In an opinion piece by South China Morning Post written by Nicholas Spiro, the author assessed the current status of Singapore as a safe haven for investors in the current midst of market turmoil due to the Covid-19 outbreak.
Note: This write-up provides a summary of the opinion piece.
The flight to safety is rampant now in the global capital markets. Due to the growing concerns over the economic impact brought by the Covid-19 outbreak, safe-haven assets like government bonds are experiencing a surge in demand from investors as they look to hedge themselves from recessionary risks as well as preserve their capital.
The investment transaction volumes had shrunk sharply in Q4 of 2019 in Asia’s commercial property markets, coupled with the steep worsening of sentiments.
CBRE, the commercial real estate services and investment company, highlighted in a new report that the Covid-19 spread is “prompting many investors to postpone investment decisions and adopt a wait-and-see approach”.
The global real estate services company JLL, estimated in its report in February the decline in transaction volumes in the first of half of 2020 as “likely to be sharply lower year-on-year as investors re-examine investment pipelines and deployment”.
The factors underscoring Asia’s real estate markets such as record volumes of capital to be deployed across the region and the historically low interest rates will remain as they are. Central banks in the region may lower rates further in order to combat the impact of Covid-19. In light of this, investors still flock to highest-quality assets in the most resilient and stable markets as they defensive strategies.
Singapore is a country that has long had the reputations as a safe haven. A few factors, such as economic and political stability, well-regulated and liquid real estate market, and the success in attracting foreign investment, have earned the country the status as a sanctuary during times of heightened risk aversion.
Based on the report in January by JLL, it described Singapore as an “an oasis of safety” in a late-cycle property market. In the next five years, capital values and office rents in the city’s central business district are predicted to increase 20 per cent, becoming “amongst the strongest of any global city in Asia”.
Last November, a survey conducted by Urban Land Institute and PwC ranked Singapore first in real estate investment prospects for 2020. This ranking is above places like Melbourne, Sydney, and Tokyo. Hong Kong, on the other hand, was not in the top 20 places.
In 2019, Singapore was one of the few markets who saw an increase in transaction volumes as well as a rise in office rents in the second half of the same year. Data from CBRE also recorded that average rental values for the region fell.
Singapore, being an export-oriented economy, is dependent on global trade and demand for its growth prospects, and thus is vulnerable to the developments of the Covid-19 spread. Even prior to the spread of the virus, Singapore recorded the slowest growth in 10 years, with growth expanding at a minute 0.7 per cent in 2019. ING released a note on Thursday (5 March) cautioned that recession may be inevitable due the bleak survey figures since the past several months.
The author suggests that Singapore will fall prey to its own success.
The country’s commercial property market attracted record levels of investment in 2019 primarily as a result of the larger role played by cross-border capital inflows.
According to data from CBRE, transaction volumes in 2019 are made up of 30 per cent by foreign investors, which was an increase from approximately 10 per cent in the years after the global financial crisis.
This higher reliance on foreign capital has now become a liability. Cross-border investors are sterner with regards to the impact from Covid-19, especially for Asia which is more vulnerable to supply chain disruptions, the author opined. In addition to this, the author added that the whole merger and acquisition market has been dragged into turmoil, with investors not being able to inspect assets and travel.
Due to the thickening fears surrounding the duration and severity of the impact from the virus, even Singapore, as a traditional safe haven, is becoming highly vulnerable.
The scope of financial market implications from the virus need yet to be fully comprehended by Asia’s property investment markets, especially the threat to funding markets.
The impacts from Covid-19 is looking to be progressing to a more dangerous stage, as evidenced by the sudden crash in oil prices, with US corporate bonds suffering the worst last Friday (6 March) since 10 years ago due to concerns about firms’ cash flows. A full-blown credit crisis is not impossible given the current mounting stresses and fears, the author opined.
The previous several weeks of collapsing sovereign bond yields have made higher-yielding real estate more attractive to investors, increasing the weight of capital targeting the sector. However, investors still need to reconsider which sectors and countries in the Asian real estate are the safest haven in the midst of the Covid-19 assault on the economy.
AEW, a real estate investment advisors company, released a report in February which recommended that targeting “commercial assets with tenants focused on serving domestic markets” to curb external headwinds is the right strategy. These assets include the Australian state capital central business districts and the e-commerce-driven logistics sector.
The author stressed that political stability and a well-regulated property market are no longer a guarantee of a market being a safe haven from the viral impact.
