Loss of an acquintance
I've been advising many friends for investments over the years. One of them was an acquaintance for a good seven years. The returns were around 3% a year since 2007, mainly because of a dip in 2008 of 30%, and that I went overweight in the mining and Asia x Japan sectors in 2011.
Recently, the acquaintance decided to move his portfolio to a blue-chip European private bank. When I looked through the portfolio, most of the investment products were not giving any kind of dividends and will underperform. I do not consider PIMCO to be a good fund manager at all considering that they have made so many errors of judgement in the last three years with US Treasuries.
In any case, it's sad when a friend is surrounded by friends and loved ones who gave advice that are sometimes not of the best interests. Land banking in Britain, hotels here and there which are off plan, luxury properties in Singapore that stayed stagnant for the last three years.
It's a very sad situation indeed. I've been advising friends and clients on the best way to make money. I'm an adviser, not so much a sales person. I practice what I preach. I grow my capital on properties by 50% every year. For financial assets, I'm at around 10% a year, surely beating most private banks who will pimp their equity linked notes and dual currencies which do not give any upside.
What can go wrong in 2015
I would summarise into 2 points:
1. China's property bubble
2. Malaysia and most of ASEAN's household debt.
China's property bubble will not affect households as much. It will instead hit the corporates, particularly real estate developers very hard. It will in turn harm the banks. The corporate sector is overleveraged. Chinese banks are trying to push out NPLs into bonds... They don't declare bad debts so it looks as if they are pimping out perfectly fine bonds.
Many smaller developers will fall in the next three years. If you read the first two articles, Chinese developers are buying wantonly land in the UK and Malaysia. Often they buy at inflated prices. Projects tend to be very large, like the Country Garden project in Danga Bay which turned out to be an abject failure. Standby for a meltdown because buyers of the Danga Bay project are told that it will be scaled back by 2/3!
Many investors of Chinese bonds will see their life savings disappear as more and more Chinese corporate default. We could see the GFC replayed in China!
The only saving grace in China is they have the benefit of hindsight, looking at the damage a real estate bubble can cause to the country. Household debt is at a very manageable level. downpayments are around 50 - 60% for the first property, unlike in Spain, Portugal, UK or the US where zero downpayments were common in the mid to late 2000s.
Iskandar will be the next fiasco. Singaporeans will see their savings decimated by failed projects in Manila, Iskandar, Yanggon, etc. They may be too weak to recover when the Singapore property market hits rock bottom in 2016.
The third article is about how difficult it is to run an honest investment advisory biz. In India, few clients wish to pay for anything! Because of that, the kind of advice given is often the worst. Many private banks are pulling out of India. Most Non Resident Indians only wish to leverage to the hilt. When rates finally rise, we could see a day of reckoning.
My advice to Asian clients, pay for advice and if your adviser is poor, change him or even sue him if you have evidence that there is conflict of interests.
I've been advising many friends for investments over the years. One of them was an acquaintance for a good seven years. The returns were around 3% a year since 2007, mainly because of a dip in 2008 of 30%, and that I went overweight in the mining and Asia x Japan sectors in 2011.
Recently, the acquaintance decided to move his portfolio to a blue-chip European private bank. When I looked through the portfolio, most of the investment products were not giving any kind of dividends and will underperform. I do not consider PIMCO to be a good fund manager at all considering that they have made so many errors of judgement in the last three years with US Treasuries.
In any case, it's sad when a friend is surrounded by friends and loved ones who gave advice that are sometimes not of the best interests. Land banking in Britain, hotels here and there which are off plan, luxury properties in Singapore that stayed stagnant for the last three years.
It's a very sad situation indeed. I've been advising friends and clients on the best way to make money. I'm an adviser, not so much a sales person. I practice what I preach. I grow my capital on properties by 50% every year. For financial assets, I'm at around 10% a year, surely beating most private banks who will pimp their equity linked notes and dual currencies which do not give any upside.
What can go wrong in 2015
I would summarise into 2 points:
1. China's property bubble
2. Malaysia and most of ASEAN's household debt.
China's property bubble will not affect households as much. It will instead hit the corporates, particularly real estate developers very hard. It will in turn harm the banks. The corporate sector is overleveraged. Chinese banks are trying to push out NPLs into bonds... They don't declare bad debts so it looks as if they are pimping out perfectly fine bonds.
Many smaller developers will fall in the next three years. If you read the first two articles, Chinese developers are buying wantonly land in the UK and Malaysia. Often they buy at inflated prices. Projects tend to be very large, like the Country Garden project in Danga Bay which turned out to be an abject failure. Standby for a meltdown because buyers of the Danga Bay project are told that it will be scaled back by 2/3!
Many investors of Chinese bonds will see their life savings disappear as more and more Chinese corporate default. We could see the GFC replayed in China!
The only saving grace in China is they have the benefit of hindsight, looking at the damage a real estate bubble can cause to the country. Household debt is at a very manageable level. downpayments are around 50 - 60% for the first property, unlike in Spain, Portugal, UK or the US where zero downpayments were common in the mid to late 2000s.
Iskandar will be the next fiasco. Singaporeans will see their savings decimated by failed projects in Manila, Iskandar, Yanggon, etc. They may be too weak to recover when the Singapore property market hits rock bottom in 2016.
The third article is about how difficult it is to run an honest investment advisory biz. In India, few clients wish to pay for anything! Because of that, the kind of advice given is often the worst. Many private banks are pulling out of India. Most Non Resident Indians only wish to leverage to the hilt. When rates finally rise, we could see a day of reckoning.
My advice to Asian clients, pay for advice and if your adviser is poor, change him or even sue him if you have evidence that there is conflict of interests.
PUBLISHED JUNE 23, 2014
China developers launching massive projects in Johor
They are betting on Iskandar Malaysia as the next Shenzhen
Huge supply: Visitors viewing a model of upcoming developments in Johor's Danga Bay area. Guangzhou-based Country Garden Holdings launched 9,000 residential units in Danga Bay last year. - PHOTO: BLOOMBERG
[KUALA LUMPUR] The growing presence of developers from China in Johor has ruffled the feathers of local developers. Following the high-profile entry of Guangzhou-based Country Garden Holdings Co Ltd, which launched 9,000 units in Danga Bay in one go in 2013, all eyes are now on other developers from China who are expected to adopt similar large-scale development programmes.
Country Garden made the first move in Johor Baru. It was followed by Guangzhou's R&F Properties Co (R&F), which bought 47 hectares near the Causeway from the Sultan of Johor for RM4.5 billion (S$1.74 billion).
R&F could be launching as many as 30,000 units over the next few years on land that is to be reclaimed, said a report in StarBizWeek
Agile Property Holdings Ltd is another China-based developer that is expected to make its presence felt in Johor Baru after it bought 1.3 ha from Tropicana Corp Bhd in Bukit Bintang, Kuala Lumpur.
A study by a government investment body which had undertaken a comprehensive development plan for Johor estimated that the number of condominiums coming up in Johor Baru is about 30 times over the number of units built in Mont Kiara, a township near Kuala Lumpur.
Country Garden, one of China's Top 10 developers, has teamed up with a subsidiary of Johor's state- owned investment arm, Kumpulan Prasarana Rakyat Johor (KPRJ), to undertake the work of developing a project near the Second Link involving 2,023 ha reclaimed from the sea.
In an interview with the business section of the Malaysian daily, Country Garden's regional president for Malaysia project Kayson Yuen said the mega project, Forest City, will span over 30 years and the company conducted studies more than a year ago before committing to it.
He said the land was bought at a "reasonable price" but could not furnish details for Forest City's land cost.
As for R&F, a very high-density project is in the pipeline with the company planning to launch 15 blocks in the first phase.
The six plots it bought from the Sultan of Johor last year came with a high plot ratio of 1:10.
Industry observers say the plot ratio can be further extended to 1:13.
R&F plans to develop high-rise residential units, retail properties, offices, hotel and a shopping mall, all of which will be on a saleable floor area of about 3.5 million square metres, which is close to 10 times the floor space of the Petronas Twin Towers in the Malaysian capital.
Local developers are starting to feel the pressure following the massive developments by the Chinese companies. But the developers from China are optimistic that Johor will be akin to Shenzhen in China and the units being built would eventually be taken up.
Said Mr Yuen: "It took Shenzhen 20 years to be where it is today . . . so we expect it to take some time for Johor to develop into the same status."
Iskandar Malaysia, which is almost three times the size of Singapore, is already being positioned as the Shenzhen of Singapore. Shenzhen is about twice the area of Hong Kong. The two cities complement each other.
The Chinese are investing in Malaysia because of its political stability, potential from the Singapore spillover effect, low cost of entry and also partly due to the slowdown in China's property market.
The developers, especially listed companies, come to Malaysia because it is still considered one of the most affordable countries in the region.
"Take Vietnam as an example. The recent (anti-China) riot shows that there is a considerable political risk in investing in the Indochinese nation," one developer explained.
As for the Philippines, its political relationship with China has been troubled over the years. Singapore, on the other hand, is expensive.
Betting on Iskandar Malaysia as the next Shenzhen, Johor becomes a natural investment choice for China developers.
But the sustainability of Iskandar Malaysia is in question due to supply far outstripping demand.
Iskandar Malaysia has a population of 1.6 million people while Singapore has 5.4 million people.
Shenzhen's population is a whopping 11 million while Hong Kong has 7.2 million people.
That leads to the question: Who will take up the massive supply of houses in Iskandar Malaysia and Johor Baru?
Country Garden's Mr Yuen said Chinese buyers make up 35 per cent, locals 40 per cent and Singaporeans 20 per cent at its high-rise Danga Bay project.
While there are rumours that Country Garden employed a "buy-one-get- one-free" approach to lure Chinese buyers, Mr Yuen denied this.
One commercial banker told the Malaysian daily that many of the buyers from China fall into the middle-income group and range from small business owners to teachers and executives.
Another report in The Star newspaper said that in the last two years, Malaysia has become the darling of Chinese developers.
According to real estate consultancy Savills, Greenland Group announced in March a US$3.3 billion deal in two residential and hotel projects here.
In 2013, Chinese institutional and retail investors put a total of US$1.9 billion into real estate in Malaysia, exceeding the US$867 million invested in Hong Kong and US$1.8 billion invested in Singapore.
"Malaysia is the cheapest in the region in terms of capital city pricing," IP Global chief executive of property investment consultant and underwriter Tim Murphy told Reuters in March. He likes Malaysia also because of the "strong foreign ownership level and because you can borrow money. Lenders are friendly."
Meanwhile, shadow banking is a huge issue in China. How Chinese developers fund their projects is a question that haunts the Chinese economy because a collapse in the property sector will have far-reaching effects on the broader economy.
The contagion effect on Malaysia would be massive, analysts warn.
Downtrend: Home prices declined in 35 of China's 70 cities last month from April, the most since May 2012. In Shanghai, prices decreased 0.3 per cent, the first drop in two years, while they fell 0.2 per cent in Shenzhen. -PHOTO: BLOOMBERG
[HONG KONG] JPMorgan Asset Management and Invesco Asset Management say China's cooling property market is an opportunity to boost dollar bond holdings as the government's targeted stimulus benefits the largest developers.
Chinese real-estate companies accounted for six of the 10 best-performing Asian notes in the past three months, according to a Bank of America Merrill Lynch index. The yield on 2018 debt of China Overseas Land & Investments Ltd, the nation's largest developer by market value, dropped to 3.35 per cent last week, from a record 4.31 per cent on Feb 5, while that on similar-maturity bonds of China Vanke Co fell to 3.95 per cent, from an all-time high of 5.07 per cent on March 20.
"We will pick the winners from these trends," said Stephen Chang, head of Asian fixed income at JPMorgan Asset, which oversees US$39 billion in emerging-market debt. "Although sales and prices are falling along with margins, we have identified the larger developers are gaining market share and executing well."
Premier Li Keqiang has pledged to safeguard this year's growth target of 7.5 per cent, fuelling bets the government will encourage increased lending to selected projects and relax restrictions in the real-estate market. Larger developers may benefit from industry consolidation as smaller builders face a funding squeeze with a record amount of property trusts maturing next year and prices falling in the most cities in two years.
Home prices declined in 35 of China's 70 cities last month from April, the most since May 2012, official data showed on June 18. In the financial centre of Shanghai, prices decreased 0.3 per cent, the first drop in two years, while they fell 0.2 per cent in the southern business hub of Shenzhen.
"Softening prices are good because they imply there isn't a bubble any more," said Ken Hu, Hong Kong-based chief investment officer of fixed income for Asia Pacific at Invesco, which manages US$787 billion globally. "We pick developers with high turnover and those who tend to build smaller-sized flats. Profit margin isn't that key to bondholders like us. Our approach is to buy on dips."
Developers including Vanke that cut prices by 10 per cent to 15 per cent achieved good sales volume, Deutsche Bank AG analysts led by Hong Kong-based Tony Tsang wrote in a June 13 report.
Vanke, headquartered in Shenzhen, recorded a 16.2 per cent increase in sales value in the first five months of 2014 from a year earlier, it said in a June 3 statement to the Shenzhen stock exchange.
Larger industry players are able to tap overseas capital markets for funds. Sales of dollar bonds by Chinese companies totalled US$91 billion in 2014, compared with US$89 billion in the previous year, according to data compiled by Bloomberg.
Smaller builders, which rely on property trusts for financing, have to repay 203.5 billion yuan (S$40.8 billion) in 2015, according to research firm Use Trust.
That's almost double the 109 billion yuan due this year. China's banking regulator said on June 6 it will monitor developer finances, a sign of concern defaults may spread after the March collapse of Zhejiang Xingrun Real Estate Co, a builder south of Shanghai.
China South City Holdings Ltd, which runs logistics parks for industrial materials, sold one billion yuan of five-year bonds at a coupon of 7.5 per cent in the interbank market on May 9. It plans to use the proceeds to repay short-term bank loans.
Greenland Holding Group has hired banks to arrange investor meetings from yesterday for a potential dollar bond offering, according to a person familiar with the matter.
Vanke's bond borrowing costs dropped to 3.45 per cent on a weighted average last week, compared with 5.5 per cent in the first quarter of 2011, according to data compiled by Bloomberg. It also managed to extend the average maturity of its notes to 3.95 years, from 2.43 years in 2011.
Slowing growth is causing declines in the yuan and onshore interest rates. The Chinese currency has fallen 2.8 per cent against the dollar this year, the worst performance in Asia.
The yield on the benchmark 10-year government bond has dropped 52 basis points to 4.04 per cent in the same period as investors sought safe havens.
Gross domestic product (GDP) will probably expand 7.3 per cent this year, the slowest pace since 1990, according to a Bloomberg survey.
The downturn in the property market will be more prolonged this time than in previous corrections, Tom Byrne, senior vice-president at Moody's, said at a June 19 conference in Shanghai.
Broad price cuts are likely to come in late August or in September when more new projects are set to be introduced, UBS AG Hong Kong-based analyst Eva Lee wrote in a report last week. Moody's revised its credit outlook for Chinese developers to negative from stable on May 21.
The Shanghai Stock Exchange Property Index, which tracks 24 real-estate companies listed in the city, has slumped 6.3 per cent this year, exceeding the 4.2 per cent decline for the benchmark Shanghai Composite Index.
"Overall, the housing market is cooling in some parts, like in third or fourth-tier cities," said Mr Chang at JPMorgan Asset. "But we do see a silver lining. There's actually a healthy pick-up in transactions at specific locations after some discounting."
The nation has introduced measures to help the real-estate industry, which JPMorgan Chase & Co says poses the biggest near-term risk to growth in the world's second-largest economy. The People's Bank of China (PBOC) told 15 banks in May to improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers. The south-eastern city of Fuzhou has removed home-purchase limits for buyers who make one-time payments, the Securities Times reported on June 18, citing sales people from two developers.
The government may announce additional "minor stimulus measures" after Premier Li said in London last week that the nation will maintain a minimum growth rate of 7.5 per cent, according to a China Securities Journal commentary on June 20.
The PBOC may release more targeted steps to prevent expansion from falling short of the goal, it added.
A preliminary Purchasing Managers' Index for manufacturing was 50.8 for June, HSBC Holdings plc and Markit Economics data showed yesterday.
That compared with a final reading of 49.4 in May and the median estimate of 49.7 in a Bloomberg survey of economists. It's the first time this year that the figure exceeded 50, signalling expansion.
"Policymakers are actually putting out more measures to support this sector," said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments, which oversees about US$71 billion. "I think, volume-wise, it could catch up a little bit in the second half, especially those who are not aggressively buying land. There is still a wide selection, even within this sector." - Bloomberg
[SINGAPORE] Major Chinese banks want to manage their own bad debts, attracted by the outsize profits being earned by recovery firms, in a sign of confidence that investments in internal risk assessment teams are set to pay off.
If they are right, it may mark the end of a buyer's market for a distressed debt pile that has topped US$100 billion, benefiting bank shareholders at the expense of asset-management companies such as China Cinda Asset Management Co.
But the phenomenon also poses a challenge for regulators as they push banks to lend more to stimulate growth; in retaining non-performing loans (NPLs) on their books in search of profit, the banks effectively limit their ability to make fresh loans. "There are so many NPLs in China, there's a lot of room for information asymmetry, where assets get written off that actually have some value," said Benjamin Fanger, founder of Shoreline Capital, a Guangdong-based firm specialising in distressed debt investment in China since 2004.
It is a lucrative business at the moment. State-owned Cinda reported a 26 per cent rise in net profit to 9.1 billion yuan (S$1.8 billion) last year and China Huarong Asset Management's net profit jumped 44 per cent to 10.1 billion yuan.
"There are four major AMCs and they've been doing very well," said Stephen Long, managing director for financial institutions, Asia Pacific for Moody's Investor Service. "It's been somewhat of a buyer's market so I can see how the banks would want to retain some of that profit for themselves."
At a recent analyst briefing, Industrial and Commercial Bank of China (ICBC) executives said they could recover NPLs at 50 to 60 cents on the dollar, around double what asset management companies would pay for them, said May Yan, head of China bank research at Barclays, who was at the briefing.
And Bank of China chairman Tian Guoli told an analysts in March the bank would use its investment banking subsidiary to dispose of distressed assets, said analysts who attended that briefing. ICBC is China's largest listed bank, and Bank of China is the fourth biggest. The banks' drive to maximise profits is a positive for economic reform in the long run; policy-driven lending helped produce China's bad-debt headache, and a focus of managing bad debts is sign of a more market-attuned corporate culture.
But it carries risks. There is no guarantee the banks will be able to better the returns they get by selling NPLs at a discount, which also has the advantage of removing the debt from balance sheets. "Taking into consideration the time value of money, the return from self-recovery may not be higher than selling the NPLs to AMCs," said Qiang Liao, banking analyst with Standard & Poor's.
A loan and compliance officer at a listed Chinese bank in Shanghai, said banks did not want to be seen giving away money by selling bad debts too cheaply. "There are a lot of vested interests and if you turn over a loan that would have made money for the state to a private company - that state mistake leads to private profit," he said.
There's a lot at stake. Banks had 646 billion yuan worth of NPLs at the end of the first quarter, up 9.1 per cent from the beginning of 2014 and almost one-third higher than a year earlier. By the end of 2014, Barclays expects NPLs to hit 700 billion yuan.
Average NPL ratios for commercial banks are at a three-year high of 1.04 per cent in 2014, above the 1 per cent red line for China's banking regulators. Given the opacity of the banking system, many analysts believe the real levels are much higher.
In the past, the economy was effectively able to grow out of the bad debts, postponing the day of reckoning, but as China's economic model changes, regulators have grown wary of letting bad loans roll over endlessly at the expense of fresh lending.
A banker at a state-owned bank said it can take as long as two years for a bank to dispose of a distressed asset on its own, and while it remains on the books it reduces the amount of capital banks have available for fresh loans.
Defaults by smaller firms and private companies have been common for some time and this year saw the first domestic bond default as Beijing moves to give markets the decisive role in pricing capital. - Reuters
Royal Bank of Scotland Group, based in Edinburgh, still offers wealth management, even though it has ended its presence in almost half of the Indian cities where it previously had branches. - PHOTO: AFP
'Customers here are far more value-conscious and stingy when it comes to paying fees. The fee-based model hasn't picked up at all.'- Abhay Aima, group head for private banking at Mumbai-based HDFC Bank
[MUMBAI] Krishnan Ga-nesh, who sold his online-tutoring company in Bangalore for US$213 million, is the type of client that attracted global wealth managers to India. His refusal to use them helps explain why some are leaving.
"Private bankers in India do limited value-addition," said Mr Ganesh, 52, whose experiences with them fed a conclusion that they pushed commissioned products for their own benefit rather than his. "In India, there's a lack of alignment between a private banker and an individual's needs."
Sceptical clients such as Mr Ganesh are just one roadblock money managers have confronted in catering to millionaires in India, where rising wealth is estimated to quadruple to 380 trillion rupees (S$7.9 trillion) from last year's levels through 2018. Regulatory crackdowns, lack of convertibility of the rupee and a preference for real estate investing add to the challenge. UBS, Morgan Stanley and Macquarie Group all have opted to exit India's private-wealth market in the past year.
"India's millionaires are not used to paying fees for advice on wealth management," said Abhay Aima, group head for private banking at Mumbai-based HDFC Bank. "Customers here are far more value-conscious and stingy when it comes to paying fees. The fee-based model hasn't picked up in India at all."
HDFC Bank is India's biggest wealth manager by customers and revenue, according to Mr Aima. It has stayed away from offering fee-based advisory services, instead making money on commissions for transactions, he said.
Other wealth-management units using advisory-fee models have been competing with HDFC Bank's free services. Private-banking businesses still operating as part of retail banks in India include New York-based Citigroup, Frankfurt-based Deutsche Bank, and HSBC Holdings and Standard Chartered, both based in London.
Royal Bank of Scotland Group, based in Edinburgh, still offers wealth management, even though it has ended its presence in almost half of the Indian cities where it previously had branches.
Stand-alone wealth managers or those operating without retail-banking units include Credit Suisse Group, Paris-based BNP Paribas and Barclays.
Morgan Stanley agreed to sell its India wealth-management unit to Standard Chartered in May 2013. Standard Chartered paid US$8 million plus an additional undisclosed amount later for the unit, which had US$800 million in assets under management, a person familiar with the matter said at the time of the sale. The bank, which has 99 retail outlets in India, making it the largest foreign lender by branches, said the acquisition represented a significant increase in its private-banking assets in the country, without disclosing figures.
Spokesmen for Morgan Stanley in Hong Kong and Standard Chartered in Mumbai declined to comment on the deal.
About 86 per cent of Indians' household assets are in real estate and tangible investments such as gold, the highest rate among 16 countries tracked, Zurich-based Credit Suisse said in an October 2013 report. Reliance on property reflects volatility in India's stock markets and debt products, while real estate is perceived to have steady growth, said Partha Pratim Basu, chief operating officer for Credit Suisse's Indian wealth-management business, which started in 2008.
Few regulations protecting consumers and the slow resolution of property disputes mean global banks tend to leave real estate advising to Indian wealth managers, who are more accustomed to the market, Mr Aima said. - Bloomberg
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