: Singapore Economy Contracts

Well I have repeatedly been warning about the growing contagion risks from different dynamics: economic slowdown on multiple fronts (Eurozone, BRICs), political deadlocks (China, Eurozone), deceleration of money supply growth in the US and the continued dithering by central bankers of major economies.

And it seems that one big casualty from these has been Singapore.

From Bloomberg,

Singapore’s economy unexpectedly contracted last quarter as manufacturing fell, adding to signs of a deepening slowdown in Asian expansion as Europe’s debt crisis curbs demand for the region’s goods.

Gross domestic product fell an annualized 1.1 percent in the three months through June from the previous quarter, when it climbed a revised 9.4 percent, the Trade Ministry said in an e- mailed statement today. The median of 14 estimates in a Bloomberg News survey was for a 0.6 percent gain. The economy expanded 1.9 percent from a year earlier.

The Asian Development Bank cut its growth forecast for the region yesterday and South Korea unexpectedly reduced interest rates as it joined countries from Brazil to China in cutting borrowing costs in July. Singapore’s exports declined in May from the previous month, and a shrinking economy could put pressure on the central bank to ease monetary policy, according to Bank of America Corp.

It is important to point out that Singapore is an open economy where the % share of merchandise trade represents more than 300% of GDP

chart from Tradingeconomics.com

The implication is that the unexpected contraction in Singapore’s economy has been a manifestation of a deepening slowdown of economic activities around the world or at least in major economies influenced by the above forces.

Reality has been reasserting dominance against fading hope.

Singapore: The Best Place to Own and Store Gold

The Sovereign Man’s Simon Black says that Singapore is the best place to secure ownership of physical gold

Mr. Black writes,

It’s official. Starting October 1, 2012, Singapore will be the best place in the world to store gold.

As a major international financial center, Singapore is rapidly becoming THE place to invest and do business in Asia. Why? Because it’s just so easy. Regulation is minimal, corruption is among the lowest in the world, and the tax structure is very friendly to businesses and investors. With one exception.

Traditionally, physical gold and silver purchases in Singapore have been taxed at a 7% GST rate (like VAT, or a national sales tax). The only legitimate exception was purchasing (and subsequently storing) at the Freeport facility, adjacent to the main airport.

In just-released budget documents, however, the government of Singapore announced that it will begin waiving GST on purchases of investment grade gold, silver, and other precious metals effective October 1st.

This is huge… and it should really make Singapore the best place in the world to buy and store gold. Prices are already incredibly competitive, with ultra-low premiums and very reasonable storage costs.

Thanks for the tip.