Investing in ASEAN: Singapore
With a total land area of just 710km2, Singapore is the smallest country in South East Asia and one of the smallest countries in the world. It is often referred to as a ‘city-state’. What it lacks in size however, Singapore makes up for with its enormous presence in the world with its free-trade economy and highly educated workforce.
Singapore is in a league of its own when compared to its fellow ASEAN countries – which are usually described as either underdeveloped, recently developed or developing – and has long been a leading global economic powerhouse.
The country has exhibited rapid growth due to a stable and competent government. Singapore is a republic, with a political system centred on democracy, a parliamentary system, and an elected president as the head of state.
Singapore is ranked first in Asia for having the least corruption in its economy and as the most transparent country in Asia.
It offers a globally connected and pro-business environment with a strong and stable infrastructure to boost and sustain growth and success in many industries. This “comprehensive suite of world-class services, capabilities and talent help businesses thrive in today’s competitive market,” says a report from PwC Thailand entitled South East Asia – Investment Opportunities, Tax & Other Incentives.
The World Bank ranks Singapore as the world’s easiest place to do business, and the country ranks as having the best business environment in Asia Pacific and worldwide.
PwC says that “the multicultural Singaporean workforce is highly educated, motivated, efficient, and proficient in English. To enhance the country’s talent pool, the government has adopted an open immigration policy”.
“Singapore also has a well-established and robust legal system. Companies can rely on protection of their ideas and innovations through Singapore’s rigorous enforcement of its strong intellectual property laws”.
The country has built on its advantageous geographical location to become one of the world’s top transportation hubs for sea and air cargo, and its container ports are the busiest in the world, offering a choice of 200 shipping lines with links to some 600 ports in 123 countries. Meanwhile, Changi International Airport is linked to some 200 cities in 60 countries, with about 5,400 weekly flights, providing convenience and effective connectivity for passengers and cargo.
Singapore is a leading provider of such services as international banking, trade and maritime finance, international logistics, insurance, treasury management, professional services, and asset and wealth management within the region. “Companies based in Singapore can tap the diverse capital markets and cutting-edge financial services from more than 500 local and foreign financial institutions,” says the PwC report, adding that “a possible downside to Singapore’s highly developed business climate and world-class infrastructure is that its wage scales, cost of living and cost of doing business are considerably higher than those of its ASEAN counterparts”.
Singapore’s dependence on external markets and suppliers has pushed it toward economic openness, free trade and free markets. The economy depends heavily on exports – notably consumer electronics, information technology products and pharmaceuticals – and on a growing financial services sector.
Singapore has always had strong service and manufacturing sectors, and the manufacturing sector contributes approximately 25% to the country’s GDP annually. Major industries include electronics, pharmaceuticals, chemicals, construction and shipbuilding. The service sector accounts for the balance, with the key industries being wholesale and retail, financial and business services. Other emerging industries that are making significant contributions to the economy include casinos, healthcare, education, communications and media. In recent years, the government has focused on developing its service sector, raising productivity and encouraging R&D.
Singapore is a major South East Asian hub and more than a third of all Fortune 500 corporations have headquarters there. Emerging Asian multinationals are also starting to use the country as a base for their global expansion.
“Singapore has a fairly comprehensive incentive regime,” says PwC.
These incentives are designed to encourage foreign companies to undertake such activities as high-value manufacturing, R&D, global trading, finance and treasury management in the country. The government has stipulated a timeframe for review of each of them however and interested investors will need to confirm that they are still available.
Incentives include the Productivity and Innovation Credit (PIC) scheme, which covers the acquisition or leasing of PIC automation equipment and intellectual property rights, external training and certain accredited in-house training of employees, registration of patents, trademarks, designs and plant varieties. Says the Singapore government: “Get significant tax deductions or payouts for your investments in research & development, innovation, automation and training”.
Tax incentives are also available for debt securities, offshore insurance and reinsurance, trusts, Islamic financing arrangements, sovereign wealth funds, infrastructure project finance, not-for-profit organisations, international arbitration, cyber-traders, and international legal services.
Real Estate investing has always been popular in Asia – especially in tiny Singapore. The common perception of how one should invest in property is often limited to buying a resale apartment or condominium.
For the unseasoned investor with limited capital, however, a condo unit might not be the best thing to start with. The down payment for a suburban condo is likely to be expensive in Singapore, and you will takes on substantial debt of up to 80% of the value of the property. The private property market, too, is showing signs of a market top. Rental yields have fallen while prices have risen.
The government’s cooling measures also mean that most young people will only own one investment property for some time. This makes diversification difficult – on the other hand putting all your eggs in one basket is risky.
The publicly traded equity market offers more options. Property development companies, which buy land, build units and sell them off, are one way to get exposed.
A relatively recent innovation in Singapore is the real estate investment trust (REIT). Investors can buy small ownership chunks of portfolios of shopping malls, office buildings or industrial factories and warehouses.
Despite the popularity of property in Singapore, Andrew Jackson, head of real estate funds at Standard Life Investments, doesn’t think the country is particularly friendly toward real-estate investors.
“For Singapore,” he says, “which is one of the most business friendly countries in the world, it’s possibly one of the least real estate investor friendly countries because of constant policy changes. While these policy changes are designed to keep Singapore competitive by lowering property prices, which is a key factor in economic production, that also puts a lot of real estate investors off”.
Others see some drawbacks with the country’s property market as well. “It’s not that it’s not friendly, but there’s very little space available,” says Peter Churchouse, publisher of the Asia Hard Assets Report. “It’s all very tightly held by the big property companies and the REITs.”
Residential property prices in Singapore have surged, propelled by rock-bottom global interest rates and quantitative easing in developed economies, even as the government enacted a series of cooling measures.
“Many would argue that those policies are very sensible. Mr. Greenspan refused and it led to a disaster,” Churchouse notes.
While on the surface, the Singapore economy is the standard to which others can only dream of attaining, Investing.com thinks that behind the scenes is a very fragile economy highly dependent on the cost of capital staying low or at least rising very slowly over the coming years, and that if rates in the US rise sooner and higher than what everyone expects, the Singapore economy and the Singapore dollar are in big trouble.
“Lets get straight to the point,” they say. “Singapore has a huge problem and it relates to its property market. “The Fed’s quantitative easing program has had far-reaching consequences for which it has openly stated that it doesn’t care.
Call Us First
From our strategic location in Hong Kong, AD ASIA Group has been providing clients with customized business consulting services and financial advisory solutions in the areas of strategic planning, financial advisory, real estate investment and trade opportunities since 2011. Contact us and let’s discuss how we can help you accomplish your business’s goals and minimize your risk in the ASEAN marketplace.