Oct 9, 2007
Singapore's landlords have already pushed their tenants into a corner; now they may be testing the central bank's patience.
If the global economy doesn't slow in 2008, the island's monetary authority may have to tighten its policy to manage the impact of skyrocketing rents on consumer prices.
And that means there is a good chance of a stronger Singapore dollar.
The average monthly rental for prime office space in the city state has tripled in the past three years, reaching a record high of $12.60 per square foot in the third quarter, according to real-estate brokerage CB Richard Ellis.
The global credit-market turmoil doesn't seem to have had a discernible impact on Singapore office demand, which continues to be dominated by banks and financial firms, Richard Ellis said.
Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are building their own office complexes as vacancy rates in the central business district fall close to zero.
Future supply, too, is getting snapped up.
Standard Chartered Plc has booked 500,000 square feet (46,451 square meters), or about one-third of the first phase of Marina Bay Financial Center, which will only be ready in the first quarter of 2010.
The government is releasing more land to ease the supply crunch, though there's no reprieve in sight for tenants for at least another couple of years.
Collective Sales
Chicago-based property consulting firm Jones Lang LaSalle Inc. estimates supply of new office space in Singapore to be less than half of the projected demand of 5 million square feet from 2007 to 2009.
A similar story is playing out in residential and retail segments, which have even deeper linkages with local inflation.
In the first seven months of this year, 61 sites were sold to developers by owners of apartment complexes in so-called en- bloc, or collective, deals, for a total value of S$11 billion ($7.5 billion), surpassing last year's record of S$7.8 billion, according to research by property brokerage Savills Plc.
This has curbed supply of housing at a time when demand is soaring. International schools are overbooked, suggesting that more foreigners are being allowed in to boost the island's small workforce of 2.6 million people.
The government has recently tightened the rules for en-bloc sales and imposed higher fees on developers. That might help contain the frenzy of collective sales somewhat.
Residential rents, however, are unlikely to come down in a hurry. If anything, the rental increase will be inflationary.
14 Percent Growth
``Given the tight labor market, we expect higher living costs to lead to more generous wage settlements,'' Nicholas Bibby and Puay Yeong Goh, currency strategists at Barclays Capital in Singapore, wrote in a research note last week.
The Singapore economy grew an annualized 14.4 percent in the second quarter, its fastest pace of expansion in two years. Adding to the pressure on inflation -- which is already at a 12- year high of 2.9 percent -- retailers, too, are faced with galloping rental costs, which they want to pass on to consumers.
The Monetary Authority of Singapore sets policy by targeting the local dollar against a basket of trading partners' currencies. At its semi-annual review tomorrow, the central bank will have an opportunity to highlight the inflation risk.
Still, it's unlikely that the monetary authority will change its policy of ``modest and gradual'' currency appreciation, which has been in place since April 2004, to seek a significantly stronger Singapore dollar.
At least it may not do so immediately.
Inflation Hawk
A stronger currency won't be welcome at a time when the island's key electronics exports -- semiconductors, disk drives and telecommunications equipment -- have fallen for seven straight months.
``The difficulty for the central bank this time around is that while the domestic economy is booming, exports are not and indeed are threatened by U.S. developments,'' says Robert Prior- Wandesforde, an economist at HSBC Holdings Plc in Singapore.
Even so, a stronger Singapore dollar may become inevitable in 2008 as inflation crosses the 3 percent mark. Last time that happened was in 1994, when the stance of monetary policy was for quicker appreciation in the Singapore dollar than at present, the Barclays economists note.
The Singapore dollar has risen just 4 percent so far this year against the U.S. currency, compared with almost a 14 percent surge in the Thai baht and a 12 percent jump in the Indian rupee.
Singapore's monetary authority is an extremely credible inflation fighter. And inflation expectations are already firming thanks to the frenzied real-estate market.
While the central bank probably won't jump into the fray to prick the property bubble, it won't let consumer prices get out of hand either. A strong Singapore dollar may be a good bet.
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