Harder to preserve wealth than make money

 

February 11, 2011 

Two stories caught my attention over the past week. The first was anannouncement in Geneva by Switzerland’s Palaedino Group and Euroasia Investment. They unveiled plans to store and manage gold in Singaporefor ultra-wealthy clients who have lost confidence in banks and papermoney. The gold will be stored in the high-security Singapore FreePortfacility.

Palaedino president Leonardo Castellana said worries aboutinflation, stoked by expansionary monetary and fiscal policies, hadspread mistrust of paper currency. He added that the 2008 financialcrisis sparked demand for super-secure assets held outside the bankingsystem.

The second was an online poll conducted across 11 markets in the Asia-Pacific region – including Singapore, Australia, China, Hong Kongand India. It showed that Singapore residents are the most concerned with putting enough aside for retirement.

The two stories reminded me of what a businessman once told me: It is harder to preserve wealth than make money.

This was certainly true of Singapore over the past 12 to 18 months.The stock market has rebounded spectacularly from its lows – by more than double. The property market has also recovered strongly and anyonewho has bought and sold in the run-up would be sitting pretty on hoardsof cash. While it was certainly easy to make the money, they are nowfinding it hard to put the money to better use.

Talking about the real estate market with many investors over thisperiod, it dawned on me that we are seeing the emergence of a new breedof property buyers. Unlike your traditional owner-occupier or investorbuyer who focuses on yields and capital gains, the top priority of thisgroup of buyers is wealth preservation.

They know that a correction in property prices will take placesooner or later as the market is cyclical in nature and that the morebullish the run-up is, the deeper will be the decline. What they wantin an asset is something that will allow them to ride through thecrisis, notwithstanding the inevitable losses.

So we will see people continuing to buy gold and other commodities even though they may be over-bought.

Likewise for property. This group of buyers do not respond to themarket in the traditional sense. Short-term oversupply is not a problemso long as they can hold on to their property through the troubledtimes and come out better than others.

Low rental yields? Not a problem but if they can be avoided, whynot? Such buyers may be willing to pay a premium for projects withlonger periods to TOP. Some wonder why two new projects of similarquality and location with different completion dates command differentpremiums. Now you know.

Punitive sellers’ stamp duties? Not a problem. The predicament ofthis new group of buyers is not about making money – they have madeenough – but preserving wealth.

If I am correct, the emergence of this type of buyers has policyimplications. It means the traditional tools will no longer be aseffective as before.

It is interesting to note that among the many measures the Chinesegovernment has introduced to combat inflation and cool the propertymarket is the raising of long-term interest rates for deposits by morethan those for lending. The goal is to encourage savers to keep theirmoney in bank deposits rather than shifting to equities or property.

Towards the end of last month, after the introduction of our fourthset of cooling measures, the Monetary Authority of Singapore dished outadvice to other countries. It said policy-makers in the region mustcommunicate clearly their resolve and the willingness to takeprogressively tougher measures where warranted as property bubbles canbuild up quickly. More importantly, for these tools to be effective,the intention of the authorities has to be clearly communicated.

So it came as a surprise when we were later told that the measuresimplemented here would not be permanent and that once they are nolonger necessary, they will be removed.

I can understand that statement but just because the majority ofproperty analysts expect the market to correct, it does not mean thatit will. If that were the case, it would be so much easier toco-ordinate a price correction. Only a short time ago, many whospecialise in the HDB resale market said that prices would correctsoon. That was in September. Has it or is it still too soon?

A recent business commentary highlighted the herd instinct of stockanalysts in giving the same recommendation. It is always difficult todefend a contrarian view because when you are wrong you pay dearly forit.

By Colin Tan – head, Research & Consultancy, at Chesterton Suntec International.