Singapore’s economy has made a spectacular rebound in the last 12 month: it grew by a stunning 32.1% quarter on quarter in the first three months of this year. And this revival is being reflected in the city state’s financial job market. “I would say in banking the level of activity is up fivefold from last year,” says Elizabeth Goh, associate director at Charterhouse Partnership, the executive recruitment firm, in Singapore.

Goh says appetite is across the board but with selected pockets of intense interest, notably private banking – one of the areas hardest hit in the global financial crisis. “We didn’t see this level of interest even before the global financial crisis, when private banking was booming in Singapore,” she says. Strong candidates in these areas – which can range from pure finance to sales, back office to support – can expect “multiple offers, three or four, and the trend of recent months has been: may the best man win.” She says 40 to 50% increases on existing salaries are common.

Goh’s experience fits with the results of surveys looking at financial recruitment across Asia. 2010 studies by Ambition, the Australian-listed recruitment firm whose coverage includes Hong Kong, Singapore and China, show excellent prospects for those considering a move. Ambition reports that 74.9% of companies in Asia would consider hiring from overseas as the local talent pool diminishes, and more than 60% expect salaries will increase this year, with bonuses expected to be paid.

Asia’s attraction grows with every new European or American crisis. “Asia’s popularity as a career destination has continued to grow and throughout 2009 we experienced far greater numbers of candidates looking to enter this region,” notes Ambition, “as it is perceived to be one of the leading regions driving the global economic recovery.” Candidates from the US and UK have been in abundance, according to Ambition, though many without Asian experience have failed to make the transition.

What about the money? Ambition reckons a group CFO in banking or financial services in Singapore, with 20 years of experience, should expect to be making about S$600,000 a year; regional CFOs S$300-500,000 a year; head of audit or head of compliance from S$300,000 a year; and a senior VP for financial control, S$200-230,000 a year. These figures in the commercial sector tend to be lower: S$500,000 for a group CFO and S$200-350,000 for a head of audit, for example.

Both Charterhouse and Ambition report particular interest in the middle management level of financial control functions, and it’s no surprise that after the financial crisis positions in risk and compliance have been a big area of demand. “Now more than ever,” says Ambition, “the focus has been to attract talent that can act as a consultant to the business and add real value whilst performing a strong control function.” One red herring is ability in Mandarin: Goh says that although client-facing staff may find themselves more employable if they are bilingual, in most finance roles it doesn’t make much difference.

Singapore may lose some hedge fund managers because of a proposed tightening of regulation announced last week, but will be stronger as a consequence, a minister said yesterday.

“Whenever we make changes, there will be some who might find it a little less attractive. We accept that,” said Lim Hwee Hua, Second Minister in Singapore’s ministries of finance and transport.

“But it’s a net consideration. We always know there will be others who will be glad we did what we did, and over time there will be new people who come in.”

On Tuesday the Monetary Authority of Singapore announced a review of the regulatory regime for fund management. It proposes to tighten the exemption regime for hedge funds which excuses them from holding a capital markets services licence provided they manage funds for 30 or fewer sophisticated investors. The review of this regime appears to be a response to global calls for greater regulation of private pools of capital: The MAS said it was to ensure “the regulatory regime keeps pace with industry and regulatory developments globally.”

“It’s not just targeting hedge funds,” said Ms Lim. “Our regulations, our rules and our incentives all evolve with the marketplace. There’s nothing cast in stone we will not change.”

These will be the first significant changes to regulation of hedge funds since Singapore eased regulations for them in 2002 in order to build an industry rivaling Hong Kong’s. It worked: Singapore has 138 single strategy hedge fund managers, according to the Alternative Investment Management Association, and oversees US$34.9 billion, the second biggest hedge fund industry in Asia after Hong Kong.

While the proposed changes do increase stringency, they stop short of doing so across the whole industry. Funds with less than $250 million under management would remain exempt from licensing. Asked about the logic of this position, Ms Lim said the measure was still under consultation and deferred further comment to the MAS, which has given participants until May 31 to respond.

Hedge fund professionals, some of whom feared greater restriction, have been generally positive about the changes. “While at the smaller end of the industry there may be some reorganisation and consolidation, generally the proposed regulations reflect current best practice without imposing arbitrary or onerous requirements that may stifle industry growth.,” said Peter Douglas, who runs the Singapore-based hedge fund consultancy GFIA and is an Asia Pacific council member of AIMA.

Nevertheless there is a question whether Singapore can continue to thrive as a financial centre if its renowned ease of doing business is in any way impeded. Similarly its highly successful private banking industry, which has grown in part because of the degree of privacy it grants clients, is under international pressure as other private wealth centres like Switzerland have been pushed to give greater access to client information.

“Ultimately what we want to make sure is that we remain pro-business to whatever financial services providers would want to do in Singapore,” Ms Lim said. “But at the same time we must maintain the stability, the integrity of the system as well. This is part and parcel of the overall refinements we will always do from time to time.”

Asked about international financial regulation, she added: “The financial services industry in particular is extremely innovative, and I am quite sure there will be instances down the road where we would encounter the same set of issues in a different form… We have the challenge of trying to decide how much regulation or deregulation to adopt.”

Australian Financial Review, April 22 2010

It is Christmas Eve in Singapore, and the Humanitarian Organisation for Migration Economics – HOME – is holding a celebration at its East Coast shelter. Donors have provided a Christmas dinner, and 60 women, all of whom sleep in a single room upstairs, have organised some carols as a thankyou. These are women who have fled their jobs as foreign domestic workers, or maids, sometimes because of physical abuse, sometimes mental, sometimes simply lack of sleep; they are here because they have nowhere else to go. They strike up Amazing Grace. Everyone in the room is crying.

The 830,000 Australians who clear immigration at Singapore’s immaculate Changi airport each year won’t see this; nor will most of the 20,000 who live here. They will see Singapore’s astonishing economic success story in action: a country that started out with nothing upon independence from Britain in 1959, too small to support agriculture or resource industries, yet which has become the eighth wealthiest state on earth per capita, earning over US$50,000 per person on a purchasing power parity basis. They’ll see the brand new casino developments rising around the city centre’s Marina Bay, and the cranes above the world’s busiest container port, but they’re unlikely to glimpse the dark side of the migrant economy without whose presence this stunning achievement would have been impossible.

Nb this is the version as originally filed; click on the PDF links to see the shorter version as it ran

AFR068FBA22APR10 AFR069FBA22APR10

Singapore’s total foreign worker population is around 1.05 million people out of a total national population of 4.5 million. Of that number, about 856,000 are migrant workers such as construction staff who fall under a restricted bracket of the country’s Employment Act called the Work Permit regulations, and 196,000 of them are foreign domestic workers (the term ‘maids’ is frowned upon). They come here from Asia’s poorer countries like the Philippines, Indonesia, Sri Lanka and Burma, frequently leaving young children behind to be looked after by family members, because they believe they can earn more money in Singapore, support an extended family, and perhaps build a house or pay their children’s way through higher education.

Many manage it. But others do not, and even those do frequently tolerate conditions that are considered commonplace here but would elsewhere be unthinkable. No day off, ever. Routinely locked in to the family home when the family goes out, without the right to leave the building. Working for eight months, sometimes more, to pay off recruitment agency debts before a penny is earned for the helper herself. “Imagine the inequality of power distribution,” says Bridget Liew, a Singaporean who founded HOME as an NGO in 2004 with her retirement savings after a career as a personnel manager. “They have no-one to help them or defend them if their rights are being invaded. In such a situation they are very vulnerable to abuse: you cannot get access to recompense if you cannot get out of the house.”

*

The AFR is sitting with 25 young Filipina women in a smart classroom in Singapore’s Raeburn Park being educated on how not to fall out of a window. Posters on the wall remind workers of their rights to be paid on time. A spritely local teacher, affecting something of a Filipina accent, is demonstrating on a model of a window frame how to keep one’s balance while hanging out washing from a high floor. “Should I lean out of the window like this?” she asks. “No, ma’am,” comes an obedient chorus.

This is the National Safety Council, and its work is important: far too many helpers, from rural areas in which there are no high-rises, have fallen from Singapore condominium windows, although it is an open question how many are accidents and how many suicides. The course is one of several efforts made by Singapore’s Ministry of Manpower to address problems in its migrant worker community and has been compulsory for new foreign domestic workers, like these women, since 2004, along with a course for first-time employers. At the end of it they’ll receive a book with advice and some emergency numbers. “A testament to Singapore’s pro-active and comprehensive efforts is that many FDWs continue to seek employment or extend their employment here,” claims Jacqueline Poh, divisional director for workplace policy and strategy at the Ministry of Manpower. She cites surveys showing that 90% of such workers are happy in Singapore, and the worst atrocities against helpers – the vicious beatings and sexual assaults – do appear to be declining, although nobody knows how much is unreported.

But the plight of the women in HOME’s East Coast shelter or those of other NGOs or embassies, women who have fled back home without reporting their treatment or those who remain undetected and unhelped in miserable conditions, is a story of falling in the gaps. It’s the gap between having legal rights and having any idea what they are or any ability to access them; the gap between the deceit of a recruiter in one country and the very different reality of a job in Singapore, with no reach to pursue that injustice across jurisdictions. It’s the gap between the right to take an employer or agency to courts, and any possibility of being able to afford to stay and contest the case when there is no income coming in and a family to support at home. And more than anything, it’s the gap between Singapore’s free markets ideology and the grim practicalities of attempting to negotiate when poor, uncertain and locked in somebody else’s home.

A good place to start to understand the complexities involved is the debate about a day off. The employment legislation that governs the bulk of Singapore’s population requires a day off per week by law, but the section relating to foreign domestic workers does not. The government does require workers be given “adequate rest,” but that’s ambiguous, and workers routinely make themselves more marketable by waiving any expectation of a day off. Roughly 90,000 work every day, sometimes for 16 hours or more.

The right to a day off has been central to the Singapore activities of the United Nations Development Fund for Women (Unifem) – an organisation which, globally, received a US$17 million commitment from the Australian government last March. For them, a day off is not just about rest. “The reason I chose the issue of a day off for our public education campaign is because if a worker is abused, this is the one day she can make a report to her embassy, a helpline or the ministry,” explains Saleemah Ismail, president of Unifem in Singapore.

John Gee is president of Transient Workers Count Too (TWC2), a local society advocating better rights for migrant workers. “For workers who don’t get a day off, it definitely has an impact on their health, and it has an effect on their vulnerability to different forms of abuse,” he says. “We find workers locked in behind barred gates and blocked from using the telephone: so if you are not paid, how do you complain about not being paid? It’s too easy for an employer who is abusive to cover up.” As Liew puts it: “Things happen behind locked doors.”

Other groups see the situation quite differently. “It seems to be a common misconception that all FDWs want a day off,” says Shirley Ng, president of the Association of Employment Agencies, which represents 500 members and is one of two accreditation bodies appointed by the Ministry of Manpower to authorise employment agencies to place foreign domestic workers. “Many FDWs choose not to have a day off as long as there is monetary compensation. The reason is mainly financial as they want the additional cash and they cannot afford to spend for their meals and transportation on their day off.” Wages for domestic workers can be as low as S$300 per month; there is no minimum wage in Singapore.

Unifem’s research – it has interviewed over 3000 households to gauge fears and concerns, and will release its findings in March – appears to show some alarming attitudes in broader society. Unifem says common concerns include “If I give my maid a day off, she may have casual sex and contract sexually transmittable diseases”; “maids are here to work not to have a good time; if my maid wants to have a day off, she should go back to her country”; and “If she goes out on her day off, there will be nobody to look after my children”. It’s an attitude that troubles Ismail. “We, Singaporeans, need to ask ourselves why do we educated people, who enjoy at least a day off each week from our employers, not give the same to our domestic workers?”

Australia generally has little reason to involve itself in this debate as its citizens are not involved, but there have been instances of it demonstrating a clear position. Miles Kupa, who served as Australia’s High Commissioner to Singapore from 2005 to 2008 and is now deputy secretary of the Department of Foreign Affairs and Trade, sent a memo to all his staff while here instructing them that if they employed domestic helpers, they were expected to give them a day off.

The day off issue is illustrative of a broader concern about the position of domestic workers. “This idea of isolation, and reinforcing powerlessness on workers, it runs all the way through their treatment,” Gee continues. “Agents habitually take their passports off them when they enter the country.” Government leaflets containing helpline information are often confiscated too, by agents or employers. And employers have the right to cancel helpers’ work permits and send workers back to their home countries without practical means to appeal against wrongful dismissal.

Liew is also troubled by the implications of contracts on basic human rights. “Local regulations make it clear if you get pregnant your contract will be terminated,” she says. “This is an outrageous restriction. You cannot terminate a woman just because of a work permit condition.” There’s even the nature of Singapore architecture: each new condominium that springs up seems to have smaller and smaller rooms for domestic workers, euphemistically described as a “plus one” addendum to the number of bedrooms by local estate agents. Most are windowless storerooms, too small for anything but a child’s bed to fit inside.

Workers are also bearing the brunt of an unwelcome shift against them in the way that employment agencies are remunerated. Up until the 1990s, when an employer hired a helper, that employer would bear the agency fee and any related costs such as training or flights that may have been incurred in the worker’s home country before flying to Singapore. Since the Asian financial crisis, the norm has become to shift most of those costs onto the employee on a “fly now, pay later” system, meaning that the helper must pay back that debt before receiving any cash for herself. Ng says most workers lose about eight months salary to cover costs incurred in their home country – and if she changes employer before the end of a contract, the fee is likely to be topped up again. It’s worse still for male construction workers who typically work for a year before earning a cent. “AEA has, for many years, requested MOM to regulate this area, but to no success,” says Ng. “Our proposition is to fix the number of months of salary that can be deducted from the FDWs… Unfortunately, MOM believes in a free market philosophy and adopts a non-interference approach.”

One area that clearly is beyond the ministry’s control is the behaviour of recruiters in places like the Philippines. “Recruiters in home countries practically always make promises that are not kept,” says Gee. “They promise the wages are better, the working hours shorter. Some recruiters will give what they call a gift to the worker’s parents, maybe $100 or $200. It all seems to be free, but she’s not being made aware of the charges that are being added all the time.” Recruiters have also been widely reported to offer one contract in the home country, only to coerce the worker to sign another, much more damaging contract at either the departure or arrival airport, telling them the employment will not proceed otherwise. “They nearly always sign it and there is no going back then,” Gee says.

On top of all this, when wronged, it’s hard for a helper to contest a legal case when they have no income or place to stay. This was the genesis of HOME. Liew has one woman in her shelter, a victim of physical abuse, who has been in the shelter for more than one year waiting for the case to reach court; while she does this, she can send no money home. “Why is a charity like ours footing the bill for a prosecution witness?” asks Liew. (HOME receives no government funding.) Far more victims of abuse likely either leave the country without pursuing their abuse, or tolerate it in order to move on to another source of income.

That was the outcome for Lunita (name changed), a Filipino helper who broke out of her employer’s home and ran to a family in a neighbouring block of her condominium, complaining of having been assaulted and verbally abused, with bruises up her arms. The neighbour helped her draft a police statement and took her to the HOME shelter, whose staff took her to the police station to file a formal complaint.

The next day the police took her to the employer’s house to retrieve her possessions. The employer – who had been reported to police for assaulting a previous helper too – showed the police gifts she said she had bought for Lunita; the police, no longer convinced by Lunita’s story, elected not to press charges and returned her not to the shelter but to her agent. The agent made it clear the inconvenience she had caused and threatened to charge her an additional placement fee equivalent to several months wages, levies she avoided after agreeing to go back to her original employer, the one she alleged had assaulted her. She made her choice to make sure she didn’t lose her ability to send money back home. The bruises were still livid on her arms when she went back.

That’s where she is right now.

BOX 1: THE UNIONIST

The closest thing to a voice in parliament for this part of society is Yeo Guat Kwang, a man who wears many hats: an elected member of parliament, a director at the National Trades Union Congress, and chairman both of a consumer initiative and of the Migrants Workers’ Forum, a collaboration between his and other unions. You would call his a softly-softly approach; three times he punctuates a comment calling for improved migrant worker conditions with a remark like: “We are also a bit worried that local members will feel we are doing too much for them [foreign workers]”. Nevertheless he believes his group has been partly responsible for improving elements of work permit conditions, notably the standard contract for domestic workers, and in a nation without a tradition of political dissent or unfettered freedom of speech, perhaps this is how change is effected. His position is that of the unionist and worker, with the contract as the key to redress: “In Singapore’s law breach of contractual agreement is the easiest thing to pursue and I push for that,” he says. “To me as a unionist I say that’s what the workers want: they want damages, they want money. I don’t care if my employer goes to jail or is fined, the fine will go the government. As a worker, I want the money.”

BOX 2: Take it home

Few employers of domestic workers realise that their maids are not only supporting whole families at home, they’re also saving their economies.

Amando Tetangco is Governor of Bangko Sentral ng Pilipinas, the Philippines’ central bank. “Remittances are an important pillar of the Philippine economy and contribute significantly to its resilience,” he says. They do so by increasing the foreign exchange supply, which helps the country purchase imports and settle foreign currency obligations; by promoting higher consumption as the recipient families spend their money on goods and services like food and school fees; by generating employment as a consequence of that consumption; and by contributing to savings.

Tetangco estimates that between eight and 10 million Filipino workers live overseas. He suggests remittances from overseas Philippine nationals hit US$17.1 billion in 2009 and will be about a billion higher in 2010. That’s more than 10 per cent of the entire economy of the Philippines.

December 2009

Singapore wants its local currency debt capital market to be one of its many foundations as a regional financial centre. It’s doing fine, but it might be a surprise to learn that it’s not even southeast Asia’s most prolific corporate bond market – more was raised in ringgit in 2009 than in Singapore dollars, according to ThomsonReuters data.

“The primary market got off to a rocky start at the beginning of the year, mainly driven by a lot of caution,” says Clifford Lee, managing director and head of fixed income at DBS. “Funding was done for refinancing rather than added leverage and the general tone has been more defensive than anything else.”

Although full-year totals are likely to be down from their highs – S$15.235 billion was raised in 2008, whereas just S$9.87 billion had been raised in 2009 by November 19, according to ThomsonReuters – the signs are good for a broadening of the issuer base.

Lee believes in recent years the Sing dollar market has answered its critics. “Previously there were three criticisms of the Singapore dollar market,” he says. “First and foremost was that this market can’t absorb large size. We’ve proven that to be untrue,” he says, referring to a self-led S$1.5 billion hybrid tier one deal for DBS Bank in May, the country’s largest ever Singapore dollar bond deal. Other big deals last year – including a S$600 million hybrid tier one deal for Maybank – support his view. “That belief of constraint has been emphatically debunked.”

The second traditional complaint was that longer tenors could not be achieved. “The market has matured and 10 years is now commonplace,” says Lee. Shortly after speaking, DBS completed an inaugural S$660 million bond issue for Temasek in 20 and 30 year maturities, and has done other deals with 15 and 20 year maturities. “In fact there’s more demand there than for below 10 years,” Lee says. “We are cracking the maximum tenor glass ceiling: for government-linked names and high grade names in Singapore, that’s not an issue anymore.”

The third is the number of investors. Here, too, Lee has seen change. “DBS has been in the Singapore dollar bond market for many years, and previously when we did a transaction we would have maybe 10 to 15 investors within a transaction, maximum. Of them, five or six would be the anchors for every transaction.” Today, things have changed. “The last few public transactions we’ve done saw 60, 70, 100 coming in. It’s taken away from the situation where it was dominated by a handful of investors. It’s given price tension some development, and the secondary market trading is starting to pick up nicely, though it’s still not where it should be yet.”

A key theme in 2009 was the arrival of supranational issuers in Singapore dollars. KfW came twice, for just under S$300 million and S$200 million respectively; the African Development Bank raised S$310 million, and the World Bank S$230 million, all four deals coming within two weeks in August and September. Attracting multinationals does test the limits of the swaps market, but interest so far has been strong.

“The supranational issuance was probably 90% triggered by two things,” says Jan Wipplinger at Deutsche Bank. “Local treasuries of banks being long liquidity; and the MAS [Monetary Authority of Singapore], in regards to allowing AAA-rated supranational issuers and their bonds to be used in the same way as SGS local government bonds for minimum liquid asset requirements [see MAS interview, box]. All of a sudden, investors could switch out of government bonds into supranationals, and use that for the same purposes as government bonds before.” That, Wipplinger says, explains why all the supranational bonds this year have been three years in duration: “That’s where the best pick-up is offered: 50 to 75 basis points over government bonds.”

In previous years retail has played a role, particularly in tier one bank issues, although that has been less widespread in 2009. “In Singapore, the tier one space will come back again,” says Terence Chia at Citi. “In 2010 we should expect to see more such tier one issues either from the local banks or very strong, internationally-recognised names tapping the Singapore dollar market.”

Peng-Meng Ling at Standard Chartered notes there is clear appeal for retail in a low-interest, high-wealth market like Singapore. If a deposit account is paying 1% or less, then a recognizable name offering 5% for two or three years – a bank, perhaps – is going to find an audience. Ling highlights the strength of high net worth individuals as a key part of the Singapore investor base, active in deals for issuers like Hyflux, HPL, CDL and Korea Development Bank in 2009.

Still, retail here is not really the same force as in Thailand, in which buyers drop into their branch to buy a bond. “99%, if not more, of the bond offerings in Singapore have traditionally been offered into the QIB market, for qualified institutional buyers. It hasn’t been meant for mass retail as yet,” says Lee. “So-called retail participation comes in the form of private banks: priority banking-type customers, and they are governed by a minimum size of $250,000 per investment. From an arranger’s standpoint we still don’t sell directly into retail: we sell to private banks, and they sell to retail.”

Still, despite improvements, the Singapore dollar bond market is not all that it could be: lower rated names struggle to access capital. “Rating is still a constraint in the Singapore dollar market,” concedes Lee. Regulation in Singapore doesn’t require bonds to be rated to access the market, but going down the credit curve is nevertheless a challenge.

“We feel we’ve reached a point in the market where domestic investors are keen to see a return of a wider range of international issues,” says Reuben Tucker at ANZ. “But the Singapore dollar market has been exceptionally well balanced in terms of the types of deals seen here: well-known corporate, property transactions, and international issuers.”

Box: The MAS

The Monetary Authority of Singapore oversees the development of Singapore’s local currency bond market. The institution shares it views with IFR Asia on how it’s doing.

“Compared to five years ago, the Singapore bond market has steadily grown by more than 50%, with healthy activity seen from both the corporate and public sector,” says an MAS spokesperson. The authority says it expects healthy new corporate debt issuance in the coming year, in light of expectations of rising global interest rates. “Anecdotally, investment banks have also indicated healthy deal pipelines going into 2010.”

The MAS highlights its high turnover – one of the highest in Asia – and increasing liquidity, with tenors available from one to 20 years, and structured instruments increasingly commonplace. In 2009 it has also attracted increasing numbers of foreign issuers, particularly supranationals. “Foreign issuers make up approximately 30% of S$ debt issuance,” the authority says.

One of its more recent initiatives was to build an Islamic market. In January it announced its first sukuk facility. “It is unique in two aspects,” says the spokesperson. “First, issuance is on a reverse inquiry basis, which means we will issue sukuk according to the needs of banks in Singapore conducting Islamic finance. Second, the sukuk is priced against the Singapore government securities market to provide a transparent price discovery mechanism for these instruments.” The theory is that as the sukuk market grows in Singapore dollars over time, it will then develop its own pricing benchmarks.

“The design of our sukuk facility reflects our effort to tap the strengths of conventional finance, while adhering carefully to Shariah principles,” says the authority. The MAS says the facility has received “strong response”, and has issued tranches to the Islamic Bank of Asia (part-owned by DBS), OCBC and CIMB Bank. “We remain committed to the programme size of S$200 million.”

Additionally, the MAS says the private sukuk market has developed substantially since the facility was launched. City Developments Ltd set up a S$1 billion medium term note programme in January, with S$100 million issued to date, while the Islamic Development Bank issued S$200 million of sukuk via a private placement in September.

One of the biggest impacts the MAS has had on the market this year was the enhancement to its treatment of high quality collateral, allowing AAA-rated Singapore dollar debt securities from supranationals, sovereigns and sovereign-guaranteed companies to be used as collateral to access central bank liquidity. Banks are also permitted to treat these securities as tier two liquid assets with the same (zero) weighting as Singapore government securities.  “These measures, and the issuance that followed, helped banks to diversify their holdings of liquid assets, in the process strengthening financial stability in the banking sector by growing available high quality assets in the banking system,” says the MAS. Since the implementation of the framework, the market has gained about S$2 billion of new issues from triple A rated issuers.

At the APEC meeting in November, Euromoney put a question to host nation Singapore’s Prime Minister, Lee Hsien Loong, who had spent part of his morning in talks with Barack Obama. The Obama administration, we said, was getting tough on private banking centres over client confidentiality and bank secrecy, most obviously Switzerland. Is that scrutiny coming to Singapore too, and what’s the impact on Singapore’s private banking industry – a mainstay of its financial services success story – if it does?

Lee told us it hadn’t featured in discussions with Obama. He underlined Singapore’s “high standards of probity and integrity”, and revealed that Singapore had now signed enough double taxation agreements with other jurisdictions to join the so-called “white list” the OECD keeps of countries that show an acceptable degree of international cooperation on tax matters. “I do not think it is a burning issue for us,” he said.

We’re not so sure about that. It’s true that the tax information-sharing deal signed with France, the 12^th such link, does take Singapore off an unappealing-sounding grey list held by the OECD (though notably the US is not among the countries with which it has signed agreements). But the pressure meted out to Switzerland in the last 12 months shows us the future for private banking in Singapore just as much as Zurich.

It’s not really just about tax. One of the most uncomfortable truths about private banking in Singapore is the origin of some of the money that resides there. Many senior Indonesians believe a lot of money that rightfully belongs to that country sits in Singapore; convicted white collar criminals who are believed to have lived and banked in Singapore include Bambang Sutrisno, Andrian Kiki Ariawan and Sudjiono Timan, all of them convicted of embezzlement of over Rp1 trillion apiece with the first two each given a life sentence. There is also discomfort about the support the private banking industry may have provided to Burmese leaders. After a stand-off in 2007 in which Indonesia briefly refused to sell Singapore any more sand (a crucial commodity in a place that has none of its own and needs tons of the stuff for land reclamation and construction), an extradition treaty was begrudgingly inked, allowing Indonesia more confidence that embezzled funds won’t now fly so easily to Singapore again. This, too, is the future: less safe harbours for funds of dubious provenance; less havens for tax avoidance.

The odd thing is that these trends have been coming together for years and Singapore has actually done very well out of them to date. Middle Eastern capital started to flow to Singapore after 9/11, whether in fear of greater scrutiny of accounts in the US and Europe or in protest at the conflicts that followed it. Some bankers report they have benefited from the alarm among private clients in Switzerland over the gradual and apparently inevitable erosion of secrecy there. It’s been a short term gain. But sooner or later, this attention is coming to Singapore too.

Happily, Singapore these days has more than enough going for it to remain a viable, indeed leading, private banking hub regardless: friendly business regulation, all the right banks represented, ease of doing business, efficiency and infrastructure. A cleaner reputation will be to its benefit. But don’t be surprised if some big redemptions start cropping up as money moves again, to more obscure locations, in order to stay further ahead of international attention. Make no mistake, Prime Minister, international scrutiny is a burning issue.

China Investment Corporation gets the headlines in Asia these days, but the elder statesman of Asian sovereign wealth funds is Singapore’s Temasek, founded in 1974 with a government seeding of 35 company holdings from a detergent maker to a bird park. These days its portfolio is worth S$172 billion, even after some humbling errors over the last 18 months, and it claims a compound annual total shareholder return of 16% since inception.

It is a curious situation, but the person who has overseen a transformation in Temasek’s professionalism, disclosure and sophistication is a person who should, on paper, exemplify conflict and a lack of qualification: Ho Ching, who quite apart from having joined from the unpromising background of the Ministry of Defence is also the wife of prime minister Lee Hsien Loong. But it is under Ho’s watch that Temasek has become an institution that scores highly on independent indices of sovereign wealth fund transparency around the world. It doesn’t disclose everything, but its detailed annual reviews frequently top 100 pages and are an open book compared to sovereign funds in the Middle East. Also under her watch has come a compensation system tied to performance which resulted in slashed pay and bonuses for senior executives last year. She answers to a board containing only one member in a direct government position, with a varied roster of other members that balances locals with executive director Simon Israel, formerly at Danone Group, and Marcus Wallenberg of the Scandinavian SEB Group.

For any sovereign fund there is a challenging balance to strike between public utility and commercial enterprise; the more so since Temasek remains a major shareholder in iconic Singaporean companies including Singapore Airlines, DBS and CapitaLand. But Ho is increasingly strident about what Temasek should seek to do. “We don’t see our role as shoring up anybody,” she says. “We see our role as getting a return and if there are opportunities for return, we will be there.”

While Ho and her team’s approach and performance reflect the growth in ability and power of emerging market sovereign wealth funds, it’s not all good news, especially lately. Ho’s time has seen the company suffer from its association with the Singapore state, most obviously in the acrimonious purchase of a stake in Thailand’s Shin Corp; and not only get burned in untimely purchases of Barclays and Merrill Lynch stakes but to sell them at the bottom of the market. Moreover, if all had gone to plan she would be in her final weeks as you read this: former BHP Billiton chief executive Chip Goodyear was supposed to take over in October, but in a still unexplained decision the two parties went their separate ways suddenly in July, raising doubts about Temasek’s receptiveness to new ideas.

This last, and Singapore’s opacity about the reasons, has dented Temasek’s improving reputation for openness, but Ho can still point to market-beating returns over almost any timeframe – and it is instructive that the duff investments during her tenure have been in the developed world. “We felt there could be a downturn… but we were looking at the triggers in the wrong places and part of the reason is because we made the assumption that the developed economies, particularly the large economies, are well managed and the regulatory risks are low,” she says. “Going forward today, we pay a lot of attention to what is being said and done in the US.” For the future, a burnt Temasek is going to cut the developed OECD to just 20% of its portfolio and stick to what it knows: 70% in Asia including Singapore, and a further 10% in other emerging markets. That, it seems, is where the opportunities are, and the markets the fund knows best.

To see the article as it ran, click here: GFPsupplement 2

Across debt, equity and lending, Olam has been one of Asia’s most active issuers and borrowers in 2009.

It all stems from a change in long-term strategy. Singapore-based Olam is active in agricultural commodities – it is, for example, the world’s largest supplier of cashew nuts and among the leaders in cocoa, cotton, teak and rice – and its model is to be involved across the supply chain wherever it’s profitable to do so, from the farm gate to the consumer. It has so far done this with a very asset-light model, which works roughly like this: a predictable 2% net profit margin on an average of three times asset turnover, net debt equity of about three to one, equating to roughly 24% return on equity.

CEO Sunny Verghese says that the change in funding approach accompanies the latest six-year corporate strategic plan for the company, announced in August 2009, which seeks to increase the company’s intrinsic value fourfold over that timeframe. Doing that under the existing model would mean a dramatic increase in the scale of the business, the total capital and equity. “We said that doesn’t make sense, particularly if our view of the future is of a potentially capital constrained world with sub-par growth,” says Verghese. Instead, he intends to reach the target by increasing margin profiles. The group’s acquisition of over 8,000 hectares of almond orchards and water rights in Australia from Timberland for A$128 million in September is an example: it pushes Olam upstream to a higher margin business. “We’re trying to find upstream opportunities in locations where we believe growing a commodity will have a sustainable cost advantage,” he says.

Verghese says that doing this will change the capital structure from its position today, with 82% in current assets such as inventory and receivables, versus 18% in bricks-and-mortar fixed assets, to potentially a 60-40 or 65-35 split. “We will therefore need more long term money than in the past, which is the reason we went down the various capital raising initiatives we executed.”

The first of these was a US$300 million equity raising from Temasek, the investment arm of the Singapore state. Next came a convertible bond, which raised US$400 million and was upsized by a further US$100 million (again in a placement to Temasek) in early October. And alongside that, Olam has raised US$540 million of three- and five-year amortising loans. Add to that some short term Islamic money and “in the last two-odd months we have raised about US$1.016 billion of equity, seven year and five year money, and US$424 million of short term funding,” says Verghese. “That gives us quite enough financial flex to execute our plans over the next three-year cycle. It also signals to the market that it is quite unlikely we will do additional equity or equity-linked financing in the next three years,” though he says “on the debt side there could be more, particularly on the long end.”

The convertible issue, the first seven-year convertible from an unrated issuer anywhere in the world, was a little fraught. Lead managers JP Morgan and Standard Chartered went out aggressively, offering a yield to maturity of 5.4% and a conversion premium of 28%. Unfortunately, Verghese says, the leads had assumed that stock borrow on Olam shares could be achieved at about 2% – yet when it came to the deal the stock borrow appeared to have dried up and what little was available was going for at least 4%, thus ruining the mechanics of the deal. “Typically the hedge funds and convertible arb funds that come in at the beginning stayed away because they couldn’t hedge their equity exposure, as the stock borrow was not available,” Verghese says. “We found no traction available so had to make a mid-course correction.” They didn’t want to budge on size or tenor so the yield went instead, up to 6%, with the conversion coming down to 25%. On top of that, the managers effectively put their own fee in and offered the bonds at 98, giving an effective yield of 6.3%. “We received an overwhelming response and it got lapped up,” says Verghese – but the leads made no money on it. Perhaps due to that sacrifice, Verghese makes great effort to be charitable about the leads, saying “they managed that process extremely well” and that the behaviour of both the bond and the stock borrow since then suggests that they were actually right about the market, just stymied by temporary instability.

Olam is a Temasek favourite: the sovereign wealth fund was involved pre-IPO, sold out at a handsome profit, and has now come back in again, reflecting the agency’s desire to play a more active role in commodities. “We definitely welcome them, not just for their financial involvement but their active involvement in the board,” says Verghese. “It’s mutually beneficial.”

Author’s note: this is the filed version. For the published version, click here: Sovereign Wealth-r4 (2)

Those who saw Chip Goodyear in Singapore in July describe a man keen to get on with things, enthused by his pending new position. Still three months ahead of his start date as CEO of Singapore’s investment arm Temasek, but by now installed on the board, the former BHP Billiton chief had already met at least half of the major Temasek-held companies. “There was nothing to suggest anything was coming,” says one.

But by the afternoon of a July 21 board meeting, it was all over. A press release announced that, four months into the leadership transition, the board and Goodyear had “concluded and accepted that there are differences regarding certain strategic issues that could not be resolved” and terminated the handover. Ho Ching, Temasek’s CEO since January 2004, would not step down after all.

And that’s pretty much all that’s been said. When the issue came up for discussion in Singapore’s Parliament, finance minister Tharman Shanmugaratnam – the key representative of Temasek’s only shareholder, the ministry of finance – put it straightforwardly. “People do want to know. There’s curiosity,” he said, when asked about the circumstances of the departure. “It is a matter of public interest. But that is not sufficient reason to disclose information… It will not be advisable, nor in the interest of Temasek or Mr Goodyear, for us to have to comment further on it.”

Asiamoney had another go at it at the Temasek results briefing in September. Can you give a single example of something you won’t be doing that Chip Goodyear wanted to do, we asked? “I can’t think of anything,” said Ho Ching. Then why, we asked, is he not here, if there was no major strategic difference between you? “This is a matter between him and the board.” When Asiamoney contacted every member of that board, they passed inquiries back to Temasek itself and declined comment. Goodyear himself has spoken once, when asked about his departure at the CLSA investment conference in Hong Kong; “differences of strategic vision was the best way to put it,” he said.

So what was the point of difference?

Informed observers think it came down to a general acceptance that they were working at crossed purposes rather than a single practical point, and was about general principles of management, not a particular deal or event. The transition period was a long one, from Goodyear’s appointment to the Temasek board on February 1 and to CEO-designate on March 1, through to his intended succession of Ho on October 1; he was actively involved throughout this time, as executive director Simon Israel confirmed to Asiamoney in September. “When Chip came on board, as part of his integration into Temasek, he became involved in a number of ongoing initiatives, and played a leadership role until the time that he left us,” he says. Asked to be specific about any he initiated, Israel said: “Broad initiatives around organization, around processes, around how you make decisions.”

While the long transition period always looked curious, it was long enough time for it to become clear that the changes Goodyear wanted to make were different to those the board was comfortable with. It is understood that this varied from a general sense of increased discipline that Goodyear tried to bring, to specific recommendations about the senior management structure. In particular, many people believe that he wished to sell down holdings in some key Temasek-linked companies, and that this was a sticking point (particularly since past and present executives and directors of some of the bigger member companies, including DBS, Singapore Airlines, Singapore Telecommunications and the unlisted port operator PSA, are on Temasek’s nine-person independent board today).

There are other explanations being mooted. His enthusiasm to sell down financials and get into resources gets mentioned, but that was surely exactly what he was brought on board for in the first place given his resources background; there is a rumour a key Chinese institution objected to him because of his background with Australian mining, but that shouldn’t have had a big impact on an investor like Temasek; some say he hoped to introduce leverage into Temasek, which of itself would surely not be enough of a dispute to bring down the deal; and others believe the objection came from higher in Singapore’s hierarchy, but such a senior veto would surely have been made ahead of his installation. Instead a number of things appear to have contributed to a sense of divergent ambitions, which came to a head in the July 21 board meeting.

In practical terms, Goodyear’s departure is not likely to make all that much difference. Temasek had already set some clear directions for itself even before he joined, notably a new geographical allocation of 40:30:20:10, for Asia, Singapore, OECD and “other” (chiefly Latin America) respectively. This represents a move away from a previous target of one third Asia, one third Singapore and one third OECD – in other words, an overweighting of Asia and other emerging markets at the expense of the developed world. Doing that surely doesn’t need Goodyear’s expertise: while he’s known for his connections in China, his professional life has been spent in developed world corporations, albeit ones with significant emerging market expertise.

Also, while Goodyear was expected to bring a lot of knowledge about the resources industry to Temasek, the company has been actively getting involved in that area anyway. In June it paid S$438 million for a 13.8% stake in Olam International, which is chiefly a soft commodities business. It has also bought a stake in the unlisted Chinese iron ore producer Lung Ming, in partnership with the Beijing-based private equity vehicle Hopu Investments; 15.4% of the Brazilian oilfield services company, San Antonio International; and 19.5% of Korea’s EKN, which as a manufacturer of compressed natural gas cylinders is an indirect commodities play too. New offices have been opened in Mexico and Brazil in the last 12 months and are likely to focus on energy and resource investments.

Observers who follow these funds closely are consequently not concerned about the change from an execution perspective. Edwin Truman, senior fellow at the Peter G Peterson Institute for International Economics, says the situation “is nice copy, but if you hire a new CEO into a complex organisation like Temasek and it turns out his or her image or vision of what they want to do turns out not to be consistent with what the board wants, the sensible thing is not to try to live with the problem but cut your losses and go your own way.”

Instead, the loss to Temasek in the Goodyear situation is in how it looks. To understand that you have to see why he was appointed in the first place.

In most respects Ho Ching is agreed to have done a good job since stepping up to the CEO position in January 2004. If we start judgement on her tenure in March 2004, when she entered her first new financial year in the job, Temasek has delivered 83% cumulative returns between then and July 2009, compared to 58% for the MSCI Asia Pacific ex-Japan and -3% for the MSCI World. There’s room to quibble with Temasek numbers, since 28% of its assets are unlisted and therefore hard to value accurately, but broadly performance has been impressive.

Ho has overseen some troubling episodes: the acquisition of a majority stake in Thailand’s Shin Corp, controlled by the Shinawatra family, put it into a major political storm in Thailand when Shinawatra lost power there, and the political associations of Temasek as an arm of the Singapore government can clearly fuel antagonism in southeast Asia. Then came the Merrill and Barclays purchases. Temasek was far from being alone as a sovereign wealth fund that bought into foreign investment banks at the wrong time, but what set it apart was selling out again, at or near the bottom of the market, and so incurring several billion dollars of losses (it’s not clear exactly when the sales were made and therefore the precise loss). Other investors, notably Singapore’s other sovereign fund GIC, have held their nerve and made money from Western banks – GIC realised a $1.6 billion profit on a sale of Citi stock in September. There may be some redeeming circumstances – around the same time as the bank sales, Temasek put money into a number of rights issues including CapitaLand, which has almost trebled since then and so may have represented a better use of those funds than sticking with troubled banks. But the bank sales were clearly the investment low point under Ho.

Yet the handful of people prepared to comment on Temasek (and there really aren’t many: Asiamoney approached nine international banks to comment on the Temasek result and all declined, mostly within seconds of getting the request and often with some incredulity) defend Temasek on performance grounds. “I think they went through what every other money or fund manager experienced,” says David Cohen, an analyst at Action Economics in Singapore. “Maybe they had their own embarrassment with Merrill Lynch, that’s probably the one they wish they could take back. But they’ve rebounded with everyone else.” Temasek’s full-year numbers for 2009 (i.e. up to March 31) looked ugly, with a 42% loss in net portfolio value in a year from S$185 billion to S$130 billion and a 66% drop in group net profit from S$18 billion to S$6 billion. But its portfolio is already back up at S$172 billion as at the end of July 31 – so 93% of its 2008 high. In the long run this is going to look like a blip.

So performance was not the reason Ho was to be replaced with Goodyear – besides which Ho says the board has been evaluating short and long-term potential successors every year since 2005 anyway, well before the Merrill investment. Instead, this is about governance and – more than anything – appearance.

Understanding this requires a detailed look at some of the changes that have taken place at Temasek in recent years, and particularly under Ho’s watch. Although Temasek compares favourably with many of the world’s sovereign wealth funds in terms of transparency (the Peterson Institute’s most recent ranking in 2008 placed it 18^th of 34 sovereign wealth funds overall, 15^th on governance and 11^th on accountability and transparency), and publishes far more information in its 100-page annual reviews than it is required to as a private company, there is a complication. Although Ho has improved transparency, accountability and professionalism at Temasek, it doesn’t look great that she is married to prime minister Lee Hsien Loong.

“They have to be apolitical but then they have the prime minister’s wife running the fund – I think it’s a little bit awkward,” says Cohen, though he doubts it impacts the fund’s management. Simon Israel addressed this issue in an interview with the author in 2007. “I think that’s a fair question,” he said then. “It’s a fact that Ho Ching is the wife of the prime minister. But… at the end of the day Ho Ching is answerable to the board of Temasek and I want to emphasise the independence of that board. The board signs off on the major strategic investment decisions. There is absolutely no link to the government.”

But the appearance of cosiness with the government may have been one of the reasons Temasek wanted to appoint Goodyear, because even if the group was in truth being managed independently, it looked better to have someone else in charge – and a western foreigner with a background in private sector enterprise, so much the better.

This, again, is important to see in the context of the time. In 2007, when Temasek was clearly looking in earnest for potential successors, there was growing concern about sovereign wealth funds, as more and more Middle Eastern and Chinese institutions bought western assets. In the US and European Union there was growing pressure to increase scrutiny of these funds. So Temasek started to get the message out that it was very different to its counterparts in the Gulf which disclose nothing at all, in the hope that if more rigorous regulation were to come into effect, it would differentiate between them.

It is interesting that the decision of Goodyear and Temasek to part ways has come at a time when this sovereign wealth debate has faded into the background through the global financial crisis. Regulators have other things to worry about and it will be a while before attention returns to this theme. At the same time, it has started to become clear that Singapore would prefer a Singaporean boss for Temasek. Tharman made some telling remarks in parliament. “The question of whether the CEO of Temasek should be a Singaporean is not a trivial one. It is one which Cabinet considered very carefully and debated on before arriving at a decision,” he said. “I would say that ideally we should have a Singaporean as a CEO.”

That remark appears to run at odds with claims of Temasek’s independence, though he subsequently qualified it: “The board knows our preferences, but it knows also that the government wants to ensure that Temasek gets the best person for the job each time it looks for potential CEO successor…. To restrict their choices would also be sending a signal, not just to Singaporeans but more importantly to the countries in which Temasek invests in, that there is an element of political decision making in the way Temasek is run. We do not want to send this signal.”

There’s nothing particularly unusual in this – most sovereign wealth funds are run by nationals – but it does suggest Singapore is not thrilled by its experience with foreign techniques, and that the urgency to bring them in, with their appearance of governance and worldliness, has diminished. This is not surprising in the aftermath of a global financial crisis that was triggered and exacerbated by supposedly well-governed western institutions like Merrill Lynch. Goodyear’s old employer before BHP, Kidder Peabody, is now part of UBS, which didn’t exactly cover itself in glory in the crisis.

It also raises the question about what happens next with succession – because it doesn’t look good for any corporation to find itself in a leadership vacuum, with a CEO who was about to depart stepping back in until a better successor is found. This is at the heart of the Goodyear situation: Temasek would look so much better if the whole thing had never happened, rather than a situation in which it has appeared to move forwards then back before ending up with the same team it started with.

And this apparent shift in attitude towards foreigners may have an impact on one person in particular.

Because, after all, why wouldn’t Simon Israel be the next CEO? He made his name as the Asia Pacific chairman of Danone Group over 10 years, after 22 years at Sara Lee Corporation across Asia. He’s been working inside Temasek as executive director day in day out for more than three years and is as much a local in Singapore as any foreigner will ever be – he chairs the Singapore Tourism Board and a locally based multinational, Asia Pacific Breweries, is a director of three of Singapore’s blue chips (Fraser and Neave, Neptune Orient and SingTel), and is on the business advisory board of the Lee Kong Chian Business School at the Singapore Management University. He has taken citizenship. Perhaps most importantly, he is respected within and without the organisation and is a perfect bridge between Temasek and the western enterprises – be they government, corporation or media – who seek to understand it.

He may not want the job. But if Temasek want a quick and logical way out of this perception of uncertainty, and to allow Ho to step aside as she appears to wish to do, it’s staring them in the face. That is, unless the Goodyear experience has really burnt the bridges with Temasek to such a degree that there’s no longer room for a foreign leader.

BOX: A questioning voice

One outcome of the Chip Goodyear situation has been an uncommon vibrancy of discussion in parliament. The most outspoken has been Inderjit Singh, a member of the ruling People’s Action Party, deputy government whip and the member for Ang Mo Kio in Singapore’s residential heartlands.

He tells Asiamoney he believes Temasek “did what it had to do” and handled its information flow “the way a professional organization should”, but thinks the government’s response has been insufficient. “I think the minister for finance should have given a better explanation to parliament. The only public channel for us to know what is happening to our reserves is parliament… These days Singaporeans would like to have more questions answered.”

Singh feels the Goodyear situation “has definitely created a dent on Temasek’s reputation because when Chip was selected we were all told how thorough the process was and that every board member was involved in interviewing Chip. Then despite this so-called very comprehensive search and selection process, it failed so quickly. So the first question everyone has is, how good really are the processes in Temasek and how well is the board managing Temasek?” Singh asked in parliament if the minister would ask Temasek to review its selection process “so that they don’t make the same mistake again… Unless the people know more about what went wrong, they will continue to speculate and have doubts about the processes in Temasek and between the Ministry of Finance and Temasek.”

Asian real estate has followed up an epic plunge with an equally dramatic rebound. Extraordinarily, deep in a global financial slowdown, there is even talk of a bubble in the residential property markets of China, Hong Kong and Singapore.

It’s quite a difference compared to the mess of 2008 and early 2009. According to CB Richard Ellis, the real estate services group, Asian property investment sales fell 83% to US$3.1 billion in the first quarter of 2009 compared to the same period a year earlier, with Japan, Singapore and Hong Kong suffering the biggest falls; investment turnover for industrial and office property fell 95% and 89% respectively. Many listed property stocks halved in value last year: indeed, the average real estate investment trust (REIT) in Singapore fell 54% in 2008.

While few property stocks have recovered all their losses, they have bounced impressively from their lows, to the point that analysts are already starting to wonder if there is any value left. “Asia Pacific listed property is relatively expensive,” says Matt Nacard at Macquarie Research, who says the sector is now at just a 3% discount to net asset value (NAV), compared to 8% outside Asia, and is now trading at 19 times 2009 earnings. The MSCI Asia Real Estate Index rose 47% in the second quarter alone.

So how has this happened? It depends on the market, but there are some common themes. “This revival in property prices has been mainly driven by the abundance of liquidity in countries such as China and Hong Kong,” says Keith Chan, an analyst at HSBC Global Research. China is probably the clearest example. As our special report on banking in China on page xx explains, the RMB4 trillion government stimulus package there has triggered a vast increase in lending by Chinese banks, with most of the bigger banks showing year on year loan growth of around 30%. Lending like this naturally helps the property market, as well as generating earnings revisions. Says Nacard: “In the absence of cooling measures from the authorities, this leads to a powerful positive combination.”

China also has some unique characteristics. “In China investment alternatives are very limited: it’s either the residential property market or the listed market,” says Kenneth Tsang, head of Asia Pacific research and strategy at LaSalle Investment Management. “And the underlying fundamentals: demand has always been very strong in China because of the growth in income, GDP and productivity. They are long term drivers for the China market.”

Consequently, just months after a period in which the real estate market seemed to be dragging down China’s economy, it is booming again, at least on the residential side. According to data from the National Bureau of Statistics of China, national residential sales were up 54% in volume and 82% in value in June year on year. Eastern seaboard cities, particularly Beijing, led the growth. According to Morgan Stanley, listed property developers in China have achieved an average of 63% of their full year sales targets in the first half of the year, “setting the stage for a potential upward revision of their target during the interim result announcements”. Also, despite the bounce back, Morgan Stanley believes affordability in China “remains at a healthy level, with property prices at six to eight times annual income, or monthly mortgage payments at 40-50% of monthly household income.” This suggests support for further growth. Correspondingly, developers are now actively bidding for new land in China, trying to get prime sites cheaply before the market recovers.

Similarly, in Hong Kong too, liquidity is driving residential prices up, despite the fact that rents are falling. Partly it has to do with government stimulus in Hong Kong itself, but also China is having a big influence. “We are seeing increased inflows from China into Hong Kong,” says Chan. “In the past, buyers from mainland China accounted for less than 5% of the property purchases in Hong Kong. Nowadays 20 to 30% is the norm.” So, when China receives a huge boost to liquidity, it is felt in Hong Kong property too. “I won’t be surprised to see property prices continue on this up trend in Hong Kong,” Chan adds.

Singapore, too, is suddenly filled with talk of price bubbles, which seems remarkable in a recession-hit country that expects its economy to shrink by between four and six per cent this year. Residential rents have halved, and yet the purchase price of the properties themselves is soaring to the point that the government is openly discussing overheating. National Development Minister Mah Bow Tan was quoted in state media in July as saying: “I wouldn’t say there’s excessive speculation at the moment, but there is some element of speculation involved. I think some of the practices that you saw in the last property boom are starting to come back. So I think we’ll have to be careful.” He also said: “I would say that there is more than sufficient supply over the next couple of years and it’s a bit too early to say whether there is a speculative bubble or property bubble building up.”

But analysts seem less enthused about the prospects in Singapore’s real estate markets than Greater China’s. Macquarie expects a 20% fall in residential prices this year.  Morgan Stanley analyst Melissa Bon calls the valuations of Singapore’s listed property developers “fundamentally unjustifiable” and has an underweight recommendation on big developers like CapitaLand, Keppel Land and City Developments.

The office market in Singapore has been particularly badly hit: CB Richard Ellis said it hosted the worst office rental contraction in Asia in the first quarter, down 34% on the previous year, and Macquarie expects a 38% fall in office rents in total this year. Indeed, across the region the office market has not enjoyed anything like the ardor that residential has. “Office is a different picture,” says Chan. “In top tier cities in China office values have dropped 15 to 20% from the peak of last year.” In Hong Kong the office market suffered in the first quarter – the 25% drop in office rents compared to the previous quarter was the worst Macquarie had seen since it started keeping records in the 1980s – but Chan says the limited supply in places like Central (Hong Kong’s CBD) help to maintain stability.

Tsang agrees. “Supply for commercial real estate in Hong Kong is not an issue: not much is coming and we are not anticipating very high vacancies.” This is in contrast to Singapore where a lot more supply is still due to come on to the market, “which may delay the recovery process.”

Nevertheless, things have clearly improved, but analysts and fund managers are mindful of how quickly things can change. Morgan Stanley’s Derek Kwong, in a recent report on Hong Kong, notes: “While we are upbeat about the benefit of escalating asset prices on the back of ample liquidity, there is always the risk of its exit.” He adds: “We are certainly mindful that the bull case is not dissimilar to a bubble situation.” In China, where momentum and mood have such an impact, there are a number of things that could reverse sentiment: the authorities may seek to rein in lending or implement a round of tightening by raising rates and reducing the attraction of debt; or a round of corporate earnings downgrades could also reduce confidence.

The global financial crisis put a serious dent in the REIT market, which had otherwise been flourishing up to 2007. Asian REITs suffered their deepest ever fall in the second half of 2008, with their market capitalization falling by almost one third to US$48 billion, according to CB Richard Ellis. Only one new REIT has been launched in Asia in the last 12 months – Centra Hotels & Resorts Leasehold Property Fund, in Thailand in October – and many existing ones struggled to raise funds to meet short term debt obligations. New City Residence, listed in Tokyo, was the first to be wiped out, filing for bankruptcy in October 2008 (see Japan box). In other cases REITs were offloaded in order to help shareholders improve their own positions: Allco Finance Group sold its stake in AllcoCommercial REIT to Frasers Centrepoint; Malaysia’s YTL bought a 26% stake in Macquarie Prime REIT from Macquarie, and renamed it Starhill Global REIT.

At its worst, there was real concern about the very viability of the REIT model, although that moment appears to have passed. “The model was under a lot of pressure when yields were 8, 9, 10%,” says Arjun Khullar, managing director and head of equity capital markets for south and southeast Asia at JP Morgan. “It’s difficult to make an accretive acquisition then. Now some are at 5, 6%, it is much easier to do.” Many of the bigger REITs that needed to recapitalize were able to do so, notably Ascendas REIT, Singapore’s biggest industrial property trust, which raised S$300 million in January in the first successful recapitalization, and CapitaMall Trust, part of the CapitaLand family, which managed to raise S$1.23 billion in a rights issue in February. “S-REITs have not disappointed in terms of refinancing their debt,” says Bon. “Indeed, they recapitalized ahead of our expectations.”

Singapore is ex-Japan Asia’s biggest market for REITs, with 21; Hong Kong, which started trying to attract REITs later, has only seven. Other, smaller markets exist in South Korea, Taiwan, Thailand and Malaysia. The Philippines and China have both spoken about launching REIT markets, with legislation already underway in Manila. Since the Philippines boasts three of the region’s blue chip developers in Ayala Land, SM Prime and Megaworld, it is a natural home for REIT structures.

While it’s clearly going to be some time before any new REITs are launched, existing ones may return to the markets. “We’re likely to see more REITs raising money again,” says Khullar. “A-REIT and CMT [Ascendas and CapitaMall], earlier this year, were defensive plays: they were raising money so that if the world did end, they would still be able to stay standing. Now valuations have come down, I think REITs will look to raise money for more aggressive reasons: for acquisition.”

BOX: Japan

Japan’s property markets have slumped with the rest of that economy. According to Mizuho Trust and Banking, real estate transactions more than halved in value and volume in 2008, particularly because J-REITs, Japanese real estate investment trusts, have not been buying. “The J-REIT market is still stagnant in terms of property acquisitions, given that most of the J-REITs’ balance sheets are geared up to their respective self-imposed maximum levels, and concerns about financing and potential bankruptcies had brought down most JREIT share prices substantially below their book values, essentially closing the door for equity raising,” says Macquarie in a recent report.

Japan was where REITs first started to come unstuck, with New City Residence being the first in the region to go under in October 2008. Things have picked up in the second quarter, though. The government has brought in measures to try to temper concerns about bankruptcies, including the provision of loans through the Development Bank of Japan, and eased tax transparency requirements around M&A (making it easier for one J-REIT to acquire another at a discount to its NAV). Also, new sponsors are being found for those J-REITs whose existing sponsors have already applied for bankruptcy. Most recently Daiwa Securities announced in June it would become the new sponsor of DA Office; other JREITs including Nippon Residential, Nippon Commercial and Joint REIT, were expected to appoint new sponsors at the time of writing.

Despite the trials of the markets, Tokyo is not officially the most expensive place in the world for office space, according to CB Richard Ellis: US$183.62 per square foot per annum, edging out London’s West End and Moscow. Despite that, vacancy rates have continued to rise in Tokyo; Macquarie expects a 9% peak within the next two to three quarters.

BOX: Asia’s blue chips

Asia’s blue chip companies are emerging from financial crisis, sometimes scarred but generally intact, and ready to take on opportunities as they arise.

The Dow Jones Country Titans indices, which measure the performance of the biggest and best known companies in each country, tell the story. Its China 88 index is up 92.5% year to date, while Singapore’s is up 48.4%, Hong Kong’s 43.7% and South Korea’s 41.1%. Compare this to the world’s old guard: the UK’s blue chips have gained just 5.4%, Germany’s 6.4% and France’s 8%.

Partly, this is because Asian markets fell irrationally far in the first place, particularly given that their banking systems were largely immune from the problems that blighted those in the US and Europe. The fall was a consequence of capital behavior: as times turned difficult for US and European fund managers, they tended to bring money home in the belief that it was safer to do so. This exit of foreign institutional capital more than anything else hit Asian markets so hard.

Now, though, some common sense is returning. Economically Asia has the best prospects, given the scale of its population steadily growing in wealth, bringing with it demand for goods and services that can’t be matched elsewhere in the world. As it is, GDP numbers in many Asian markets remain highly impressive despite their decline – China may well log 8% GDP growth this year. Generally, Asia’s populations are characterized by high savings, and those in weaker Anglo countries by higher debt. On top of that, Asian banks and companies, have learned lessons the hard way from the Asian financial crisis in 1997-8, have tended not to be highly leveraged; the banks in particular have been run with greater conservatism than many US houses in particular, and it could also be argued they were protected by a lack of sophistication from owning things like collateralized debt obligations which caused such trouble elsewhere.

Those fundamentals are coming back into focus for analysts and investors. “Expect Asian markets to outperform in the next five to 10 years,” says Shane Oliver, chief economist and head of investment strategy at AMP Capital Investors. And the biggest companies, since they have the easiest access to capital when bond and stock markets regain their liquidity, are also in the best position to acquire other businesses.

From the investor perspective, much of the easy gains may already have passed: Oliver, speaking to Institutional Investor in July, points out that most Asian markets are already trading around their long-term price/earnings ratio averages despite the fact that most of the world is still technically in recession. Nevertheless, he thinks that five to 10 year projected equity returns are higher in ex-Japan Asia (11.6% per year, 3.6% of it coming in dividend yields) than anywhere else in the world – he projects just 6.4% for Europe, for example. Besides, very few stocks have recovered so far as to be higher today than they were 12 months ago: while a handful have done so, such as China Life, Posco, CNOOC and Sun Hung Kai Properties [NOTE to EDITOR: this is based on August 6 closing prices], even some of the most resilient portfolio stalwarts are still under water over the last 12 months, among them PetroChina, Hutchison Whampoa, Taiwan Semiconductor Manufacturing, Industrial & Commercial Bank of China, China Mobile and Shinhan Financial. This suggests there is still value available.

So what now for Temasek? Chip Goodyear’s curious decision to step down from the chief executive role several months before he was even due to commence it raises a number of questions about the direction of Singapore’s state investment arm.

Assessing the impact depends on what you think Goodyear was appointed for in the first place. If it was to bring resources nouse and a change of asset allocation to the sovereign fund, well, that’s actually been underway all year anyway. Temasek has been selling down its western bank exposures, albeit getting out of Bank of America (in which it gained a stake through its Merrill Lynch holding) and Barclays at what history will probably judge as being the worst possible time to do so. And almost every significant recent purchase it has made has been in the resources sector anyway: a stake in the Chinese iron ore producer Lung Ming, and a $303 million purchase of a stake in Olam International, which is mainly involved in soft commodities. Temasek had already set its new asset allocation formula, with 10% of the portfolio in emerging markets such as Latin America and Africa alongside 20% in developed markets, 30% in Singapore and 40% in Asia, before the change of CEO was announced. Sure, Goodyear would have been helpful to find the right energy assets, but this policy can be rolled out without him.

Instead, the bigger significance is in what Goodyear represented: independence and new ideas. Temasek is among the more transparent of sovereign wealth funds, with a nine-strong board among whom only one member is a representative of the Singapore government, but it has never really looked so independent from a distance. That’s for just one reason: because its chief executive is not only someone whose background is in government (the Ministry of Defence), but because she is the wife of the prime minister.

Until the ill-fated western bank stake acquisitions, there was nothing to suggest that Ho Ching was doing anything other than a good job: that’s not the reason she was on her way out, and Temasek’s courtship of Goodyear predates the disastrous Merrill purchases anyway. Instead, Goodyear was important because he demonstrated a clear commitment to run the fund on absolutely commercially-minded principles independent of the government – even if that was already happening in practice. That, in itself, was important because Temasek wants to look as different as possible from the likes of Abu Dhabi Investment Authority and other Gulf sovereign funds, expecting those funds to come under greater scrutiny from American and EU regulators and governments.

It’s that initiative, more than the rebalancing of the portfolio, that is derailed by Goodyear’s change of heart and the retention of Ho Ching of the top seat. Temasek’s own statement that there were “differences regarding certain strategic issues that could not be resolved” is troubling and doesn’t look good either, because it raises the assumption that where Goodyear had wanted to implement change, it was resisted. Having announced change and seen it reversed, the net effect on perception of Temasek is worse than if they had never announced a change at all.