warning to singaporeans: debt level too high!

Oct 25, 2008, The Straits Times WARNING TO SINGAPOREANS Reduce debts MONETARY Authority of Singapore statistics show Singaporeans have piled on debts at a fast rate up to August this year. Total debts to individuals and professionals stand at $112 billion, almost 10 per cent up in the past 12 months. In particular, credit card rollover debt has ballooned to $3.3 billion, an increase of $296 million over the past 12 months against a $94 million increase in the previous 12 months. It is not just credit card debt that has increased. Housing loans are up $6.6 billion. There was also a $2.5 billion (18.4 per cent) jump under \'other loans\' to individuals which presently stand at almost $16 billion. The previous year\'s increase was only $584 million in this category. Going into a recession with such high debts will push many into financial difficulties as jobs and incomes are affected. Individuals need to make every effort to reduce or restructure their debts, especially credit cards and credit lines which are expensive and recallable. They should stop using more credit. Unsecured debts can be converted into instalment loans that can be paid over a longer period. Financial institutions should be more accommodating in approving such requests. The problems of delinquent borrowers are exacerbated by heavy over limit and late payment penalties, which can add up to more than 50 per cent on an annualised basis. Although these penalties encourage borrowers to pay promptly, such high charges can also make it impossible for a defaulting borrower to be current again, let alone pay off his debts. Collection procedures by creditors should exclude tactics which amount to undue harassment and intimidation. For example, phone calls during working and unreasonable hours should be curtailed. Writs of seizure and sale which are costly and usually realise little proceeds should be stopped. Lawyers should not write to employers stating that they are acting on behalf of an unnamed financial institution and asking for verification of employment and other details as this will trigger inquiries by employers which can often affect the career of the employee concerned. A code of conduct for debt collectors should be drawn up and adhered to by lenders and their outsourced agents. The Government should also accelerate implementation of the debt restructuring scheme, which is designed to give wage earners an alternative to bankruptcy. Kuo How Nam President Credit Counselling Singapore

If you read the book \"Rich Dad, Poor Dad\". Debt is not a bad thing if you utilise it properly. We, Orientals have this mentality that borrowings are bad. Companies with 1x gearing are often discriminated. But if you look at the Nasdaq and Dow Jones companies, most of then (>70%) are more than 1x geared. These companies though geared, monitored their free cash flow and their interest coverage ratio carefully to ensure that there\'s always sufficient in the kitty to repay the bankers. That\'s how business grow and that should be how individuals should grow their wealth. A classical example is property. If you buy a property worth $1 million, you probably paid a deposit of $200-300k. Your rental is likely to be in the range of $3500-$5500 per month, which works out to be a gross yield of 4.2% to 6.6% if you take the entire property value of S$1 million. But bear in mind that you only paid, say $300k. Your intrinsic gross yield is actually 14% to 22%. Moreover, your instalments can be paid with your CPF (which you will never see until you are past 60 years old). I say this is a good use of debts. Would you agree?

Yes..technically you\'re right. Here is the problem...would you leverage right now to be for example CDL which is paying 15% yield? If you do, your effective yields will be 50%. Your argument will probably be that real property is more stable in value which is a misnomer becoz it is not quote on a daily basis. I would rather not leverage and get outright yields from REITs if given a choice. Property prices in S\'pore is still very high and not reflecting the huge downside bias. If you\'re bulish about property for the future (which I am) I would rather buy REITs or property companies now; Allgreen or HoBee or Keppel Land as the valuations presently are almost at the bottom (discounting 30%-40% drop in property prices) The real bargains in property is in the United States...really unbelivable prices...makes me salivate.

Hi Gary, You are right about the US property market. A 1000 sq ft apartment in Manhatten is going for roughly the same price as a similar sized apartment at The Sail. Incredible! No offence to Singapore but this is Manhatten, New York!!! Where the really rich rub shoulders. Singapore got some distance to catch up. Property in Singapore cannot be banded together. The luxury segment is ridiculous and the only way is down. Good Luck to those who bought $1,200 psf and above. A 10% correction is the minimum. But if you dig down to the mass market, this segment is supported by the expats who are tired of being squeezed by their landlords in District 9,10 and 11 and they are turning to rent / buy apartments in the non-traditional districts. I like REITs but I don\'t like the way that the big boys are playing this game. Look at the Macquarie deal that YTL did... Macquarie got out of the deal at a best price while YTL got what they wanted -- A big discount to the NAV.. So where does that leave the retail unitholders? Dangling in the air, I guess. REITs is a sophisticated way that the property landlords used to reduce their systematic risks and at the same time, enjoy the upsides by charging high management fees. Thanks but I stick to the physical stock.

Hi MacGyver, The deal with YTL puts a \'floor\' on the REITs and should be viewed positively. It shows that prices can only fall so far before someone snaps it up for a song which YTL did. Francis Yeoh is well know in the M\'sian circles to be an astute investor and well respected. You can now buy MP REIT for less than what YTL paid and don;tyou think it is a great deal now. Of course it\'s no solace for those who have already bought in earlier at higher prices but at least everyone knows that MP REIT can only get much better from here on with well known sponsor such as YTL. If you look at what he did for Bintang Walk you can be assured that the unitholders will eventually reap huge gains by being under the YTL banner. In fact, with such a sponsor the yield differential should narrow vis a vis CMT (Capital Land as main sponsor). That\'s my 2 cents. As for real property, I would rather value it based on price/income index which measures property price divided by annual household income. A measure of 4 would be the long term average. As for S\'pore you do the maths. The unfortunate thing is that the HDB valuation is based on the mortgage affordability which is 0.25 of the annual household income,which tends to have a much higher value. With all said and done, my personal view is that one should have one property to live in and the rest should be invested in the financial markets (bonds, shares, unit trust, etc). If one has a love affair with property which I sincerely do then REIT\'s is the way to go. It is very liquid...takes 1 second to sell compared against months for real property, lowest transaction cost (legal fees, plus plus plus) someone to manage all the rentals etc etc..you just sit back and collect \'rental\' every 3 months...I could go on and on)....I think the best part is most of the REIT properties are well located and tenanted by corporate clients who pay their dues on time. Come on...let\'s make this an interesting discussion.I would like to see some detractors to the above statement.

Hi Gary, while I agreed on most of your points, I beg to differ on the followings; 1) YTL\'s purchase should not be view as a floor for REITs. YTL managed to buy 50% of its management company that will earn recurring management fees irregardless of whether the DPUs are going up or not. YTL\'s paid a premium to obtain a significant stake in the Company. With this stake, he can now inject his Malaysian commercial assets into this REIT at a price deemed \"reasonable\" by his property valuer. This is a great way to dispose of his property assets and get good prices for them. Look around you, there\'s not many commercial REITs that you can buy in Singapore nowadays. I admired Francis Yeoh for his good business senses to seize opportunities when they present themselves. But then again, he has also bought some properties at premium levels before. Only time will tell whether this is a good move. For the second point, physical property enables the investors to leverage up almost 5x. You pay 20% downpayment and then stretch your term loan to 30 years. As long as you did not buy at the peak and do not over-stretch yourself, you should be able to sell the property when the next property bull cycle comes along in 3-5 years. Historical data suggests a 20-30% profit off the purchase price is possible. But bear in mind that you leverage 4-5x.... ROE is actually more than 50% p.a But if you are a speculator, who bought during the launch and waiting to sell prior to TOP. Good luck to you. You need good timing for this. REITs sound like a good investment proposition. From the investors\' point of view, it ensures stable income. From the developers\' point of view, it diversify away the inherent risks of holding the properties and yet be able to enjoy the upside when the rental increases. Think, what is the downside for the property developers by injecting the assets into the REIT? If the downside does not equal the upside, then the investors probably had the shorter end of the stick.