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IREIT: Is the projected distribution yield of 8% safe?

Friday, January 16, 2015

For investors who plonked down money in IREIT's IPO at 88c a unit, they must be feeling somewhat relieved that the turmoil in the European markets, following the move by Switzerland to scrap a 3 year peg to the Euro, sending the Swiss Franc sky rocketing, has not affected IREIT's unit price. However,  I have a faint suspicion that this feeling could give way in time to come.


I did not take part in the IPO partly because I didn't like the fact that it was priced at a hefty premium to its NAV of 78c per unit. When we are buying real estate, we must have a very good reason to pay a premium to valuation. If it is a hefty premium, the reason must be even better. Often, it is on some expectation that the piece of real estate would provide higher returns in future either in the form of higher rental income or capital gain. However, I have difficulty seeing both or either one happening in IREIT's portfolio.

I also wondered if the promised yield of 8% per year was actually going to be sustainable. This is especially so when there was no currency hedge in place and, bearing in mind what Mr. Lee Kuan Yew said about the Euro before, I was not sure if the currency's strength might not falter.

From my FB wall last year in August.

In fact, with many Eurozone economies very weak and requiring more help in terms of money supply, my expectation was for some form of QE by the ECB which now seems imminent. This could, in fact, be the reason why the Swiss decided that enough is enough and scrapped the currency peg to the Euro.

In the event of QE by the ECB, what is going to happen to the Euro? The currency would most likely fall in value. The US$ fell in value when the Fed carried out rounds of QE. The JPY fell when the Japanese carried out what is now called QQE. So, it is not going to be an exception with the Euro.

With the expected QE by the ECB, the Euro, this time, would not just fall in value against the Swiss Franc, it would also fall in value against the S$. This is going to affect the value of IREIT's portfolio in S$ terms and it is going to affect income distribution as well in S$ terms.

SG/JPY. Source: Yahoo!Finance.

How much would the Euro decline against the S$? I don't have an exact figure, of course, but remember that the JPY sank as much as 30% against the S$ from its peak in 2012. Quite alarming.

To be honest, I do not think that the Euro would fall as much as 30% against the S$. The JPY was perceived as a safe haven, for some reason, and was attracting quite a bit of interest before its decline. Thus, it had more room to fall. The Euro, on the other hand, doesn't have such a lofty status to begin with.

So, what is my opinion of IREIT now?

Although I rather like the stability of the REIT's income, the inability to milk more rental income from its current portfolio plus the strong FOREX risk means that if I want more certainty of an 8% yield in future (which was what attracted many investors to part with their money in the first instance), then, I would need a lower offer price from Mr. Market.

Related post:
Mr. Lee Kuan Yew on the Eurozone.

6 comments:

AK71 said...

The stage is set this week for the European Central Bank to unleash its biggest weapon yet in the battle against deflation in the eurozone, analysts said.

Financial markets and ECB watchers are betting that central bank chief Mario Draghi will unveil a programme of sovereign bond purchases known as quantitative easing (QE) at the first policy meeting of this year on Thursday (Jan 22).

With area-wide inflation turning negative in December - consumer prices fell by 0.2 per cent across the single currency region - the alarm bells have been ringing, and Draghi and other top ECB officials have been busy priming the markets for action. Draghi said the bank had few other options at its disposal to counter the risk of deflation, a dangerous downward spiral of falling prices.

UniCredit economist Marco Valli said that with tumbling oil prices putting significant downward pressure on headline inflation, a programme of sovereign bond purchases "appears unavoidable, if only for a credibility reason".

He suggested the programme would include "at least 500 billion euros of government debt" and up to 250 billion euros of other non-financial corporate debt. "The timing of the announcement is a close call, but ECB rhetoric of the last few days suggests that the plan could be ready on January 22," Valli concluded.

Source:
http://www.channelnewsasia.com/news/business/international/ecb-poised-to-pull-qe/1597654.html

Siew Mun said...

More will flock to Yen and Dollar as a safe haven

AK71 said...

Hi Siew Mun,

I kind of suspect that it would be more the US$ than the JPY. If the JPY should go up in value, I think the JCB would sell it down. So, the JPY could be less attractive an option.

AK71 said...

Reports say the ECB will inject up to €1 trillion by buying government bonds worth up to €50bn (£38bn) per month until the end of 2016.

Source:
http://www.bbc.com/news/business-30915210

AK71 said...

British Prime Minister David Cameron - whose country is not a member of the eurozone - said the result of the Greek election would "increase economic uncertainty across Europe".

Meanwhile, the euro fell to $1.1098 against the dollar - the lowest level in more than 11 years.

On Klathmonos Square, the flags were flying high, supporters of Syriza were singing and dancing, there were hugs and tears and broad beaming smiles.

This was an extraordinary victory for the radical left in Greece - probably beyond its own expectations.

Alexis Tsipras will now try to lead an anti-austerity revolution, backed by a strong democratic mandate.

He said in his victory speech that he is willing to negotiate with Greece's European partners. The question is: how much are they prepared to compromise with him?

Source:
http://www.bbc.com/news/world-europe-30975437

AK71 said...

This is just the beginning and I expect the Euro to weaken more significantly in the next 12 to 18 months.

The euro retreated against other major currencies on Friday (Jan 30) as struggling Greece refused to meet with its international creditors and rejected fresh loans, and the Eurozone showed weaker inflation.

Source:
http://www.channelnewsasia.com/news/business/international/euro-falls-as-greece/1627932.html

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