While global investors worry about the United States subprime crisis, the mounting capital outflow from the US to Asia is pumping up certain Asian property markets. One in particular, Singapore, has seen rents for private residential units rise by 31.2% from the middle of 2006 to 2007, and rental rates for prime office space occupied largely by foreign companies has risen 13.9% in the second quarter of 2007, reaching an average of S$10.33 (US$6.84) per square foot.

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Despite the strength of the upper echelons of the property markets, concerns about the spreading effects of the US sub-prime mortgage crisis are having effects further and further afield.

Asian bond spreads widened in Hong Kong this week, with the popular iTRAXX Asia ex-Japan high-yield index widened by 20 basis points, in turn raising the costs of protecting investors against defaults or restructuring.

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According to “Emerging Trends in Real Estate® Asia Pacific 2008,” just published by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP, Shanghai, Singapore and Tokyo rank as the three most promising Asia Pacific cities in terms of real estate investment prospects.

David Sandison, a Tax Partner with PricewaterhouseCoopers in Singapore said, “It is expected that even greater amounts of capital will be flooding Asia Pacific real estate markets in 2008. The real challenge for investors will lie in finding the right assets against the backdrop of yield compression and scrutiny by regional governments and tax authorities.”

Shanghai topped the list for investment prospects, edged up from its second-place ranking last year. Singapore received the highest rating of any of the cities included in the report in terms of overall risk.

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Agence France Presse reports that Singapore’s residential property prices rose by 10% in 2006 and that rents have risen by a truly extraordinary 100% in 2007 so far. That rentals are increasing steeply is confirmed by other sources (http://lushhome.wordpress.com/2007/04/) and there is evidence to suggest that the government is just as surprised at the change as everyone else appears to be. However, we’ve found no confirmation of AFP’s 100% increase statistic, yet. Data to hand suggests that rental yields have normally been in the region of 3.5% maximum for a number of years. Given that interest rates on savings in Singapore are less than 1% pa (www.singstat.gov.sg/Keystats/mqstats/ess/essa51.pdf ), property would still seem to be an attractive investment but, as borrowing rates are considerably higher (prime lending rate is 5.33%), any kind of gearing for property investments would be heavily dependent upon prices of assets rising to be economic. Mortgage rates are lower with fixed rate mortgages available at 3.75% and floating rate ones available at 3.4% (with even more favourable terms for one to three year terms. With the increase rental yields in the first half of 2007 the economics of property investment in Singapore are seeing a sea-change.

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The marked first quarter improvement in the Singapore property market raises a number of important questions; such as where is the growth, where does it come from and is it sustainable?

Private residential property values rose 4.8% in Q1 in Singapore compared to a 10% improvement for the whole of 2006. High end developments such as Marina Bay Residences and One Shenton have led the way but there are also reports that both mid-level residential properties and commercial developments are rising in value, too.

Analyses of where the impetus for growth is coming from vary. The mainstream interpretation (and certainly the one supported by the Singapore authorities) is that Singapore is in the process of launching itself into the first of division of world cities with enhancements to its status as a business and tourist centre. This will see Singapore strengthen its credentials as an international financial centre. Eric Ellis, SE Asia correspondent of Fortune magazine has a dissident, minority view that sees Singapore as the beneficiary of an enormous amount of personal investment on the part of wealthy Indonesians and that country’s Chinese community. Holdings in Singapore by Indonesians are now over $100 bn

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