Stuart Yeomans

As the ringgit declines and as US quantitative easing reduces, the era of low interest rates and cheap credit via bonds – the drivers of speculative investment – may soon end. Can that lead to the popping of the property bubble?

For the past few years, most Malaysians have realised what business journal Forbes has now articulated: Malaysia’s economy, together with high property prices, low interest rates, rising federal government and household indebtedness, shows all the signs of a classic credit and property bubble. The Finance Minister for Malaysia, published the 2014 Budget at Parliament. Among few of the significant changes the country will face, such as the introduction of the Goods and Services Tax (GST), he also mentioned that the minimum price for foreigners to purchase propeties will double from the current RM500,000 to RM1million.

The real property gains tax (RPGT) rate has increased to 30% for citizens who sell their units within three years. For disposals within the holding period of up to four and five years, the rates have risen to 20% and 15% respectively. For disposals that took place in the sixth year and so on, no RPGT will be imposed on citizens, but companies will pay tax at 5%. Foreign buyers are subject to a RPGT of 30% on the gains from property disposal during the holding period of up to five years, and for sales in the sixth year and subsequently, a 5% RPGT is imposed.

The years 2014-2016 is the crucial time for the repayment of housing loans. This small factor can cause a financial meltdown. Most banks double interest rates from 4.25% to 8.5% per month if you fail to pay your installments for three months. Many people may default on their loans and market value of properties held by banks will decrease.

The International Monetary Fund (IMF) has warned of another possibly disastrous housing crash given that property prices are still well higher than their historical averages in many countries in relation to incomes and rentals. The world financial institution says the situation has emerged as one of the biggest threats to economic stability.

Is Malaysia faced with a risk of a property market bubble and should we be worried of a damaging burst of the bubble given that the inflated prices of property apparent in the last two years may not be sustainable?

National House Buyers Association (HBA) honorary secretary-general Chang Kim Loong said that in the event borrowers are unable to pay their mortgage installments and the banks are forced to auction off their properties, “there is a risk a property bubble in Malaysia can burst, just like what happened during the sub-prime crisis in the US.”

However, CB Richard Ellis Malaysia executive director Paul Khong does not predict any serious bubble in the market, specifically this year, and further predicts the market to continue to march ahead towards the second half of the year.

“The first half of 2014 has been relatively quiet as predicted earlier, as the property market has been absorbing the market cooling measures silently hoping for some good news. We currently see the secondary market becoming slightly active and prices in select locations are now looking relatively attractive,” Khong says.

In my opinion the Malaysian property bubble is not a question of “if” it’s a question of “when”.

I myself have been shocked at the property prices that people are expecting. I visited a 4 bedroom property in Ampang the other week and walked around a property that needed a new drive, new marble flooring, no air-conditioning, no lights, a new kitchen, a new bathroom, it had dry rot on the balcony, needed new swimming pool tiles and a whole lot more!  Literally everything and the cost of this dilapidated half finished home…….  RM3.4 million for a property that was not in a gated community and in a rundown road.

Anyone with sanity would conclude, that for USD1 million they could get much better deal in the UK or America.

I have already sat on the side lines at some distressed sales here in Kuala Lumpur and I have seen units in my own condo go for RM1.2 million, for 2,600 square feet, my home is situated in the center of KL and an identical unit was valued at over RM2 million two years ago. This condo is around 6 years old, still looks modern and is a 15 minutes’ walk to KLCC. This same residential block recently sold a penthouse which was 6,400 Sq Ft at auction for RM2.4 million; a distressed sale from an expat that was sold the dream!

In my opinion, the cracks of the Malaysian property market are not just starting, they are erupting as we speak; with a number of factors such as GST being implemented, higher mortgage rates, the weakening RM and expats leaving the capital. This all means weaker demand and eventually the property bubble will burst.

Property agents say to me that the market is fine; however, when you get to speak to a more honest and experienced agent, they will open up. A large number of agents agree that the home prices are ridiculous and that the market needs a correction. The well-known property websites that rent and sell, are all inflated and have some ridiculous values put on them. This is not the fault of the site, it is certain agents/owners that demand silly prices.

You can negotiate apartments from RM10,000 a month for RM5,000 a month, so how can you trust what is listed?

There is little honesty on these websites and in my opinion, they look to take advantage of the unsuspecting consumers and people with little knowledge on properties in Malaysia.

So why are prices doomed to fail in Kuala Lumpur?

To start, the expats are diminishing in KL and its surrounding areas and so is the demand for overpriced properties. Another realisation is that the larger oil and gas companies are now giving their expat employees a monetary package, so they can go and hunt for a property and negotiate their own price. Gone are the days where big oil and gas firms have a set budget for property and pay RM15k for a property worth RM8k a month.

Agents had a field day with this and this fueled unrealistic rents. However, these days are now numbered and rents are very low indeed.

Now that this RM15k is paid directly to staff, they are being a lot more careful on squandering their own pay; why pay RM10,000 or RM15,000 per month when you can get nearly 3,000Sq Ft for RM5k unfurnished or RM6k furnished?

The property market here is very unstable and simply googling the bad news and negative posts will open up a realm of information. Please remember that the agents and companies that post the positive property news and figures, do have an agenda and that is to make as much commission from sales and rentals as possible, so painting a positive picture is the best course of action!

The above is just my humble opinion on the property market in KL and I stress the importance of research; you yourself can pick up a bargain, but you must take your time and shop around. If you need any additional information, please feel free to contact me.

I hope that you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The Central Intelligence Agency’s World Factbook says “Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base.” A hundred years ago, it says, it was one of the world’s wealthiest countries.

But that was then and this is now. Or nearly now. In the intervening years, Argentina’s economy has surfed a series of booms and busts and in late 2001, the nation defaulted on nearly $100 billion in sovereign debt as its currency collapsed — a record amount for a government.

On June 23rd the country’s statistics agency announced that Argentina’s economy had officially entered recession, shrinking by 0.8% in the first quarter of 2014 after a 0.5% contraction in the final quarter of 2013. Many economists are expecting the first calendar-year recession since Argentina’s devastating 2001-2002 financial crisis.

The economy’s contraction can be attributed largely to a devaluation of 20% in January, accompanied by interest-rate hikes. That subdued output and spurred on inflation, predicted to reach almost 40% by year-end. For Miguel Kiguel of EconViews, a consultancy, expectations of devaluation also played their part, by pulling some economic activity into 2013: “People stocked up on durable goods such as cars, and they were smart to do so given that prices have since spiked and the peso has lost value.”

Many of Argentina’s problems are familiar. Inflation has plagued Argentina for much of the past decade; it still grew by an average of 5.6% from 2005-2013. Exchange and trade controls have long made it hard to get hold of primary materials, stifling production. But whereas in the past Argentina could maintain growth by propping up the peso and consumers’ purchasing power, falling foreign-exchange reserves mean it can no longer afford to do so.

However it ends, Argentina’s standoff with the holdout creditors is likely to exacerbate this problem. On June 27th the New York judge in charge of the case warned Argentina that its preparations to make a June 30th payment to its exchange bondholders, without also paying the holdouts, would not be allowed. If Argentina cannot find a way to pay its exchange bondholders by the end of a grace period on July 30th, it will be in default. According to Fausto Spotorno at Orlando Ferreres & Associates, defaulting would “make a situation that is already unsustainable, less sustainable still”. Commercial credit lines would be cut off, he says; investment would drop to zero and access to dollars would be further strangled, putting more pressure on the peso.

Negotiating a settlement with the holdouts has its own costs. A cash payment to the holdouts would mean a further drain on the country’s foreign-exchange reserves, again putting pressure on the currency. Argentina could try to pay the holdouts in bonds, as they recently did to compensate Repsol, the Spanish oil company, for the expropriation of its stake in YPF, another oil firm, in 2012. But with lots of new IOUs already in the market, that might make it less easy for the country to fund itself with new debt even if there is a rapprochement with the holdouts.

In any case, access to financing will not solve Argentina’s deficit problems. The fiscal deficit swelled to 15 billion pesos ($1.85 billion) in the first quarter of 2014. To reduce this gap the Argentine government will need to curb spending, a task that would be tough politically and would do little to pep up the economy.

At the very least the Argentines can take heart from their national team’s World Cup performance so far, maybe this will be their year.

I hope that you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The 2015 UK budget has unveiled several major changes in the UK pension system. At the same time the budget has also instigated several consultations on even bigger changes.

What’s changed in the Budget?

There were three main changes in the UK budget. The first was to increase the size at which a small pension fund can be liquidated. This was increased from £20,000 to £30,000. In addition to this the government has reduced the amount of guaranteed income someone is required to have to avoid having to use their pension fund to purchase an annuity from £20,000 per annum to £12,000 per annum.

Both of these changes are relatively minor and make sense by allowing people with smaller pension funds to avoid the annuity market which has historically offered people bad values for their retirement savings.

The biggest change in the budget was to increase the amount of money a person can withdraw from their pension pot each year. This now means that an individual can pull down 150% of GAD each year. GAD is a number based on life expectancy and government bond interest rates that set’s out how much someone can expect to draw down from their pension sustainably each year. To give you an idea drawing down at 150% of GAD would allow a 65 year old to take out 9% of the value of their pension in the first year. This change has also been matched in many QROPS schemes as well that follow the same rules as the UK system.

In addition to these changes the government will also prevent public sector workers from withdrawing their final salary pensions.

What’s going to Change?

Consultations were announced in the budget that will consult the industry on some even larger changes to come out in the next year. Perhaps the biggest change is giving people the ability to withdraw the entire value of their pension at age 55. However these withdrawals will not be tax free as some in the media reported but instead liable to up to 45% income tax.

As part of this change the government is also investigating stopping private sector workers with final salary schemes from transferring out. The reason for this is that these types of pensions are heavily invested in government bonds and if people suddenly start taking the pensions out then the government bond market could collapse. This move would also prohibit people from transferring into offshore tax efficient QROPS’s schemes.

What’s coming around the corner?

There are many rumours circulating about further changes the government may make in the next year or two to the pension system to generate more tax for the government.

The Labour Party and potentially the Tory Party as well are said to be interested in capping the maximum 25% tax free withdrawal at £36,000.  This would generate a substantial amount of tax for the government especially if people start to pull down the entire value of their pension funds.

In addition the treasury is said to be quite interested in capping the amount of pension savings anyone can have at £1 million or around £33,000 per year. Anyone with a fund larger than this would be liable to a 55% tax charge on the balance above £1 million.

If you are looking for further information on this subject please drop me a message and I will get back to you as soon as possible.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Equity markets have continued to see limited returns as we approach the second month in the second quarter of 2014. The US and the Emerging Markets were almost flat in April. The severe winter in the first quarter impacted economic activity in the US across a wide range of sectors, however those problems have now passed and we have been seeing growing signs that the US is back to normal rates of growth. The US also released a weather-beaten first quarter GDP result showing the economy had grown by 0.1% quarter on quarter. This figure was well below estimates of 1.1% however, the markets took the disappointment in their stride. Digging deeper into the release does provide some positive reading for investors. Private consumption grew by 3% suggesting that consumption, which makes up nearly 70% of US GDP, is beginning to pick up and that strong growth is just around the corner now that the bad weather has receded.

The recovery of the UK economy has continued during the early months of 2014 despite some setbacks from storm-related damage to roads, rail, farmland and other infrastructure. The manufacturing PMI remained as high as 56.9 in February, and the services PMI stayed at 58.2, both levels consistent with continued growth of over 2.5% annually. If the current pace of activity continues, the UK should at last exceed its pre-crisis peak level of GDP in real terms by year end. UK equities seemed to be a flavor of the month, as the FTSE 100 rebounded by 3.1% after a selloff in March. In the UK, first-quarter GDP was just below consensus, with the headline growth figure coming in at 0.8% quarter on quarter compared to the real GDP for the fourth quarter of 2013 which was at 0.7%.

Despite the unrest in Ukraine, the European economic recovery remains on track as consumer and business confidence indicators continue to improve. Most core and peripheral economies registered positive growth, including Italy, which experienced its first increase in real GDP after nine successive quarters of decline. Since then, economic indicators in 2014 have continued to record slow but positive rates of growth. The eurozone’s Purchasing Managers’ Index (PMI) for February was 53.2, the eighth successive month in excess of the 50 level that points to expansion. This confirmed that the eurozone emerged from recession in mid-2013 and suggested that the moderate recovery should continue in 2014.

However the improving confidence comes at a time as inflation outlook continued to weaken in the region. In April, the estimation for inflation came in below consensus at 0.7% year on year. Bank lending has also been reported to be still falling, with loans to private sector falling by 2% and loans to non-financial companies contracting by 3.1%. Tighter credit conditions and a lacklustre inflation environment is no doubt giving policymakers at the European Central Bank (ECB) a headache. There is growing pressure on the ECB to utilise monetary policy to help support the still-fragile recovery. However, question marks remain not only on what action the ECB might take but whether it will act at all. Mario Draghi hinted this month that an asset purchase programme should not be ruled out but would only be used if the medium term inflation outlook deteriorated significantly.

The first-quarter earnings season is now underway in Europe and the US. In the US, nearly 70% of companies who have reported so far have beaten earnings expectations. Whilst earnings have surprised on the upside by 5.2%. However, in Europe earnings have continued to contract. With over half of the STOXX 600 having reported, earnings growth has contracted by 2.0% despite the improving economic backdrop. On both sides of the Atlantic the financial sector has underperformed. Banks have cited a decline in net lending as the main issue for the lack of earnings growth this quarter.

Bond yields in the periphery have declined sharply over the last month and have reached multi-year lows for many European countries. A year ago, Spain’s 10-year bonds yielded 4.7% and today the yield stands at just above 3%. Such sharp contractions have been credited to the disinflationary environment that has weighed on bond yields.

Sentiment for Japanese investments continues to decline, with the TOPIX contracting by 3.4% in April. The question for many investors is whether the Bank of Japan (BoJ) will unleash another round of quantitative easing. Currently, the BoJ remains in a holding pattern as it waits to see the economic impact of the controversial sales tax increase that came into force at the beginning of April.

China released its first quarter GDP figures showing that the economy had advanced by 7.4% year on year which was marginally higher than expectations. However, Chinese growth is likely to continue to slow over the coming quarters as the economy attempts to rebalance towards a more consumption led model rather than an investment led one.

In the wider emerging market universe, discussions over emerging markets tend to be dominated by politics. There has been continued unrest in Ukraine this month, which has prompted the west to place further sanctions on Russia for its part in the violence.

The Indian elections, the world’s biggest democratic exercise, has entered into the fourth week of voting. Initial forecasts tip Narendra Modi, seen as investor-friendly, to be the next prime minister of India. Modi’s track record for economic and business reform could be key in helping the country revitalise its slowing economy.

Alternative investments such as commodities and real estate investment trusts (REITs) continued their strong start to the year as they grew by 2.4% and 3.2% respectively. Investors continue to seek alternative sources of returns away from poorer performing traditional asset classes that have struggled so far this year.

If you are looking for further information on this subject please drop me a message and I will get back to you as soon as possible.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The Economy Ministry of Russia has announced slow growth, rapid inflation and high capital outflows. This is an indicative sign that global strains across the Ukraine are now delivering serious economic costs.

There had been economic hopes of recovery, but growth in the economy last year demonstrated only 1.3 percent, which was far below initial forecasts. Russia’s economic performance is also in decline due to its activities in Crimea and across the Ukraine. The EU and US have provided a firm response and have placed restrictions on trade with Russia, which is resulting in capital and investment leaving Russia. Former Finance Minister Alexei Kudrin and other economists predicted capital flight at $50 billion in the first quarter compared to $63 billion in the entire of 2013.

While Russia’s economy is barely growing, inflation rate is increasing.  According to analysts inflation rate will rise up from 6.2 % in February up to 6.9-7.0% in March. As a result high inflation rate caused the depreciation of the Rouble. Despite the dramatic intervention of Russia’s Central bank the RTS Stock Market Index dropped by 12 % on March the 3rd and the Rouble lost 1.9% against dollar. Also, huge reliance of the Russian economy on imported products resulted in a huge drop of the Rouble’s value by 10% in two months.

Above mentioned factors are clear signs of long and deep stagnation. The independent analysts claim that even with a climate-friendly investment and rapid development of small and medium sized businesses, Russian economy will not show growth faster than 2% per year until 2016.

However, despite pessimistic forecasts of analysts Russian Economic Development Ministry predicts 0.5 % growth of Russian GDP. On the other hand, Finance Ministry argues that this pattern does not take into account all potential risks for the Russian economy.

Although most economic predictions differ, most experts believe that the cost to Russia’s economy will increase the longer the crisis in Ukraine continues.

I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Kuala Lumpur : Malaysia