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Saizen REIT and Croesus Retail Trust: Much ado about Yen.

Monday, March 3, 2014

A reader sent me an email and expressed worry that the JPY might weaken further against the S$. With exposure to Saizen REIT and Croesus Retail Trust, he is worried.

For sure, the JPY has weakened dramatically in the last 2 years (and a few months) against the S$. By now, it has weakened some 25% or so. It might weaken further or it might not. I am sure there are arguments made in favour of both cases.

I think, as investors, we have to know clearly what is our motivation for investing in Saizen REIT and Croesus Retail Trust. If we are investing for income and if we have not overpaid in either case, I feel that we have little to worry about.

Luz Shinsaibashi, Osaka.

Both Saizen REIT and Croesus Retail Trust hedge exchange rate risk. So, even if the JPY were to weaken another 10% in the next six months, their next income distribution in S$ will barely be affected. Similarly, if the JPY were to appreciate significantly in the next six months, don't expect any big gain in DPU, everything else remaining equal.

Of course, the income distribution after the next could be hedged at an even lower exchange rate if the JPY is weaker by then. Yikes! Yes, this is one of the risks that comes with investing in anything that receives income in a foreign currency.

With Saizen REIT trading at 88c a unit and giving a DPU of about 6.5c, we are looking at a yield of 7.38%. Croesus Retail Trust is trading at about 89c and will offer an annualised DPU of about 9.3c, by my estimate, or a distribution yield of 10.44%, after its recent acquisitions. Double digit yield, anybody?

Of course, we have to remember that Saizen REIT has a much stronger balance sheet compared to Croesus Retail Trust and that they own different types of properties.

In the event that the JPY weakens another 5 or 10%, what would the impact be on the distributable income in S$ terms? Yield falls to 6.64% for Saizen REIT and to 9.45% for Croesus Retail Trust? Is that so unpalatable? Is that a catastrophe?

Photo of the Great Buddha in Kamakura I took on a trip in December 2011 when JPY was at its highest against the S$.

Investing for income is supposed to give us some measure of equanimity even if the equity market sails through a storm. If the slightest hint of choppy waters scares us to bits, we might want to look at our motivation for being invested again and also check to make sure that we have not invested with money we might need in the next few years.

There must be a reason for our fear. Find it.

Related posts:
1. Saizen REIT: Is the DPU sustainable?
2. Croesus Retail Trust: Recent acquisitions.
3. Motivations and methods in investing.
4. Be comfortable with being invested.


AK71 said...

In addition to a better investment environment, a weaker yen and expectations for inflation—ending years of debilitating price declines—in Japan have also prompted wealthy Asians to go on the hunt for office buildings and condominiums in Tokyo. Over the past year, condo sales have jumped to their highest level in six years, and Japan's REIT index has hit a five-year high.

Land prices in Japan's major cities continued to rise in the final three months of 2013, according to government data released Tuesday. Prices of commercial properties rose in the biggest metropolitan areas, while residential prices also showed gains

"Since Mr. Abe took office and stated his priority is to revitalize the economy, the way foreign investors look at Japan has changed," Mr. Hiroi said, adding that their expectations for the Japanese economy and inflation are still high.

He said real estate in Tokyo is undervalued compared with properties in Singapore, Hong Kong and Shanghai.


Kyith said...

oh. if the trend for yen is down, how do you hedge that for indefinite amount of time?

AK71 said...

Hi Drizzt,

Indefinite amount of time means forever. I do not think that the Yen will be on a downward spiral forever.

Currency exchange rate is, of course, about pairing. So, your question also suggests that the S$ could become stronger indefinitely. Is that likely?

So, this is where a bit of macroeconomics might put things into perspective. Japan shows signs of an economy in the early stages of recovery. The demand for Yen has improved and this will limit the downside although Abenomics' monetary policies could weaken it further.

However, if Abe is a good politician, he will not want the Yen to be too weak as that will cause immense hardship for the Japanese people. It is not in Abe's interests to have that.

The Yen could weaken over the next 12 months or it might not. The trend shows a weakening but will it continue in a way that the Trusts have to hedge the risk for an indefinite amount of time?

This is a risk that can be managed through hedging but if we do not like the risk and how it could be managed, avoid the products. :)

Anonymous said...

Hi AK71,

Are you vested in CRT? I was also looking at this counter recently but decided to wait out since the sales tax will be raised to 8% coming April. I am not sure how the Japanese consumers will react to this. Furthermore, I had never personally visited the malls in their portfolio, although I had been to Japan a couple of times :)

AK71 said...

Hi aceirus,

Yes, I am. If you search "Croesus Retail Trust" in my blog, you will find all my blog posts on the Trust. :)

I doubt very much that the increase in sales tax would have any big impact on Croesus Retail Trust. Any impact will probably be transient. People will get used to it and life goes on.

The fact that renewals at Mallage Shobu is able to see double digits rental reversions of up to 80% so far this year shows how depressed rentals have been and how optimistic merchants are about the future. :)

Jane said...

How do I find CRT at Can't seem to find it.

AK71 said...

Hi Jane,

Croesus Retail Trust is listed under 'stocks'. Sometimes, people make the mistake of trying to find it under 'REITs'.

pearlrhythm said...

Thanks for your timely reminder of the reasons for our investments. I was reviewing Saizen and was dismayed by its recent price performance.

I heard this podcast by Steven Dubner (author of freakonomics) that provided interesting (at least to me) insights into the real estate market in Japan. Here is the link

The title is what caught my attention - disposable homes! The issue is half of all homes in Japan are demolished within 38 years — compared to 100 years in the U.S. There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980. The reasons cited are economics, culture, World War II, and seismic activity (deflation is not mentioned).
Culture: Japanese values newness as something that is spiritually clean and pure.
WWII: Homes built after WWII were quite shoddy and were demolished once the country got richer..
Earthquakes: New building codes as new tech becomes available would render old homes obsolete..
It went on to argue that WWII and Earthquake factors caused the Japanese to look at homes as "perishables"... even tho newer homes would still easily meet the updated building codes.
Economics: So with the "perishable" mentality, there isnt an incentive to maintain buildings, and this perpetuates the cycle..

I thought these are some interesting points to keep in mind against the backdrop on an improving Japanese economy.

AK71 said...

Hi pearlrhythm,

Thanks for sharing. :)

Yes, if we are buying properties in Japan, buy the newer ones which are up to code for seismic activities.

As for Saizen REIT's unit price performance, actually, I am looking forward to further weakness. ;p

Lower price will allow me to accumulate with a bigger margin of safety. :)

pearlrhythm said...

So what does your crystal aka bowling ball tell you about how low the price will go? :)

AK71 said...

Whenever I ask a question like this, my bowling ball refuses to talk to me... -.-"

Looking back in history, however, I think it got to 10c a unit at some point. That means 50c, post consolidation. Wah! :o

pearlrhythm said...

Wah indeed!

AhJohn said...

Hi AK, Croesus now have "preferential offering", it this same as right issue?

AK71 said...

Hi Ah John,

Apparently, it is. I am waiting for the documents in the mail.

Ken said...

Hi AK,

Will you be voting yes or no to Blackstone scheme?


Ken said...

Hi AK,

Will you be voting yes or no to Blackstone's scheme?


AK71 said...

Hi Ken,

You might want to read this:

Vote for or against selling CRT?

I am OK either way. :)

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