Singapore - Another Hong Kong?
by
Stuart Gray, June 2005
IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
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Located
in South East Asia, Singapore is a highly developed
and successful free market economy which enjoys an open
and corruption-free environment, stable prices, a low
tax regime and a per capita GDP equal to that of most
parts of Western Europe.
Historical and Economic Overview
Although
most probably think of Singapore the city, the Republic
of Singapore is actually a 700 square kilometre island
sandwiched between Indonesia and the tip of the Malay
peninsula. The city was founded as a British trading
colony in 1819 and formed an important strategic trading
and naval post within the British Empire in the 19th
and early 20th centuries.
After
the Second World War, decolonisation meant that Singapore
gravitated towards the Malaysian Federation, which it
joined in 1963. However, this was a short-lived phase
of the country’s history, and, two years later,
Singapore become an independent republic. Subsequently,
it has become one of the world's most prosperous countries
with strong international trading links and one of the
busiest international ports.
Since
independence, Singapore has been a parliamentary republic
with a directly elected unicameral parliament. As a
legacy of its association with the former British Empire,
Singapore’s legal system is based on English common
law. Also, English is one of the four official languages
spoken on the island, alongside Chinese, Malay and Tamil.
Approximately
three-quarters of Singapore’s population are of
Chinese origin but there are significant minorities
of Malaysians and Indians, while the presence of the
major global multinationals in the city also ensures
a sizeable army of expats from Europe, North America
and elsewhere around the globe. Singapore’s currency
is the Singapore dollar. At the time of writing, US$1
was worth S$1.66.
Singapore’s
economy has been heavily dependent on exports, particularly
in electronics and manufacturing and it was hard hit
by the slump in the technology sector at the turn of
the century. An outbreak of Severe Acute Respiratory
Syndrome in 2003 hampered its recovery by curbing tourism
and consumer spending. However, fiscal stimulus, combined
with low interest rates, a surge in exports, and internal
flexibility led to vigorous recovery in 2004, with real
GDP rising by 8%, the economy's best performance since
2000. In 2005, GDP growth was 6.4%.
The
government, led by Prime Minister Lee Hsien Loong has
also been actively putting in place investor-friendly
reforms in order to diversify the economy and better
insulate it against future troughs. It is the government’s
ambition to elevate Singapore to the position of South
East Asia’s main financial services and investment
hub, a position currently occupied by Hong Kong.
Member
of ASEAN
As a member of the Association of Southeast Asian Nations
(ASEAN), Singapore will benefit from participation in
world’s largest free trade area, with China committed
to reducing tariffs on certain goods traded with the
10-nation group, which includes Brunei, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Thailand and
Vietnam. Japan and South Korea will also participate
in this tariff-cutting process.
The
deal will trigger cutbacks in tariffs over a five year
period, commencing an enduring process of economic integration
in the region. Furthermore, Singapore can be expected
to benefit from direct negotiations with China on free
trade, which commenced last year. These discussions
will also encompass a revamp of the existing double
taxation avoidance agreements.
Tax
For
resident individuals, Singapore’s tax regime is
fairly benign. Capital gains taxes are only levied in
very limited circumstances, there are no gift taxes
and estate duty stands at 5% for estates up to US$5.7
million and 10% above that level. Personal income tax
rates in Singapore are also relatively light- resident
individuals are taxed at progressive rates up to 22%
on income accruing in or derived from Singapore.
From January
1st 2004, foreign income received or deemed received
by a resident individual in Singapore was no longer
subject to Singapore income tax, except if received
through a partnership in Singapore.
A non-resident
employee present in Singapore for more than 60 days
but less than 183 days in a calendar year faces a 15%
tax on gross employment income, or is taxed as a resident
on that employment income, whichever is higher.
Non-resident
individuals employed in Singapore for 60 days or less
are exempt from tax on employment income. Other income
derived in Singapore by non-residents is taxed at the
corporate tax rate, with the exception of interest income
derived from approved financial institutions in Singapore,
which is tax-exempt.
The top personal
tax rate was reduced to 21% in 2006 and will be further
chopped to 20% in 2007.
Singapore
currently has tax treaties with 55 countries. Notable
among these are treaties with Australia, Canada, China,
France, Germany (awaiting ratification as of May 2005),
India, Italy, Japan, South Africa and the United Kingdom.
Limited treaties have also been signed with Bahrain,
Chile, Hong Kong, Oman, Saudi Arabia, the United Arab
Emirates and the United States.
Agreements
in place between Singapore and Chile, Hong Kong, Oman,
Saudi Arabia and the US cover only international air-transport
or shipping operations. Treaties with Slovak Republic,
Oman and the Russian Federation were signed, but had
not yet been ratified as of May 2005.
Social
contributions to the CFP (Central Provident Fund) in
2005 amounted to 36% of gross salary (16% from the employer
and 20% from the employee), but they are optional for
non-permanent residents.
For
non-resident individuals withholding taxes are levied
on Singapore-source income at varying rates; foreign-source
income is untaxed whether remitted or not.
In
his February 2005 budget, Prime Minister and Minister
for Finance, Lee Hsien Loong announced a phased cut
in income tax and a series of new tax incentives designed
to boost the city’s wealth management industry.
Investment
Sectors:
Property
Singapore
is emerging as a genuine player in the real estate finance
market that is developing across the Asia-Pacific region.
According to a recently released report by Standard
& Poor's Ratings Services it was noted that Singapore,
with over US$1 billion in capital raised since 2002,
is increasingly being seen as a key player in the region’s
REIT and securitised real estate market arena.
Real
estate investment trusts (REITs) are in the main publicly
traded companies that own and, in most cases, actively
manage income-generating commercial real estate. Generally
speaking, the majority of a firm's income is passed
onto investors without taxation at the corporate level.
In Singapore, REIT dividends are tax-free provided more
than 90% of the firm's income is distributed to investors.
All five of the city's listed REITS have chosen to do
this.
According
to S&P, the marriage of tax benefits with factors
such as a highly-skilled and educated workforce, clear
legal system and ’AAA’ rating has made Singapore
the preferred location to list shares for many regional
real estate owners.
While
property prices in Singapore struggled to recover from
the Asian financial crisis of 1997/1998, investors in
REITS listed on the city’s stock exchange, the
SGX, have enjoyed bumper returns since the vehicles
were introduced. For example, investors who bought into
the CapitalMall REIT when it was listed in 2002 would
have earned a 100% return on their investment by 2005,
based on the appreciation of its stock-price.
CapitalMall
invests in income-producing retail properties in Singapore.
Income is mainly derived from rental payments received
from a diverse range of over 1,000 leases from local
and international tenants. It currently has a portfolio
of five major shopping malls in both the suburban and
city areas.
Another
Singapore-listed REIT that has been performing well
is the Fortune REIT, a property fund controlled by Hong
Kong billionaire Li Ka-shing, which invests exclusively
in Hong Kong property. Fortune's net property income
rose 2.8% in Q2 2005, compared to the same quarter a
year previous, and the firm's tax-exempt yield was 6.44%
on a pre-tax basis - the highest of any REIT listed
in Singapore.
Keen
to encourage foreign interest in the domestic REIT scene,
in his 2005 budget speech Prime Minister Lee announced
that foreign non-individual investors would be encouraged
to invest in the Singapore property market with a cut
in the withholding tax on REIT distributions to 10%
from 20%, for a period of five years. Additionally,
to attract more REIT listings, the government wants
to waive stamp duty on the instruments of transfer of
Singapore properties into REITs to be listed, or already
listed on the Singapore Exchange, for a five-year period.
Funds
Regulatory
changes made by the Singapore authorities have lured
many international fund managers to relocate their operations
to the city. New Star International Investment Products,
which expanded its operations from Hong Kong to Singapore
in 2005, is an example of the calibre of fund firms
being attracted to the city. Singapore‘s regulatory
changes have meant that international fund managers
are no longer required to maintain a physical presence
in the territory, and are permitted to make their funds
available via private banks.
Singapore
has also been making progress in attracting hedge fund
managers. The meteoric rise of the hedge fund in recent
years can hardly have escaped the notice of alternative
investors, and Asia has probably been the fastest growing
region of all in terms of new assets over the past few
years: hedge fund assets there grew from $22 billion
to $47 billion in the twelve month period to the end
of June 2004 – the first occasion assets have
doubled over such a time span.
While
Japan and Hong Kong dominate the region’s hedge
fund management arena, Singapore is emerging as one
of the most popular Asian locations amongst hedge fund
managers for fund start ups.
According
to data compiled by Eurekahedge, Singapore saw 19 fund
launches in 2004, compared to 13 each in Hong Kong and
Australia. However, in terms of assets under management
and average fund size, Hong Kong remains considerably
larger. At the end of 2004 there was US$9.3 billion
in assets under management in Hong Kong compared to
US$2.8 billion in Singapore. Average fund size in Hong
Kong was US$114 million compared to Singapore's US$46
million.
Nonetheless,
the growth potential is there, and Singapore seems to
be rapidly ascending the hedge fund ladder due in large
part to the relatively uncomplicated registration process,
an issue identified by hedge fund managers as crucial
when deciding where to set up. While fund registration
in Singapore may take around two weeks, in Hong Kong
it can take several months. As a result, Singapore has
managed to attract interest from some major American
funds including the likes of Tudor, Everest and Moon
Capital.
Also,
under changes designed to help foster growth in the
financial services sector, Prime Minister Lee announced
in February 2005 that start-up fund managers would be
given a 12-month grace period to meet the requirement
that 80% of share capital must come from foreign investors
to qualify for a 10% tax rate on fee income, which also
helped to win over the global hedge fund community.
Islamic
Banking
Singapore
is intent on becoming an Islamic banking hub, particularly
in the area of wealth management. Although it faces
some challenges, including the creation of a designated
regulatory system, there are almost 270 million Muslims
right on Singapore‘s doorstep in the Islamic states
of Malaysia and Indonesia. The city has also attracted
interest from Middle Eastern investors.
While
Singapore has its work cut out catching up with more
established Islamic banking centres such as Labuan and
the United Arab Emirates, Prime Minister Lee made a
start in the 2005 budget by announcing new rules abolishing
double taxation for Shariah-compliant property transactions.
The budget also granted Islamic bonds the same concessionary
tax treatment as those given to conventional financing.
Living
in Singapore:
Residence
Under
Singapore’s Global Investor Programme foreign
investors with substantial capital and good entrepreneurial
track records may apply for permanent residence. Foreigners
who have net personal assets of at least S$20 million
and who place at least S$5 million of financial assets
with a financial institution regulated by the Monetary
Authority of Singapore (MAS) may apply for permanent
residence under the Financial Investor Scheme. Applications
can be obtained from MAS-regulated institutions or the
Financial Investor Scheme Secretariat of the Financial
Centre Development Department.
Also,
persons born in Hong Kong or who can show proof that
they have or used to have rights of abode in Hong Kong
may also apply for in-principle approval for permanent
residence.
The
fee for an Entry Permit in 2005 was S$100 and the fee
for a Re-Entry Permit was S$10 per year. For foreigners
requiring a visa, the visa fee is was S$20 per issue.
Processing time for an application is around 3 months.
Lifestyle
and Cost of Living
Singapore’s
tropical climate ensures that temperatures are hot the
year round. With two monsoon seasons from December to
March and from June to September, the climate is also
very humid and in the heat of the city those from chillier
European or North American climes may find the atmosphere
somewhat oppressive. Nevertheless, Singapore is a modern,
cosmopolitan and vibrant city where various far eastern
cultures mix harmoniously with western influences.
According
to a survey conducted by Mercer in 2003 the cost of
living in Singapore is not as prohibitive as one might
expect, and the city emerged as a considerably less
expensive place to live than Hong Kong or Beijing. This
survey, which compared the cost of 200 items including
housing, food, clothing and household goods, transport
and entertainment placed Singapore 32nd in a ranking
of 144 cities.
Renting
and Buying Property
However,
Singapore’s limited land availability means that
the real estate stock has to be carefully managed. Naturally
this makes property quite expensive to both rent and
buy.
The
need for Singapore to manage land development means
that foreigners face restrictions when buying certain
types of property on the island, such as vacant land,
‘landed properties’ or bungalows, semi-detached
and terrace houses and flats in buildings of less than
6 stories. In these cases, foreign buyers need to apply
for approval from the Singapore Land Authority for permission
to buy. However, foreigners have unrestricted access
to condominiums or apartments higher than six floors.
Once
a buyer has identified a property, they can pay 1% of
the purchase price in exchange for the Option to Purchase.
Option to Purchase is usually prepared by the seller's
solicitor or property agent. The buyer then has 14 days
to decide whether to proceed with the purchase. If the
option is exercised, an additional 9% of the purchase
price is passed to the seller's solicitor. Alternatively,
buyers can bypass this procedure and ask their realtor
to prepare the Offer to Purchase. The latest ruling
by the MAS entitles buyers to borrow up to 80% of the
valuation or purchase price, whichever is lower.
Bank
accounts
To
open an account in Singapore will requires copies of
one’s passport, an employer's letter, and a statement
from a bank in the applicant’s home country. Most
of the major banks in the world are represented in the
city and there is an extensive network of automated
teller machines (ATMs) as well as a cashless payment
system called NETS. Most banks open from 9.30 am to
3 pm on weekdays and 9.30 am to 11.30 am on Saturdays.
Conclusion
So,
in conclusion, Singapore maintains its reputation as
a culturally diverse, democratic and business-friendly
location which welcomes input from investors from around
the globe. A rising star in the world of alternative
investment, Singapore is quickly becoming the regional
location of choice for new hedge fund start-ups, while
Islamic banking and wealth management are also making
their mark upon the city. As the property market slowly
recovers from the Asian financial crisis of the late
1990s and retail and office rents begin to rise, investment
opportunities also exist in Singapore’s real estate
market through the REITS sector.
Moreover,
economically speaking, Singapore is on a strong footing
once again after a period of stagnation, and as the
government strives to rival Hong Kong as the region’s
premier financial services and wealth management centre
with pro-investor tax and regulatory reforms, the country
is likely to continue along this upward curve for the
foreseeable future.
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