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

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.

To be richer, do not indulge in creature comforts. Really?

I am definitely not one of Starbucks' favourite people as I always tell family, friends and readers of my blog that Starbucks coffee is very expensive. 

I am always using Starbucks as an example of something that is really not a necessity in life. OK, for some of us, we need to drink coffee but do we need to drink Starbucks coffee? OK, definitely, their shareholders don't like me too.

Well, this is one of the perils of being the leader in an industry.  Yes, whenever I think of expensive coffee, I think of Starbucks. 

Depending on how you look at this, it could either be a good thing or a bad thing. So, maybe, they would look at it as a good thing, be flattered and don't dislike me that much.

Anyway, there are times when I would indulge in a bit of Starbucks coffee although I am not much of a coffee drinker, preferring tea most of the time. Iced mocha? I rather like that although friends have told me that it isn't real coffee. It is more like a chocolate plus coffee mixture. Adulterated. OK, I am not into gourmet coffee nor gourmet anything. If I like the taste, it is good for me.

So, when are the times I would indulge? Here is an example:

Yes, I know. I am terrible.

I think some readers would remember that I shared what David Gan said in an interview before:

"Tell you a secret. I have a bad habit. If it is not expensive, I don't buy."

People like David Gan would look down on people like me.

Well, AK has a secret too. Nah, I am not going to say it. I am sure you know what it is.

Anyway, I do agree that there is nothing wrong with indulging once in a while. For example, why have only one Fillet-O-Fish for lunch? Have two!

Easily my favourite thing on the menu at McDonald's but at $3.95 each, it isn't cheap. However, it looks much better when we have this:

It is not about not indulging in creature comforts, it is about looking to get greater value for money and trying not to pay full price for anything.

OK, I am feeling full and doubly happy now.

Related posts:
1. Kopi with Song Stonecold.
2. A meal for $2.00 from McDonald's.
3. Seven money habits of AK71's.

Newly married and planning to have a child: Questions.

Is there anyone here who might be in a similar situation as this reader?

Hi AK,

Happy weekend to you. I see that you have recently posted quite a lot on saving and contribution to SA for retirement. This has really set me into thinking, seeing the benefits of compound interest. 

However, as I only started to work for 2.5 years and juz got married and got a house, my situation may not be favourable for making huge moves in my savings. Below are some pointers that I may need your input.

1) I did think of volunteering to contribute to CPF thru cash but as I juz started a family, cash flow could be very important especially we are planning to have a kid next year. Would you advise us to still bite the bullet (like seriously) and still contribute or wait till we are more comfortable before we start contributing? We both own some small portfolio of reits.

2) As we find it hard to contribute cash to CPF, how about transfer in from OA to SA lump sum when we get our bonuses to exploit the higher Interest rates? Alternatively we can opt to pay down our house with the lump sum, which lower our loan and perhaps it more worth it as the small monthly payments we are paying now in the initial phase mostly go towards interest. :( What would you do if you are us? Haha

Thanks AK. As usual, look forward to your enlightening reply. :)

Regards,
B

My reply:

Hi B,

Yes, the blog posts are meant to set people thinking. They are not meant to be advice. OK, this is where I talk to myself. ;p

1. Get my priorities right. Now, I have a family and planning to have a child next year. Need money. Budget. Make sure that the money needed for this has been or is being put aside.

2. Do I have an emergency fund? Is the emergency fund able to cover 12 months of regular personal, household and other routine expenses? This would include the necessary insurance coverage.

3. Before I do an OA to SA transfer, check whether there is enough funds in the OA to pay the monthly mortgage for at least 12 months? If there is, the balance, I could think of transferring to the SA.

4. What is the interest rate on my housing loan now? Am I able to get better returns by investing my funds instead of paying down the housing loan? However, ask am I risk averse? Would paying down the housing loan give me peace of mind (which is priceless)?

I hope these questions will help you find the answers you are looking for. :)

Best wishes,
AK

If you have any ideas or relevant experience to share, please leave a comment for us here. Thank you very much.

Related posts:
1. Achieving level 1 financial security.
2. Options for CPF-OA with a new flat on the way.
3. PM Lee Hsien Loong on retirement adequacy.

What to do when you have a hole in your backside?

Last evening, when I was walking back to my car after meeting a friend for dinner, I was stopped by a stranger who told me with a smile:

"Excuse me, you have a hole in your backside."






OMG! I was taken aback!

I looked at him and I didn't know what to say to that.

I mean, how would you react if you were in my shoes?

Black hole?

Of course, I have hole in my backside.

All of us do, don't we?






I wondered if he was trying to be funny.

Anyway, I must have stared at him long enough for him to feel uncomfortable after that.

He gave a weak smile and pointed at the back of my pants.






I turned to look and found a big tear in the seat of my pants!

So, that was what he meant.

I smiled and thanked him for telling me.

It must have happened very recently as I didn't see the tear when I did the laundry over the weekend.






I have had this pair of pants for almost 10 years.

I knew it was getting a bit threadbare and even ratty looking in some parts but this particular tear makes it (possibly) indecent to wear out from now on.

Looks like I will have to part ways with another old friend.






Feeling a bit sad but what to do?

Related post:
Parting with an old friend.

Is it wrong to be idealistic and live the good life?

If we should be able to do something we love and be paid well for it, we are very lucky indeed.

Now, if we should be given two choices of 

1. a job that pays us well but we do not enjoy 

and 

2. a job that doesn't pay well but we enjoy, 

which one should we choose?




Which option we choose might depend on whether we are a pragmatist or an idealist.

However, I also believe that which one we choose will depend on how comfortable (or uncomfortable) we are financially.

My breakfast. Cute?

I know young people who are very idealistic and many can afford to be so because they already have a roof over their heads, they get a generous amount of pocket money from their parents and the labour market is generally quite tight. 

So, they can afford to be picky.


Is there anything wrong with this? 




Well, as long as they and their parents are able to sustain that kind of an arrangement almost indefinitely, I don't think so. 

There are families which have enough old money to last them a few generations, for example. 

Lucky people.






However, if we are talking about a regular middle class family, then, I think that such an arrangement could be a problem. 

It could be a problem also because it could become a problem for society at large.





"We can afford this lifestyle. What is your problem, AK?"

Yes, for how long? 

Have they ever asked that question?





"We have a plan. Don't be so nosey, AK!"

Oh, ok, that is good. 

I am so sorry for being a big kay poh.




Bad AK! Bad AK!

(I hope the plan does not include a "RETURN OUR CPF" protest in Hong Lim Park.)

Related posts:
1. Why a wealthy nation cannot afford to retire?
2. Two questions that help us build wealth.
3. Are you a millennial? (30 years old or younger.)
"Millennials' general attitude towards work is a result of having doting parents, structured lives and a high level of connection with others through information technology."

How much to invest? Nibbles, gobbles, values and prices.

I have blogged about my nibbles and gobbles in the stock market before and although it might be quite intuitive to us, what exactly is a nibble in terms of numbers? 

I received an email from a reader asking if I could blog about this in greater detail. 

So, this is my attempt to give some notable form to the concept of nibbling in the stock market.





When I have identified a business I would like to invest in, I should also decide how much money I want to invest in it. 

Now, how do I do this? 

Hint: Remember the pyramid? 

Cannot remember? Go to related post number 1 at the end of this blog post.

So, based on my own unique pyramid, I would be able to estimate (yes, it is always an estimate for me) how much I want to invest in the business. 





Example 1:
If it was an investment for income and growth and if I had allocated, say, $200,000 for that kind of investments in my portfolio and if there should be $50,000 left in unused funds earmarked for the same, then, that should be the upper limit of my investment in the business.

Of course, we can have variations. 

Example 2:
If I had decided that no single investment in this layer of the pyramid (i.e. my portfolio) should exceed $25,000 in size, then, that $50,000 left in unused funds for this layer would have had to find at least two businesses to invest in, not one.






Now, let us say that I had decided that $50,000 was a good amount to invest in a business I had researched that had a PE ratio of 12x under more normalised circumstances and generated a dividend yield of 3% based on a pay out ratio of about 35%, I might start nibbling at a PE ratio of 12x. 

Pay a fair price for a wonderful business? I can accept that.

To me, a nibble should be a single digit percentage of the total amount earmarked for the investment. So, in this case, it would be under $5,000.





When do we stop nibbling? My take? 

When we have already invested a third or so of the funds earmarked for the purpose.

Then, what about the rest of the money? 

The rest of the money is reserved for gobbling. 

What is a gobble? 

A gobble is bigger than a nibble. 

50% bigger? 100% bigger? 

Well, I am not prescriptive.

One instance in which I would gobble is when I feel that the stock has become undervalued.

So, for example, if a stock which usually traded at a PE ratio of 11x to 13x should be offered by Mr. Market at a price that translated to a PE ratio of under 10x, to me, that would be undervalued. 





The closer the PE ratio declines to crisis valuation, the more undervalued the stock becomes, all else remaining equal.

Now, this is just me talking to myself. Definitely, there is nothing sacred about the numbers. They are just examples. 

The philosophy that is the foundation of this blog post is, however, quite timeless. 

I hope this blog post has thrown some light on the matter of nibbles and gobbles.




Specific numbers and percentages? 

You know your circumstances best. 

That is your job.

Related posts:
1. Investing and position sizing.
2. AK went shopping in the (stock) market. (Nibble.)
3. Saizen REIT: Why did I buy? Buy more? (Gobble.)

Another step towards retirement adequacy taken.

My voluntary contribution in 2015 to CPF is done:

With this, I will enjoy the risk free interest rates of 2.5% to 4.0% earlier.

Sit back, relax and wait for the magic of compounding to do its work.

Related post:
Retirement: AK is buying a AAA rated bond.

Friend selling exclusive investment with 6% a month return. (Could this be a great investment?)

"Those at the bottom are left with a loss."

This is another example of my ignorance:

Hi S,

Welcome to my blog. :)

What you have described is something very esoteric. Well, at least to me, it is.

I am afraid I know nothing about something like this. If you would like me to blog about it to see if other readers might be able to throw some light on the matter, let me know. :)

Best wishes,
AK


What was this in response to? This:

Hi AK,

Just a basic introduction of myself, I am a 21 year old teenager, I have been reading your blog since I was 19. I made my first small sum investment when I was 19 too.

Here is my query:

Recently, a friend of mine contacted me to sell an investment policy to me. It was described as an "exclusive" investment. Here is how it goes.

- Minimum sum invested must be at least SGD $2 million dollars

- Period of investment is 25 months

- The investor will get a return of 6% a month (4% being the capital return, 2% being the interest of the sum invested)

- There is a banker's guarantee attached to this investment for the capital return too

So I did my simple math and calculated, if someone invested 2m, by the end of 25 months, it will be 3 mil. I was very skeptical about it at first, but after consulting one of my friend from the bank, he said there are such things. Why is there such an investment instrument in the market? What's more the security is there with a banker's guarantee attached. Can investment like these be trusted just because there is a banker's guarantee attached? We all know 2m is not a small sum, therefore I am humbly enquiring about this with you. Could you give me some opinions on this?

Thank you:)

Best regards,

S

Sure thing, share it with the readers. I am really curious, is there really such thing as a "almost-zero-risk" investment like this?:) thank you AK.

Much appreciated.

Sounds too good to be true? A healthy dose of skepticism is likely to improve our chances of survival in the field. However, what if it were true?

If you have any idea what this is or if you have something to say about this, please leave a comment for us. Thank you.

A useful reminder as we are offered opportunities:
Advice from a fraudster.