The New Year that opened with a Bang (and a Crash)

On Monday 4th January 2016, the first working day of the year, Singapore’s Business Times shouted on its front page “S’pore risks fading into investment backwater as market cap shrinks”. The article pointed out that the total market value of stocks listed in Singapore at the close of trading on 31 December 2015 (excluding ETFs and ADRs) was US$463.46 billion, making “the entire Singapore market cap smaller than that of Nasdaq-listed Apple” (US$586.86 billion).

Some 3 days later, the BT carried a story on the Singapore Business Federation suggesting that CPF monies be invested in Singapore’s “moribund” stock market, instead of pooling that money with the country’s other reserves to be managed by GIC.

Putting aside the consideration of whether the SBF’s proposal would in fact help to revive the market, and ignoring the erroneous characterisation of Singaporeans’ CPF monies as part of Singapore’s reserves, the word “moribund” catches attention. Singapore’s stock market has been said to be at death’s door more than once in the past year.

Singapore’s Real Estate Market, and the Related Construction Sector

Singapore’s per capita GDP is, by any measure, one of the highest in the world. We are one of the countries with the largest concentration of millionaires, but this is principally due to the fact that their homes are so pricey. In 2014 and 2015, Singapore was ranked one of the most expensive cities in the world to purchase property. A large proportion of Singaporeans’ assets are held in real estate, so the performance of the real estate market, and the related construction industry, are good indicators of how our wider economy is faring.

In 2014, household debt in Singapore was 75.8% of GDP, up from 73.3% in the preceding year. More specifically, household debt is 230% of household income in Singapore. According to the Rabobank Country Report March 2015, almost 74% of household debt consists of mortgages. In 2015, private homes prices in Singapore dropped by 3.7%.

Put these factors together and the picture is not a rosy one. Given the outsize role that real estate prices play in Singapore’s economy, when the property market sneezes, the construction industry catches pneumonia.

And indeed, the contagion is spreading.

In the last few years, a number of large local and international construction companies in Singapore have become insolvent or had to seek protection from creditors. This includes Alpine Bau, Sembawang Engineers & Constructors and CCM Industrial Pte Ltd (a subsidiary of the CCM Group Ltd).

In 2014, 51 construction companies petitioned for compulsory liquidation, up from 27 in 2013. A further 36 companies were wound up in 2014 compared to just 13 in 2013. The number of construction companies petitioning for compulsory liquidation or which were wound up in 2014 accounted for 20% of all companies so petitioning or wound up. This represented a significant increase from the 14% and 10% respectively in 2013 and 2012.

There is also other anecdotal evidence that the construction industry is faring poorly. Payment delays in the construction industry rose to some 51.4% in 2014. This means that only about two in five payment transactions within the construction industry sector were on time, according to the data from the Singapore Commercial Credit Bureau. Moreover, the number of adjudication applications under the Building and Construction Industry Security of Payment Act (Chapter 30B) was 50% higher in 2015 than in 2014.

While the Building and Construction Authority has previously estimated that between $29 billion and $36 billion worth of contracts would be awarded in 2015, with similarly strong construction demand until 2020, this may not be a source of unalloyed cheer to the industry. In July this year, the monthly levy for unskilled work permit holders in construction will rise by $100 from the present $550. With some 320,000 unskilled foreign workers employed in the industry, this adds $192 million to the wage bill for the period July to December 2016 alone.

The downward spiral of oil prices is also causing a dramatic slowdown in construction in the Middle East. The possible entry of international construction companies into the Singapore market will likely result in even stiffer competition for the incumbents in Singapore.

The weakness in the construction industry and the moribund real estate market have been doubly challenging for some of the major listed contractors. It is well known that some of them also dabble in property development, and it is no secret that some of their projects have many unsold units. Based on calculations by property consultancy firms, property developers collectively may be liable to pay up to $328 million in extension charges in a worst case scenario, of which a significant proportion may have to be borne by these construction companies.

The Canary in the Coal Mine

The story goes that coal miners would keep a canary in the mines. When the carbon monoxide rose to dangerous levels, the death throes of the canary would tell the miners that it was time to get out. So it is with the construction industry. With so much of Singaporeans’ wealth locked in the bricks and mortar of their residential properties, the health of construction companies is a good bellwether as to whether we are in dangerous territory.

Many in the industry are holding onto the hope that the government will step in and alleviate, if not altogether solve, the hardship. This is perhaps too sanguine – and thus dangerous – a view, and does not give enough weight to the other priorities of the government. In a time of a greying population requiring increased social safety nets, and a restructuring of the economy as a whole, it is not farfetched to suppose that the government will prioritise its financial support where it is needed most. Looking at the recent headlines, it doesn’t seem that the construction industry is foremost in the minds of policy makers.

In the heady days of quantitative easing and ballooning property prices, chief executives of construction companies were known to spend as much as $20,000 on a single bottle of whiskey. In today’s toxic environment, when the canary has begun to sputter instead of sing, will it be “Vodka anyone?”