Saizen REIT: Deeply undervalued but is it a BUY for you?

Regular readers know that I have been invested in Saizen REIT for a long time. Some might even be able to write a script for a K-drama based on my experience with the REIT. Anyway, if you are interested in the history, just use the search function found in the top right area of this blog. I shan't bore you.

I mentioned Saizen REIT in the last "Evening with AK and friends" session and went on to highlight why it is one of my top 3 investments in REITs. I think that episode might have interested quite a few members of the audience as I received not one, not two but three emails asking me whether the REIT is priced fairly now. I must say that the emails weren't phrased exactly like this but they were close enough.

Taken on my last trip to Japan. Love the chocolates. Cheap too.

I will say that we must question, as always, our motivation for thinking of investing in Saizen REIT. Is it for income or capital gain?

For someone who is thinking of capital gain, the fact that Saizen REIT is trading at a huge discount to valuation might be the reason for his interest. At 86c a unit, it is trading at more than 20% discount to its NAV/unit of about $1.10. This is despite the continual fall in the JPY against the S$. Even at its high of 98c touched almost a year ago, it would still have been undervalued based on the weaker JPY today.

The first question we have to ask, of course, is whether the NAV is realistic. The best way to ascertain this is to see what price Mr. Market is willing to pay for the REIT's properties. In September last year, I said that the REIT sold two properties at premiums of 19% and 12.8% above book value. That told me that the REIT's NAV was conservative. In the REIT's February 2015 presentation, they reported that another property was sold at 16% above valuation.

There is some deep value in Saizen REIT's portfolio of freehold residential properties in Japan, I believe. However, whether the value could be unlocked and returned to unit holders is much harder to say. Could we see an acquisition by a residential J-REIT? I know that a substantial shareholder, Argyle Street Management (ASM) was pressing for something to this effect.

So, anyone who is buying into Saizen REIT, hoping for value to be unlocked, will have to be patient and also remember that it might or might not happen. While waiting, Saizen REIT offers about 6c in DPU per year. Based on 86c a unit, that is a distribution yield of about 7%.

For someone who is thinking of investing in Saizen REIT for income, it is important to bear in mind that income is generated in JPY by the REIT's assets but converted to S$ for distribution. There is always risk in foreign exchange rates. What do I think?

Gingko tree. So many of them in Japan.

The JPY has fallen a lot in the last 2 years against the S$. It is my opinion that any further fall is likely to be mild as:

1. The S$ is also weakening because the M.A.S. is mindful that Singapore must remain competitive and with the dramatic fall in the price of crude oil, Singapore's economy has become mildly deflationary of late.

2. The Japanese government wouldn't want to cause hardship for the Japanese people which any greater fall in the value of the JPY might bring. Already, the people are grappling with much higher inflation in prices of imported goods.

Having said this, for the income investor, what is very important to note is that Saizen REIT's loans are amortising in nature. I have mentioned this many times in the past when I was more active in blogging about the REIT. This means that the principle sums shrink over time as they are paid down. Amongst S-REITs, Saizen REIT is probably the only one that has this feature.

Also, amongst S-REITs, Saizen REIT is probably the only one with very long term loans with many maturing in the 2030s and 2040s. Long term loans actually make sense for REITs because property investments are, logically, long term commitments.

Anyway, the point is that because the loans are amortising in nature, Saizen REIT cannot distribute all its income to unitholders. Some of it goes to amortising the loans. However, because Saizen REIT amassed quite a bit of cash from many of its unit holders who exercised their warrants, they are able to use that money to amortise the loans, distributing income as if the loans were non-amortising. One day, this money will run out. Then what?

Then, everything remaining equal, we might see the DPU reduce by two fifths. So, distribution yield might become 4% then. This is something investors in Saizen REIT at the current price must be aware of and be comfortable with.

I estimated before that it would be many years down the road before it happens but when it does happen, the REIT would be even stronger in its balance sheet as its debt burden would have reduced significantly. I like this very much as it would give the REIT more debt headroom to acquire more properties which would mean a higher DPU. In other words, the REIT would be able to grow without having to raise funds from its unit holders.

There are many things which I cannot foresee happening or not happening. Could Abenomics breathe life into Japan's economy in a sustainable manner? Would demand for housing improve, leading to higher occupancy and asking rents? Would the JPY sink much lower?  These are some questions I do not have definite answers to.

However, there are some things that I do know and those are the things that inform my decision to be invested in Saizen REIT, those are the things that tell me Saizen REIT matches my motivation as an income investor. If there should be an unlocking of value sometime in the next few years, it would be a bonus for me. In the meantime, I am quite happy to be paid regularly.

Related posts:
1. Saizen REIT: Sell the entire portfolio?
2. Saizen REIT: Is the dividend sustainable?
3. Saizen REIT: Why did I buy? Would I buy more?

Upgrade our income but not our expenses: AK's expenses.

When I learned from a member of the audience on Monday evening that OCBC 360 is going to reduce their bonus interest by half for online payments and credit card spending, I was saddened. I have to say that it wasn't as if it was unexpected but, I guess, I didn't expect it to happen quite so soon.

Well, it has been a good one year. Yes, it has been one year since I started my OCBC 360 account. Time does fly, doesn't it?

It is also because of the OCBC 360 account that I have an OCBC credit card again after many years of not having one. Well, got to have one to get some bonus interest, right?

Only last night, oddly, I found out that OCBC's ibanking has a bar chart which shows how I have been using my credit card and since I have diverted all my credit card spending to my OCBC Frank card with the exception of petrol purchases for my car, this gives a good snapshot of my monthly spending.

Dining. I guess I don't visit restaurants very often. I think this was clocked from a couple of visits to Curry Times by Old Chang Kee.

Groceries. I go to NTUC Fairprice supermarkets once or twice a week.

Medical and personal care. I think this must have been from a visit to NTUC Unity (Pharmacy).

Other financial services and charges. I did auto top ups to my OCBC Frank Card's NETS Flashpay function (for parking and ERP charges) six times in March to help hit the $500 monthly spending required to get the higher cash rebate for card spending. I didn't use all the $300 stored in the card for parking and ERP charges which usually add up to not more than $30 a month.

I use the money stored in the card to pay telco and utility bills. I also use the money stored in the card to pay for groceries by using the NETS Flashpay function. So, actually, my monthly groceries bill should be higher and not just $148 which makes sense as I like my ice cream and chocolates.

Government services. This was for passport renewal. Won't happen again for another 5 years.

Of course, this is just a regular month's snapshot. It shows roughly how I spend my money on a monthly basis using my OCBC Frank Card. There are big ticket items like insurance premiums and car servicing which are not reflected here.

I don't keep a record of my monthly expenses but I think I am pretty careful with how I spend money. Yes, I know. This is just an excuse. AK is lazy.

As our income gets upgraded, make sure our expenses are not upgraded and we will naturally have more savings over time, all else remaining equal. Unless severely disadvantaged, anyone can do this.

Related posts:
1. Get paid more while waiting for opportunities.
2. An easy way to improve cash flow: My Frank Card.
3. How to have a comfortable retirement?

$2.00 Burger King's Fish N Crisp Burger: A Failure.

When Burger King announced their $2.00 Fish N Crisp Burger, McDonald's responded by lowering the price of their Fillet O Fish Burger to $2.00.

I have always been a fan of the Fillet O Fish and would order the $5.00 Extra Value Meal whenever I visited McDonald's in the past. When they dropped the price of Fillet O Fish to $2.00, I was overjoyed.

Then, I would order two Fillet O Fish for $4.00 instead of spending $5.00 on the Extra Value Meal. I am not crazy about the fries and soft drink. Just that when the Fillet O Fish was priced at $3.95 each, it was kind of silly not to take the fries and soft drink for only another $1.05.

Anyway, Burger King's claim that their Fish N Crisp Burger offers better value for money with one slice of cheese, not half, and 40% more fish got me curious enough to give it a try. Yes, AK is a sucker for value for money deals.

Poster outside the restaurant. Looks good, right?

So, I tried.

Hmmmm... Doesn't look quite the same.

Opened it up to add some ketchup. The bun felt stale.
The piece of fish looks to be the same size as the Fillet O Fish's.

Alamak!
AK is not a practitioner of Shaolin Temple's Da Li Jing Gang Zi!
The bread is definitely stale. This was from lifting the top earlier.

The fish is sooo salty! Why so salty?

Very disappointing.

Staying with McDonald's Fillet O Fish.

Burger King's Fish N Crisp Burger gets a resounding "C.M.I." from AK.

Related posts:
1. $3.30 Fillet O Fish meal.
2. 1 for 1 Fillet O Fish.

Should I do a CPF-OA to SA transfer before buying a flat?

I received an email from a reader in my age group regarding the purchase of a resale HDB flat. He asked if it would make sense to use up his savings in his CPF-OA to fund the purchase.

As I am not familiar with the rules in the purchase of a resale HDB flat, I would like to share our email exchange here and see if others have any ideas to share:

 

Hi AK,

I know you have blogged a lot about CPF, in particular to build one's retirement fund.


I'm 45 years old. I am buying a re-sale flat, say, $400K. I have $200K in OA and $200K in cash. But I do not want to spend all my cash and hence plan to take a bank loan between $100K to 200K.
 
Would like to know your opinion. Should I use up the money in the OA + cash or cash plus bank loan to fund the purchase?

Leaving the money in CPF (and perhaps transfer OA to SA) seems logical for beefing up my retirement fund. But it will mean I need to pay interest for bank loan, whose trend is increasing.

-------

Hi ,

If you think you are able to take a $100K loan and repay it in full in 8 years, the POSB HDB loan will save you some money still as the interest rate will be capped at 2.5% for the first 8 years. After that, given the rising SIBOR now, it will probably be higher than the 2.6% rate from the HDB Concessionary Loan.

Also, you might want to consider buying BTO, if you are eligible, against buying a resale flat. A BTO 2 room flat costs about $100K which is a small fraction of the $400K you are thinking about for a resale (3 room?) flat. Just being kaypoh. ;p

Best wishes,
AK

Hi AK

Appreciate ur reply.
Unfortunately, I'm not eligible for any new HDB flat :(

Btw, I still have friends advising me to "use up" CPF for housing. They say, govt may increase the min sum and increase the withdrawal age. Hence, our money will be stuck in CPF. 

 Hence better keep cash and invest it for (hopefully) highly return than CPF.

I see merits in their points and yours. Confusing ?

----------

Hi ,

Well, if you are able to use your CPF-OA money to generate higher returns consistently than the risk free 4% offered by the CPF-SA (which you would get if you were to do an OA to SA transfer), then, you should invest the money. When we are doing the comparison, the ideas to bear in mind are "risk free" and "consistently", not "hope". ;p
 
I will say this to your friends:

1. The minimum sum will increase at a rate of 3% per annum.

2. Withdrawal age is at 55 years. You may withdraw anything that is above the minimum sum based on your cohort.

3. Our CPF money is our money. It is not "stuck". It is going to fund our retirement through CPF Life, an annuity.

Please feel free to share my blog posts on how we can make the CPF work for us with your friends. I think you will be doing them a favour. ;p
 
Best wishes,
AK

In this case, I feel that it makes sense to do an OA to SA transfer (maxing out the SA, if possible) before using the balance in the CPF-OA to help fund the purchase of the resale flat.

Of course, before doing this, the reader should consider whether he would be able to repay the loan (i.e. POSB HDB loan*) in 8 years when the interest rate is capped at 2.5%. 

This way, he would be saving on the interest payment for the home loan (in a rising interest rate environment) and also benefit from the higher interest payment on his CPF savings. Sounds good?

*It is 5 years now. Blog post on POSB HDB loan updated.

Related posts:
1. How did AK amass so much in his CPF-OA?
2. A lot of the money in my CPF-SA is from...
3. How to upsize $100K to $225K in 20 years?

The name is Bond, Singapore Savings Bond (Part 3).

There is more news on the Singapore Savings Bond (SSB) by now and there is also plenty of discussion in cyberspace about it. I am sure there is no shortage of questions along the line of "Good or not har?"

So, this is AK asking the same question (i.e. "Good or not har?")  and attempting an answer.




To answer this question, we must first answer a couple of other questions:

1. What is our purpose for considering the SSB?

2. What are the alternatives out there?

When I first found out about the SSB, I thought that it might be a good place to park my emergency fund and war chest. 

Whether I would do it or not would very much depend on the yield I could get from the SSB.




Currently, I park my emergency fund in fixed deposits. The emergency fund is money that I will not touch unless things go very wrong. If the unthinkable should happen, I would have to break the glass, um, I mean fixed deposits. 

So, locking up the money in several fixed deposits that pay 1.08% to 1.25% per annum made sense.

As for money in my war chest which is to be used to capitalise on investment opportunities, I need them to be very near to me. 

The nearest form would be money in savings accounts (unless we consider money I keep in a tin at home as well). I could easily transfer money to my broker using internet banking from my savings account without having to visit the bank.

So, I have an OCBC 360 account which earns higher interest of up to 3.05% (but this is due to change to 2.05% from 1 May, apparently) for the first $50K. I have a CIMB savings account which pays a flat 0.8% for the first $750K. 

I also have some money in my brokerage account which pays 0.6% in interest per annum. All of these rates are better than the 0.05% we get from regular savings accounts here. 

We need a war chest but we should try to reduce the cost of holding money.

If our war chest is somewhat bigger (and, logically, this should mean at least more than $50K in size since the OCBC 360 account, even at 2.05% per annum, would beat any 12 months fixed deposit's interest rate today), then, it makes sense to have some money in fixed deposits which offer interest rates higher than the 0.8% offered by the CIMB savings account. 

Try to make sure that each fixed deposit is smallish in size so that we don't lose out too much if we should have to break one.




When would the SSB make sense for me then?

I understand that the SSB's interest rate would step up every year and if we were to hold the SSB for the maximum of 10 years, we would receive the same yield as a 10 years Singapore Government Security (SGS) which has a yield of about 2.4% per annum. 

So, if we are simply renewing a 12 months fixed deposit each time it matures to capture higher promotional interest rates for the next 12 months, would the SSB be a better option?

Well, right now, the interest rate is about 1.4% for a 12 months fixed deposit and it is more likely than not that interest rates will increase, given time. 

With expectation of higher interest rates in future, each successive fixed deposit would probably have a higher interest rate in the next few years. In such an instance, it makes the SSB less attractive.




If the SSB is not really that attractive an option for my emergency fund, then, it is definitely not an attractive option for money in my war chest which is less likely to be locked up for a much longer period of time compared to money in my emergency fund (touch wood).

We want to remember that in a deflationary environment, interest rates will keep dropping. In an inflationary environment, however, interest rates are likely to keep rising.

Of course, I do not know for sure what is the yield going to be like for the SSB if it were to be held for only a year or two. Only the MAS knows the answer. 

However, I do know that if it is not above the interest rate which I can get for a 12 months fixed deposit from a local bank, it is probably not going to attract me, keeping my purpose for considering the SSB in mind.

Related post:
The name is Bond, Singapore Savings Bond (Part 2).

The name is Bond, Singapore Savings Bond (Part 2).

On 26 March, I blogged about the Singapore Savings Bond (SSB) and during last night's "Evening with AK and friends", we talked about it too.

I am of the opinion that the SSB's coupon is unlikely to be as high as the CPF-OA's base 2.5% interest rate although it has been said that the coupon will be linked to long term Singapore Government Securities' (SGS). If we look at the yields of the 10 years to 30 years SGS, they are above 2% to under 3%.

The SSB gives holders the flexibility of early termination without incurring penalties. Holders will not have to worry about price volatility if they were to sell their SSBs before maturity date. Bonds are supposed to be safer if held to maturity. With the SSB, there is no need to hold to maturity and will be equally safe. This is a big plus.

Of course, now, what is on our minds is what will be the yield?

During last evening's session, Azrael, a fellow blogger whom I got to know not too long ago shared that the yield might be between 0.375% to 1.75%. He blogged about it too. You might want to read his blog post: here.

Credit: Yune Ki.

We really have to wait for more details from the Monetary Authority of Singapore (MAS) closer to the date of the launch which has been scheduled for sometime in the second half of this year. Who knows? We could be pleasantly surprised with the yield. 2.5%? Dare I hope?

Although I really like this development, I feel that the banks will have reason to be worried. Of course, by extension, their shareholders should worry too. Interest income forms about 60% of their total income. The finance companies will have to worry too. Interest income forms about 80% of their total income.

These financial institutions' interest income will take a hit if their cost of funds should go up. Cost of funds will probably go up if they have to compete with the SSB for deposits. By this, I mean they will have to offer more competitive rates for their fixed deposits. Will they be able to charge borrowers correspondingly higher interest rates to maintain their NIMs? Well, whichever way we slice it, things will get a lot more competitive for them.

However, all is not gloom and doom because the MAS also said that there will be a cap as to how much SSB each person is allowed to buy. They said that they want a broader reach and I think, by that, they mean that the SSB is not to benefit the very rich but the masses. This is similar to the mission of the CPF. If the cap is rather modest, then, the impact on the banks and finance companies is likely to be minimal. A cap of $20,000 to $50,000 per person, perhaps?

A modest allowance of SSB per person will also mean that the institution that is the CPF remains relevant as a long term savings tool. The SSB could be like the SRS which is an additional tool to help us achieve retirement adequacy.

I do feel that the government will tread carefully so as not to make the CPF less relevant nor cause hardship for the local financial institutions (which will have unpleasant ramifications).

Let's wait and see.

Related posts:
1. The name is Bond, Singapore Savings Bond.
2. National Day Rally (2014): CPF and retirement.
3. SRS: A brief analysis.

An interest rate of 10.68% per annum for a fixed deposit!

In January, I shared in my blog about POSB's Chinese New Year fixed deposit special.

The offer was:

Get 1.88% per annum for a 12 months fixed deposit from a minimum sum of $1,000 to a maximum sum of $1,000,000.

I tried taking part in it and because I am such a dinosaur with IT stuff, I wasn't sure if my application went through.

In fact, when a reader asked me about this during the second "Evening with AK and friends" last week, I was not able to give a clear answer.

Anyway, I checked earlier and I found that my account has been credited with $88. Apparently, I was one of the first 10,000 customers! My application was successful!

We need little happy surprises like this from time to time in life.

For POSB customers who deposited only $1,000 and received the $88 ang bao, they are actually getting an interest rate of 10.68% per annum!

In fact, it is more than that since the $88 ang bao is given now and not at the end of the 12 months period!

Thank you, POSB, for the generous ang bao.

I'm smiling. :)

Where to put your emergency funds? Fixed deposits aren't too bad. See related post number 1 below.

Related posts:
1. A special chest for emergency fund.
2. Should I put money in a foreign currency FD?