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Monday, November 29, 2010

Six questions to consider before investing

Investors have a natural tendency to lose faith in asset classes or strategies that have not been working.

Mon, Nov 29, 2010
The Business Times

By Teh Hooi Ling

Senior Correspondent

WE ALL tend to form our opinions based on the most recent data. And according to Ben Inker, director of asset allocation at GMO, which has US$150 billion (S$194 billion) under management, in 2000 we were apt to hear quotes like the following from institutional investors:

'Bonds are wasted space in our portfolio, and we want to have as few of them as we can get away with.'

'We are long-term investors, so we should have an equity-dominated portfolio.'

'International diversification is overrated. When you need diversification, correlations go to one.'

In 2010, we are hearing the following:

'Our portfolio should be first and foremost about matching our liabilities, not seeking returns.'

'Equities will play a smaller role in our portfolio going forward.'

'Equities are growth assets. We should put our equity money into faster- growing economies.'

The comments in 2000 were made after the S&P 500 rose 18.2 per cent a year in the preceding 10 years, far outpacing non- US equities, which themselves outpaced bonds, which returned 6.8 per cent a year.

In the decade to 2010, however, the S&P 500 fell 1.3 per cent per year, with bonds giving decent returns of 6.5 per cent per year. Within equities, only emerging markets made any real money for investors, with a return of 9.1 per cent per year.

Investors, said Mr Inker, have a natural tendency to lose faith in asset classes or strategies that have not been working - and gain confidence in those that have. Investment managers and consultants capitalise on this by selling products around themes that are hot.

Investment managers, consultants, and Wall Street are not going to change. So how can investors avoid doing in 2020 what they did in 2000 - and may be doing in 2010?

Mr Inker thinks a crucial part of why investors find themselves swayed so much by the winners and losers of the last cycle is that they lack a strong anchor to their investment beliefs. So to help investors think about their portfolio, Mr Inker came up with a list of six questions in his paper entitled Back to Basics: Six Questions to Consider Before Investing.

The six questions are:

Would investors rationally buy this asset if they did not believe it would give returns above cash?

Where do the returns from this asset come from, and who funds them?

Why would the funder of returns for this asset be willing to offer a return greater than cash in the long run?

Have historical returns been consistent with the risk premium we expected?

Have the sources of the returns been consistent with the returns achieved?

Has something important changed to make us doubt the relevance of the historical returns?

Mr Inker then applied these questions to various asset classes starting with equities, to bonds, to commodities, to private equity and venture capital.

When it comes to equity, any rational investor would not buy it if they believe the return will be below cash - unlike bonds, which can be matched to certain liabilities, or commodity futures, which may offer inflation protection.

Equities are volatile, have no legally mandated cash flow and are the lowest rung in the capital structure in the event a company gets into trouble. Returns from equity come from the cash flow of the issuing companies. The cash flow is in the form of dividends or share buybacks.

Issuing companies are willing to offer a return above cash to shareholders in the long run because equity is safe capital for them. It allows them to make long-term, risky investments with less risk of bankruptcy. There is no refinancing risk. So companies should be willing to pay a premium for equity.

Mr Inker then tested whether the historical returns for US equities have been consistent with the risk premium expected by investors. The average equity risk premium for the rolling 10-year periods since 1930 until now has been 6.4 per cent.

There have been a number of decades in which stocks have lost to cash, but the general level of the risk premium has been high, Mr Inker noted. None of the periods of underperformance have been excessively long - although the 1974-83 period is a bit long for comfort. All in all, the returns have been consistent with the risk premium the market expected.

I tried to test with data from the Singapore market. Using the five-year T-bond rates, which went back the furthest, I generated Chart 1. I used a monthly five-year rolling return for the Datastream-calculated Straits Times Index (STI) and compared them to the five-year T-bond rates.

Between 1988 and now, in 46 per cent of the rolling five-year periods, equities yielded less than cash. But in the periods when equities outperformed cash, they outperformed quite significantly. And that lifted the average and median outperformance of equities over cash sharply.

Meanwhile, holding periods of seven years seem ideal for Singapore equities, as they outperformed cash some 95 per cent of the time. And the outperformance average has been a significant 6.4 per cent.

However, staying in the Singapore market for 10-year stretches doesn't do much for one's portfolio. In fact, one would actually have underperformed cash 62 per cent of the time. And the underperformance averaged -0.1 per cent, with the median at -1.2 per cent. It is said that a financial crisis happens once every seven years.

In Singapore, or Asia, in the brief history that we looked at, it's more like once every 10 years. And one wouldn't want to be holding equities when a crisis hits.

The above returns did not include dividends. Including dividends, returns from equities would be boosted by more than two percentage points.

Mr Inker's next question is: Have the sources of return been consistent with the equity returns achieved? According to Datastream, dividend yields averaged about 2.5 per cent for the STI since 1973. That's about the return above cash that equity investors who held for 10-year periods received.

For the US market, dividend yields averaged 4.3 per cent - lower than the average 6.4 per cent return from equities since 1930. The return came more from earnings yield that averaged 7.1 per cent during that period, Mr Inker noted.

According to Bloomberg, the estimated price-earnings ratio of the S&P 500 is now 14 times, or 16.56 times before extraordinary items. That works out to an earnings yield of between 6 to 7 per cent - within the long-run average.

As for Singapore, the PE ratio and the dividend yield currently approximate the 37-year average. The only difference is that the one-year interbank rate now - at 0.56 per cent - is way below the 25-year average of 3 per cent.

So has something important changed that makes us doubt the relevance of the historical returns to stocks? Well, there may be a bigger backlash against unbridled capitalism following the recent crisis.

That may result in more government regulation and corporate earnings may be crimped as a result. Interest rates, of course, are not likely to stay this low over the long run.

On the other hand, we now have vast new markets that are opening up in China and India and elsewhere. All in all, the return for equities seven years out should still beat cash comfortably.

Tuesday, November 23, 2010

Identify trends to predict asset prices

Investors who understand technical analysis can have more knowledgeable trades.

Tue, Nov 23, 2010
my paper

By Reico Wong

INVESTORS looking to make more knowledgeable trades and reap profits from financial markets will do well to understand technical analysis.

Related stories:
» The 3Rs to investing in uncertain times
» 6 invest themes for 'new normal'
While investment brokers and analysts use this tool to make sense of statistics generated by market activity, one does not have to be an expert to be able to grasp at least the basics.

Simply put, technical analysis is the study of a particular asset's historical prices and volume data represented in a graphical form, with the aim of identifying patterns to forecast future activity and price movements.

Still, experts warn that technical analysis cannot provide absolute predictions and investors should not be reliant on it alone.

Investors need to first note the three underlying assumptions of technical analysis - all information that has or could affect a company is already priced into its stock at any given time; price movements are believed to follow trends; and history tends to repeat itself as investors repeat their behaviour.

Here is a look at identifying certain trends using technical analysis:


The first step is to identify an overall trend. Stock and other asset prices do not move in a straight line but in a series of highs and lows. The pattern of highs and lows constitutes a trend.

The two easiest trends to spot and trade in are the uptrends and downtrends. A formal uptrend occurs when each successive peak and trough is higher than the ones found earlier in the trend. The same logic applies for the downtrend, but in terms of lower successive peaks and troughs.

In the case of a formal uptrend, experts suggest that one considers selling the asset once it fails to create a new peak or trough to avoid the large losses that can result from a reversed trend. If a formal downtrend is noted, one should sell the asset quickly to cut losses.

The market could also trade sideways, defined as a series of ups and downs that do not exceed a certain minimum and maximum price point. These are also known as support and resistance points, respectively.

Also note that the more frequent the series of highs and lows in a trend, the more volatile the market is likely to be and, correspondingly, the more difficult it is to trade in.

"A sideways volatile market is the worst to trade in because it is the least predictable, with no directional bias," said Mr Winston Ng, chief executive of FXDS Learning Group.

"Violent fluctuations will mislead one into thinking that the directional trend of the market has changed, when actually nothing has happened and it is still locked in its range."


After identifying the overall trend, trend lines - also known as support and resistance lines - need to be drawn up. As mentioned earlier, such lines mark the points where asset prices hit a minimum and maximum.

One needs to keep in mind these boundaries to make trading decisions, as these are where orders consolidate and revolve around. It also allows one to identify when a trend is reversing.

A break below an identified support point would be considered bearish, while a break above an identified resistance point would be considered bullish.

Investors are advised not to trade at the two major points, since the surrounding area of the points typically comes with a high level of volatility.

Mr Ng highlighted some rules to drawing up good support and resistance lines for an analysis:

Firstly, find any three points and draw a line as its floor (support line) or its ceiling (resistance line). Then, use parallel lines to draw channels where possible. Leave the lines as they are even if they look like triangles when drawn.

Draw lines which are most obvious and not those difficult to see. Also, it is normal to give and take a little as the lines actually mark narrow bands of area.


There are different types of charts used to reflect market activity, but certain graphical patterns can always be established. The patterns fall into two main categories - trend reversal, and consolidation break-out or continuation. Double tops and double bottoms are the most common trend-reversal patterns found.

The pattern is created when price movements test the support or resistance points twice and is unable to breach them. It signals that the trend is about to change.

Experts say traders should sell on the break of the support line of a double top and buy on the resistance line of a double bottom.

Mr Ng added that, in a double- top situation, traders should protect and cut losses if the price rises above the support line by more than 10 per cent.

Similarly, losses should be cut if the price falls below the resistance line by more than 10 per cent in a double-bottom situation. Another popular trend-reversal pattern is known as heads and shoulders. This is formed when successive peak formations start to deteriorate.

Once again, traders should sell on the break of the support line of a heads-and-shoulders pattern; and buy on the break of the resistance line in the case of such an inverted pattern.

Last but not least is the consolidation pattern known as flags and pennants. As the name suggests, a price pattern reflecting a flagpole and flag (either triangular or rectangular) can be seen.

A sharp price movement (the flagpole) is followed generally by a sideways price movement (the flag). This pattern is then repeated. If the flag pattern is in an uptrend, this means the market is bullish. Traders may then want to look into going into a long-term position, and buy particularly at the break point of the trading range captured by the flag.

If the flag is flipped upside down, a bearish market is likely to follow. Traders would similarly want to sell at the break point of the trading range captured by the flag.

Ultimately, technical analysis does not necessarily have to be complex and can be applied to any security with historical trading data.

Monday, November 15, 2010

Reits look good, for now

Nov 15, 2010

By Goh Eng Yeow, Senior Correspondent

IT IS a time of plenty again for Singapore real estate investment trusts (Reits), as rentals soar and loan servicing costs drop precipitously.

In the past month, Reits have begun to make a big comeback on the local initial pubic offering (IPO) scene.

Mapletree Industrial Trust - a Temasek Holdings-linked Reit which owns factories, business parks and industrial buildings mostly in Singapore - recently raised $1.19 billion.

Another, Sabana Shari'ah Compliant Industrial Reit - backed by locally listed Freight Link Express Holdings - is hoping to muster up to $700 million, if it successfully launches its offering.

And those two may just be teasers. DBS Bank - a market leader in helping Reits with listings and other forms of fund raising - expects a lot more such IPOs here in the coming months.

Its head for asset-backed structured products, Mrs Eng-Kwok Seat Moey, said recently that a number of sponsors had long been keen to launch Reits, but conditions in the past two years were simply not right.

Still, despite the palpable market buzz around Reits, many investors are still ignorant of what they are getting into.

The big draw are the headline-grabbing projected dividend yields of 7 per cent to 8 per cent offered by these Reits. That looks highly tempting when compared with the paltry 0.125 per cent interest typically offered on bank deposits.

But it is instructive to understand what Reits are all about and the potential pitfalls that may arise when times are not quite so rosy.

Reits are 'closed end' funds, which operate in a similar manner to unit trusts. But unlike unit trusts, which raise funds to invest in shares, Reits specialise in income-generating real estate assets, such as shopping malls, offices, industrial buildings, warehouses or hospitals.

Funds raised in a Reit IPO are used to buy a pool of properties which are then leased out to produce rental income - later distributed to investors as dividends or distributions.

A Reit will also appoint a manager - usually its sponsor or major shareholder - to manage its properties.

For the sponsor, the big attraction is the management fee which is paid to it as the Reit manager.

As this fee is charged against any income earned by the Reit, it may be in an investor's interest to find out how it is structured. This is because a hefty management fee may eat into any profit produced by the Reit and result in a lower dividend payout.

For Reits, the best way to enhance returns is to resort to bank borrowings to finance their property purchases. That is why they look their best in a low-interest rate environment.

To give an example, let us suppose a

Reit raises $500,000 from investors and borrows another $500,000 to buy a $1 million property which gives an annual rental income of $40,000.

If the bank charges 1 per cent interest on the loan, this will give the Reit an income of $35,000, after deducting the $5,000 in interest payment.

This works out to a 7 per cent return on the $500,000 put up by investors, even though the rental yield is only 4 per cent.

But here is the rub: If interest rates rise sharply - as they did during the global financial crisis two years ago - investors may suffer a plunge in dividend payout, as the increased debt servicing costs eat into the rental income.

Using the same example, if loan interest shoots up to 4 per cent, this will jack up the interest payment to $20,000, cut the Reit income to only $20,000 and almost halve the investors' return to 4 per cent.

Still, this is not the biggest problem which could confront a Reit if another financial crisis were to erupt.

In late 2008, the global credits market froze up completely after the collapse of investment bank Lehman Brothers, and the global financial system teetered on the edge of collapse as banks trimmed their credit lines to customers sharply.

As most Reits had resorted to short-term borrowings to finance their property purchases, some of them faced difficulties in refinancing their debts as the lending dried up almost completely.

As the global credit crunch hit Singapore, some banks were reluctant to accept the properties offered to them by the Reits as collateral, even though they were still producing healthy rental incomes.

Fortunately for the Reits, the frozen credits market thawed after a few months, as central banks across the globe flooded the financial system with trillions of dollars of fresh money.

But one lesson that should be learnt is not to assume that the eye-catching high yields offered by Reits come risk-free.

Besides assessing the quality of properties in the Reit's portfolio, an investor should also ascertain its sponsor's financial health and willingness, as well as ability, to inject fresh money into the Reit if it is hit by a credit crunch.

One good example is CapitaLand. Early last year when things were at their bleakest, it stood fully behind its retail Reit, CapitaMall Trust, when it made a $1.23 billion cash call.

Three months later, CapitaLand also injected fresh funds into its commercial office Reit, CapitaCommercial Trust, when it made a $828 million cash call.

CapitaLand's move sent an unmistakable message to bankers and investors of the strong backing it was giving to the two Reits.

Looking ahead, as more Reit IPOs look set to come onto the market, investors should ask if other sponsors can offer a similar level of commitment to their Reits - or if their overriding objective is to earn that mouth-watering fee that comes from managing the properties in the Reit when times are good.

Once the champagne is popped and the headline-grabbing dividend yield is forgotten, these are the tough issues which a hard-headed investor must take into consideration before he puts his hard-earned money into a Reit.

Sunday, November 14, 2010

What's your money personality?

All of us have unique personalities - and this extends to how we handle money and investments.

Sun, Nov 14, 2010
The Star/Asia News Network

By Milan Doshi

During my seminars and personal financial consultations, I have come across many people who have different attitudes towards money.

All of us have unique personalities - some characteristics are inborn and some are learnt along life's journey. Likewise, when it comes to money and real estate investments, we too possess various money personalities. They are:

1. Spenders / Shoppers
These personalities derive great emotional satisfaction from spending money. They need instant gratification and can't resist spending money. Spenders often shop to entertain themselves, even if the items they buy go unused. A sale is simply an excuse to spend money on the pretext of getting a good deal on things that they do not need at the moment.

A well-to-do good friend of mine was shocked to discover, during his house moving, that his wife owned more than 100 pairs of shoes and over 30 handbags! Like most guys, he couldn't see the need for his wife to own so many pairs of shoes and handbags. As money was not an issue, he didn't mind his wife buying more new shoes or handbags, provided that she gave her old ones away. He was concerned that his new house was quickly running out of closet space to store the things his wife bought.

Unfortunately, besides being a shopper, his wife was also a hoarder. She didn't have the heart to give away things that are still fairly new and seldom used. This led to frequent quarrels and my friend decided that the only way out was to build more closet space in his current house and to move to a bigger house a few years later to accommodate his wife's impulsive shopping habit. It was a small price that he could afford to pay to keep his wife happy.

Advice for Spenders/ Shoppers: Shop a lot less, save a lot more

If you love to spend, it's very likely that you are going to continue doing it. when shopping, try to seek long term value, not just short -term satisfaction.

Before purchasing, ask yourself how much that purchase is going to mean in a year. If the answer is "not much", then forgo the purchase.

This way, you can limit your spending to things that you'll actually use. If possible, set a monthly budget and stick to it. In case you over-spend in a month, make sure that you have the discipline to cut back the following month.

Another suggestion is to cut up any extra credit cards you may have and lower the credit limit on the ones you use regularly. Give standing instructions to auto-debit your bank account on the due date with the full amount for all your credit cards. This way you will not be tempted to overspend.

2. Debtors
Debtors are similar to Spenders/Shoppers.

The only difference is that they are spending money that they don't have and are living beyond their means. They are deeply in debt and often, are not in a position to do much investing.

Debtors will typically live rich but die poor!

A newly married young couple in their late twenties came to see me for a personal financial consultation. They were keen on investing in properties and stocks.

Their combined gross income was RM15,000 per month but their net worth was less than RM100,000! They had RM20,000 in credit card debts, less than RM5,000 in savings and they both drive brand new Japanese cars worth around RM70,000 each.

Their logic of purchasing new cars was that they didn't want any problems associated with buying cheaper second-hand cars.

In my opinion, both fell into the Debtor personality.

While they were earning well for their age bracket, they were mismanaging their money by accumulating credit card debts and over-spending.

Since both were desk-bound employees, there was no need for them to make a good impression by driving new cars. In fact, they could ill-afford to drive new cars at this stage of their lives, given their current financial situation.

In order to clear up the credit card debts and begin their investment journey, I strongly suggested that they sell off their two cars which were around a year old and downgrade to a three year old Proton or Perodua car which costs around RM35,000 each.

Straight away, they would be able to settle their credit cards debts and have sufficient start-up capital of around RM50,000 to begin investing.

Unfortunately, it was easier said than done.

Towards the end of our consultation, the husband blurted out that they had just placed a deposit for a new car for himself worth RM85,000 to lock-in the low interest rates.

Since both had the Debtor personality, I really had a tough time convincing them to change their spending habits. If one of them had a different money personality, perhaps I would have an easier time to get one spouse to convince and force the other to change his/her ways.

Finally, all I could do was wish them good luck. Personally, there is no way they will go far in life unless they make drastic changes to their behaviour

Advice for Debtors: Start saving, investing & don't spend money that you don't have!

If you are already in debt, you first need to get your debts sorted out before you can begin investing. If you are not able to do it alone, get some professional financial help like what the couple did when they saw me.

Also, analyse what caused you to get into trouble.

If it was easy access to credit cards, then the solution would be to cut up all "temptations" cards and sticks to debit cards. If spending was something that you used to compensate for other areas in your life that you feel were lacking, think about what these might be and work on changing them.

If your house and cars were purchased because of the need to look good, then you may even need to downgrade your lifestyles by moving to a smaller house, drive an older car, etc.

Next, focus your efforts on saving money diligently.

Pay yourself first by setting aside a certain portion of your take-home income that automatically goes into a special bank account that is used for investments. The money in this account can never be spend - it is your golden goose.

Later, when you retire, you can only spend the eggs that your golden goose laid i.e whatever interest, dividend or rental incomethat your investments generated.

3. Savers
Savers are the exact opposite of Spenders/Shoppers and Debtors.

They only shop when absolutely necessary and never accumulate credit cards debts. They generally have no debts and are often viewed as cheapskates.

Savers are not concerned about keeping up with the Joneses or following the latest trends. They are happy with their 20-year-old cars and derive great satisfaction from seeing the interest earned on their bank statements.

Due to their conservative nature, they don't take big risks with their investments. They prefer fixed deposits instead of other riskier investments where there is a possibility of a loss.

Extreme Savers unfortunately will live poor but die rich!

Most of our parents who had lived through the Second World War and experienced hard times, where they didn't have the luxury of three meals a day, will fall into this money personality type.

I met many people who live in old houses that were last renovated 20 years ago and drive well-maintained cars that are more than 15 years old. These people are the ones who have more than RM5 million in fixed deposits!

At the current fixed deposit rate of 2.5% p.a., their interest income alone is over RM10,000 per month which is more than sufficient to fund their no-frills lifestyle.

Advice for Savers: Practice moderation & take a little more investment risk

If you are a Saver, you should not let all the fun parts of life pass by just to save a few cents.

To achieve some sort of balance, it's advisable that you allocate a small sum of "Play Money" where you can nourish your inner child by living like a King/Queen for a few hours every month.

Spending a bit of money on having fun isn't going to make you bankrupt. Once you have tasted the good life, would you want more?

The answer is a definite 'Yes'. In fact, you would be motivated to challenge yourself to make more money so that you can have more of the good life.

Instead of taking little or no investment risk by leaving all your money in fixed deposits, you need to learn to take a little more risk by investing a portion of your capital into higher return investments such as REITs, properties, bond funds, etc.

After all, the key to investing success is to minimise risks while maximising returns. Avoiding investments risks completely will not get you far in the long run.

4. The Avoiders / Money Monks
These people are not comfortable with the subject of money due to their lack of interest or they feel that that are other more important issues.

Often, they will try their level best to avoid the subject completely. Money Monks are happy-go-lucky types who strongly belief that God will take care of them. At the extreme end, they may not even know whether they are rich or broke.

If you are married to an Avoider or a Money Monk, you will have to shoulder the responsibility of managing money and investing for your family. The big advantage is that you will have little or no arguments on any money matters with them.

Advice for Avoiders/Money Monks: Make sure that you do not marry your own kind. Alternatively, find a trusted professional financial planner.

It's a sad fact that people typically will not change even when they know they need to.

Hence, it is extremely tough to suggest to Avoiders and Money Monk that they should have an interest in knowing how money works.

If you are an Avoider or Money Monk, an easier alternative is to make sure you don't marry their own kinds or you should seek professional help when it comes to managing your money.

5. Investors
Investors are consciously aware of how money works.

They know where they are financially today and try to put as much of their money to work.

All investors tend to seek a day when their passive income from their investments will provide sufficient income to cover all their expenses.

Their actions are driven by careful decision making, and they are comfortable with the need to take a certain amount of risk in pursuit of their goals

Advice for Investors: Keep it up!

Congratulations! Financially speaking, you are on the right path and doing great! Keep doing what you are doing, and continue to educate yourself.

It's extremely important to know which money personality you fall into as each has its own strengths and weaknesses.

Understanding your unique money personality will help you shape your approach to spending, saving and investing.

If you are married, it will also help you understand your spouse better as most marriages get into trouble because of money issues.

Friday, November 12, 2010

Are HDB flats affordable?

by Mah Bow Tan 05:55 AM Nov 12, 2010

Recently, the Housing and Development Board was conferred the UN-Habitat Scroll of Honour Award - the most prestigious human settlements award in the world. In recognising Singapore's achievement, the UN-Habitat Chief of Information Services said: "It's really quite impressive for a country to provide adequate shelter and home ownership for so many."

Ask most housing experts and observers, and they will say that HDB flats remain within reach of the majority of Singaporeans. After all, HDB builds and sells flats at heavily-subsidised prices to ensure affordability. This has made it possible for an average of 15,000 young couples every year to join the ranks of homeowners.

Most of these couples buying new flats use just 20 to 25 per cent of their monthly income to pay for their flats. With their CPF contributions, few have to pay any cash for their mortgage payments. In total, more than 80 per cent of Singaporeans live in 900,000 HDB flats today. Yet, people still worry that HDB flats are not affordable. Why are there such sentiments?

Indeed, housing affordability - whether a flat is within financial reach - is not a straightforward issue. Different people have different notions of what is "within reach". Some argue that a 30-year housing loan is too long for a flat to be considered affordable. Others say that flat prices are much higher compared to their parents' time. The debate is further complicated by rising aspirations - whether housing is "within reach" also depends on what we aspire towards.

For a meaningful discussion on affordability, we need objective and commonly accepted yardsticks. So, what are the measures of affordability? How does HDB ensure that flats remain within reach of Singaporeans?


Focus on first-timers. To ensure that first-time buyers have access to affordable housing, we do several things. First, HDB prices its new flats below market value, taking into account the income of homebuyers. Hence, first-timers enjoy a substantial subsidy when they buy new flats from HDB.

Next, for first-timers who cannot wait for a new flat or wish to buy a specific flat in a specific location, HDB provides a CPF Housing Grant of $30,000 (or $40,000 if they stay near their parents) to buy a resale flat. Beyond that, new and resale flat buyers can apply for a concessionary loan. For a $200,000 loan over 30 years, the interest subsidy amounts to about $30,000.

Help according to income. For households earning $5,000 or less a month, an Additional CPF Housing Grant of up to $40,000 is provided for their purchase of new or resale flats. In other words, a family earning $1,500 can get as much as $80,000 in housing grants. Families earning more, between $8,000 and $10,000, can now buy new flats under the Design, Build and Sell Scheme (DBSS), in addition to Executive Condominiums, and enjoy a CPF Housing Grant of $30,000.


I have been discussing affordability in layman's terms. Let me now get into the technical stuff. In particular, how do experts determine housing affordability? There are a few generally accepted benchmarks.

Income affordability. One is the housing price-to-income ratio (or HPI), which compares median house price to annual household income.

In a Straits Times article in February 2010, two NUS professors, Tu Yong and Yu Shi Ming, noted that Singapore's HPI for resale flats in non-mature estates is 5.8, compared to Hong Kong's 19.8 and London's 7.1. That means Singaporeans generally need 5.8 times of their annual household income to buy a resale flat in non-mature estates, whereas a Hong Kong resident needs more than three times that amount.

If we take Department of Statistics 2009 data on the median income of younger households - those aged between 25 and 35 years old - who are likely to be first-timers, their HPI is even lower, at 4.5 for resale flats and 3.8 for new flats. This is because they have higher incomes than average households.

Financing affordability. While the HPI is relatively easy to understand, it does not consider factors like loan availability and financing costs, which are important for many deciding to buy a flat. Therefore, another widely-accepted measure is the debt-service-ratio (DSR), which looks at the proportion of the monthly income used to pay mortgages.

The DSR for new HDB flats in non-mature estates, based on an industry norm of a 30-year loan, averaged 23 per cent this year. This is well within the 30-35 per cent international benchmark for affordable expenditure on housing.

Depending on flat type, the DSR ranged from 11 per cent for standard flats to 29 per cent for premium projects like the Punggol Waterway Terraces, which cater to higher income households.

We must also remember that CPF savings can be used for the initial downpayment and monthly instalments. Hence, more than 80 per cent of new flat buyers pay for their housing loans entirely out of CPF, without having to touch their take-home pay.

Whichever objective measure we choose, it is clear that there are enough HDB flats within reach of today's homebuyers. They range from smaller, no-frills flats in non-mature estates to premium flats in mature estates, catering for different aspirations and budgets (see table above). I hope buyers choose carefully, taking into account their budgets and aspirations. Housing affordability is decided not just by the options offered by HDB but also the choices of homebuyers.


I can understand the anxiety among young couples wanting to buy a flat of their choice, within their budget, and as soon as possible. HDB has ramped up supply significantly and recently introduced more measures to temper excessive exuberance in the market and to moderate prices.

HDB also regularly reviews its subsidies to ensure affordability. But I must caution that there are limits to how much we can increase subsidies, without compromising other interests.

In other words, we must also consider affordability from a national standpoint. If we increase housing subsidies, what would we have to give up? The quality of education for our children? Healthcare services for our parents? Or do we impose a higher tax burden on Singaporeans?

There are no easy answers. Ultimately, we need to balance the interests of affordability for homebuyers and the burden on taxpayers.

The writer is the
Minister for National Development.

Thursday, November 11, 2010

Considering DBS Preference shares

November 11, 2010 Thursday, 10:27 AM

Goh Eng Yeow examines the attractions of preference shares

JUST over two years ago, I wrote a commentary to highlight the unhappiness of small investors being left out of DBS Bank’s $1.5 billion preference shares offering.

Surely, there must be some way to enable them to enjoy the much higher payout offered by the preference shares, rather than the pittance they are getting from their accounts with POSB, which is now part of DBS.

That is about to change. The bank yesterday announced that it is offering up to $800 million worth of new preference shares to retail investors. It has also taken out a full-page advertisement in The Straits Times today about the offering.

It is a big change in mindset for the bank.

As my colleague Gabriel Chen highlighted in his article this morning, DBS did not sell preference shares to the public in 2008 because of misgivings that the product would not be suitable for retail investors.

Indeed, investors who had bought the preference shares offered by OCBC Bank and United Overseas Bank – soon after the DBS offering – suffered paper losses on their investments as they crashed below issue price when Lehman Brothers failed a few months later.

Of course, those who have held on to their investments are now laughing all the way back to the bank, as the preference shares have climbed back to well above par value.

Compared to the DBS preference shares offering which offered a 5.75 per cent dividend payout, the current offering is not as attractive, since its payout is only 4.7 per cent.

But real interest rates have sunk into negative territory, as the US central bank’s printing presses go into over-drive. Getting the yield from the preference shares will at least help to preserve the value of the savings.

I got a few calls this morning asking me about the risks involved.

Let me stress that unlike a bond, there are risks associated with a preference share.

The issuer is not obliged to pay the dividend on the preference shares, if he suffers a loss and does not have money to declare any dividend payout to his shareholders.

Considering that our lenders are financially prudent and are consistently profitable, this is a scenario which is unlikely to occur here.

But the recent global financial crisis has shown that nothing is impossible, even for institutions which are believed to be too big to fail.

The best examples are the US-government backed mortgage giants Freddie Mac and Fannie Mae, whose preference shareholders were completely wiped out when the two companies were put under "conservatorship" – whose nearest equivalent here would be judicial management.

What happened was that both firms were unable to pay the dividend on their preference shares because of their heavy losses, forcing the many funds holding them to write their value down to zero. The logic is ruthlessly simple: If it doesn't offer a payout, it is effectively a worthless piece of paper. 

It must have come as a big shock to these investors, that the two firms holding a big chunk of the US mortgages, could collapse in such a spectacular fashion.

But the local lenders are strongly supported by their shareholders.

Last year, when the financial storm was raging at its peak, DBS boldly came out with a rights issue to strengthen its capital base and it  was oversubscribed. OCBC revived its scrip dividend scheme and persuaded the majority of its shareholders to opt for shares, rather than cash, for their dividend payout.  

So, those planning to invest in preference shares should know what they are in for.

It is not simply about getting that attractive coupon in the preference shares offered by the issuer. You also have to carefully study the business it is in, and how well it is being supported by its shareholders. Then again, isn't that true of all investments?

Happy investing.