Capital Flows into the Singapore Real Estate Market: An Analysis of the Land Sales Program

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Abstract

The free flow of trade and investment is an important feature of Singapore's economy. The inflow of foreign investment has contributed significantly to the rate of development, with the real estate sector playing a distinct role in enhancing Singapore's status and in attracting multi-national companies to establish their regional headquarters. Singapore's Land Sales Program has played a significant role in this process, the analysis of which provides a basis for tracking sources and volumes of investment flows into the Singapore property market. Using capital contributions from shareholders of property companies active in the Land Sales Program, this study examines the origin and magnitude of Foreign Direct Investment (FDI) flows into the Singapore real estate market. The analysis indicates that there is a low level of capital flows from Europe and North America to the Southeast Asia region whereas Asian investors play an important role in terms of foreign investment flows into the Singapore real estate market.

Introduction

Since independence, achieved in 1965, Singapore has adopted an open door policy to encourage both local and foreign investment. This comprises a strategy based on attracting foreign investment that has made a substantial contribution to the country's development program. As part of this process, the real estate industry has grown in importance and investment flows have played a vital role in the economic and physical maintenance of the city-state of Singapore, influencing the function, location, character and vitality of its communities while shaping its urban landscape and built environment. One of the cornerstones in the rapid transformation of Singapore's physical environment is the Government Land Sales (GLS) Program. Under the program, the government plans redevelopment in accordance with national goals and economic strategies and provides the basic infrastructure and other urban services to facilitate private development, whereas the private sector contributes financial resources and expertise in an entrepreneurial role.

State ownership of land is of paramount importance in land scarce Singapore (Keogh and D'Arcy, 1999). In this respect, the government's Urban Redevelopment Authority (URA) with responsibility for over 70% of Singapore's state land is a key player. It is contended that the URA Sales of Sites Program (SOSP) provides an important handle on capital inflows by establishing the amount and geographical origin of capital in the Singapore marketplace. With the increasing sophistication of the global property investment market, and the Singapore government's interest in making the island a global fund management center, this study provides an investigation of the Singapore property market through an analysis of the origin and type of investors participating in the scheme.

International Capital Flows

The move towards more `open economies' leading to the deregulation of financial markets acted as the catalyst for the rapid growth of global capital flows in the 1980s (Karantonis, 1995). Worldwide foreign direct investment was dominated by the United States in the 1980s (accounting for nearly 50% of the total investment), however it has since been joined by Japan and the European Union (Jacobs, Currie and Jackson, 1995). Indeed, the growing importance of FDI has seen annual global flows increase from $60 billion to $315 billion between 1985 and 1995 (WTO, 1996). Originally destined for the equities and securities markets, this `globalization capital effect' soon flowed into property finance and subsequently into the real estate sectors of a number of selected countries where such investment was permitted (Karantonis, 1995). According to Laposa (1996), the market capitalization of global real estate public companies (excluding the U.S.) has increased from $59.6 billion in January 1993 to $142.5 billion in January 1996 with the Asia Pacific region accounting for over half that of the world's capitalization, confirming its international stature. …