Invest in Japanese real estate: Saizen REIT and Croesus Retail Trust.

Over the weekend, I spoke with a friend who told me that his uncle is interested in investing in properties in Japan. Actually, he is not the first person to talk to me about the subject. Two other people spoke with me in the last 3 or 4 weeks expressing the same interest.

Ever since Prime Minister Shinzo Abe launched "Abenomics" in order to break the country out of vicious deflation which has lasted some 20 years, there has been renewed optimism that Japan could finally grow its economy once more. Although some might claim that Japan has joined USA and Europe in devaluing currencies, Japan has claimed that it is only bringing its currency down from an over valued position to a value that is more in sync with the current value of the US$.

Against the S$, the JPY has come down more than 20%. So, not only is Japan once again a less expensive destination for holiday seekers from Singapore, together with early signs of economic growth, it has also become a more attractive investment proposition.

Therefore, it should come as no surprise that some in Singapore should be looking at investing in Japanese real estate now. Indeed, anecdotal evidence shows that American and Chinese investors have already started doing so.

However, unless we have a lot of money and we have someone whom we can absolutely trust in Japan, I would caution against investing directly in Japanese real estate. It is complicated for foreigners to actually own a piece of real estate in Japan and we also do not have access to housing loans in the country. So, 100% cash down is required.

If we are really interested in investing in Japanese real estate, be it for rental income or possible capital appreciation, there are options right here in Singapore. Regular readers would have guessed the answer.

Off the top of my head, Saizen REIT is currently trading at about 20% discount to NAV even after the JPY has weakened so much against the S$. Gearing level has increased to 39%. At 18.7c a unit and a more conservative estimate of a 1c annual DPU due to the much weaker JPY, we are looking at a distribution yield of 5.35%. 

I do not think we can do better than this by directly buying an apartment in Japan without any leverage. The theoretical non-leveraged yield of Saizen REIT is about 3.85% and it is truly passive income compared to being a landlord of an apartment.

What about Croesus Retail Trust? It is now 96c a piece. Before the launch of "Abenomics", I was pessimistic about the retail sector and, consequently, shopping malls in Japan. In its 2011 report, Starhill Global REIT's  management said as much although not in the same words.

However, anecdotal evidence shows a revival in the Japanese retail sector since the launch of "Abenomics". As inflation returns to the Japanese economy, the people no longer defer purchases in the hope of lower prices in a deflationary environment. Consequently, this means brighter prospects for Japanese shopping malls.

At its IPO price of 93c a piece, it projected a distribution yield of 8%. However, the Trust's gearing level of 48% based on the appraised value of its properties is much higher than Saizen REIT's current gearing. Of course, gearing will magnify gains. Nonetheless, the theoretical non-leveraged yield of Croesus Retail Trust is 5.41%.

With a brighter outlook for the Japanese economy and retail sector, Croesus Retail Trust is beginning to look attractive as an investment for income.

In conclusion, with Japan's fortunes seemingly turning up, there will be an increasing level of interest in investing in Japan and real estate will be a natural consideration. We don't have to look too far to benefit from the improving fortunes of the country.

Related posts:
1. Croesus Retail Trust
2. Saizen REIT: Refinancing.

"REITs that buy apartments benefited from a shortage of new supply and a stable number of tenants in a nation where less than half of Japanese under the age of 40 own their own home. Japan has accelerated efforts under Prime Minister Shinzo Abe to end deflation and boost the world’s third-largest economy, including measures to revive the property industry, which has been struggling since an asset bubble burst two decades ago. The government has a target to increase assets owned by REITs by 40 percent by 2020. "
(Source: Japan Apartment Real Estate Proving Best: Riskless Return)

Dr. Marc Faber: How not to lose money?

I have the greatest respect for Dr. Marc Faber and his insights have so far been spot on. In a recent interview, he said "I am ultra-bearish about everything geopolitically. In an environment of money printing, we have to ask ourselves, how do we protect our wealth? ... Where do we allocate the money?"

In summary:

1. Treasuries:

"U.S. government bonds are junk bonds," Faber said. "As long as they can print, they can pay the interest. But another way to default is to pay the interest and principal in depreciating currency." (AK71: Yup, countries inflating their way out of hard times has been done before.)

2.  Cash:

Specifically, the problem in Faber's view is the loss of purchasing power as inflation whittles away the value of money. (AK71: I believe he is referring more to the US$ and also the Euro. The S$ has been strengthening and we are still seeing inflationary pressures but it would be much worse for the US$ and the Euro.)

3. Stocks:

If you print money, stocks will not collapse. (AK71: I am sticking to my plan like glue! Remember my plan?)

4. Emerging markets:

Faber's own stock portfolio is centered on dividend-paying Asian shares, particularly in Malaysia, Singapore, Thailand and Hong Kong. These include a variety of real estate investment trusts and utilities. (AK71: Honestly, I knew that he was a fellow investor in Hyflux Water Trust but I did not know that he is also into REITs! I like this. Stick to the plan!)

5. Gold:

Faber is convinced that the price of gold will continue rising and that any pullback is a buying opportunity. And as a currency, Faber said gold should be held in its physical form and not in shares of gold miners or even exchange-traded funds. (AK71: I have recently replied to a reader that I feel that I am underinvested in gold and silver. However, being in Singapore and having S$ denominated assets, I feel much safer.)

Read complete article here.

Related post:
1. Sleep well at night with a plan.
2. Hedging and precious metals.
3. Hyflux Water Trust: Privatisation.
4. Staying positive on S-REITs.

Japanese real estate: Has it bottomed?

Many asked me if I think the real estate prices in Japan has bottomed. After 20 years of decline, I believe it has.  Why am I so confident? Well, I do not have a PhD in Economics but I understand that price is a function of demand and supply.

The Japanese are fearful of buying any real estate because anyone who bought a piece of real estate in the country within the last 20 years would more likely than not have lost money and this could be as much as 50% of the original purchase price! If the person had taken a bank loan to buy that piece of real estate, including interest on the mortgage, the losses could be even higher.

Little wonder that 40% of the Japanese population rent the roofs over their heads.  Little wonder why Japanese residential real estate's rental rate declined little relative to the decline in real estate prices over the years.

OK, so the rental demand is strong and this means that rental rates would remain resilient but what about the prices of real estate in Japan? Well, the US$ is probably going lower in time. With QE2 (quantitative easing part 2) by Mr. Ben Bernanke, the fate of the US$ is sealed. Anyone who wants to get a better rate of return would be bonkers to put any money in US Treasuries.

So, what are investors to do? They want to invest in assets denominated in currencies which would gain against the US$. They want to invest in assets which would generate cash flow in currencies with relative strength against the US$. Many Asian countries offer opportunities to these ends.

The fact that Saizen REIT managed to sell quite a few of their properties in their YK Shintoku's portfolio is testament to the fact that buyers are back in the Japanese real estate market and they are looking for better returns on their investments. Money will go to where it is treated best.  Borrowing at very low interest rates and getting more than 10% yield in net property income from Japanese residential real estate is a mouth watering deal!

Even if the market has not bottomed in Japan, I believe it nearly has. This could be the next big story.

Related posts:
Saizen REIT's properties: Would I buy?
Japan's debt issue and Saizen REIT.
Invest in Asian equities and inflation is here to stay.
Buy Japanese real estate.

Increasing demand for S-REITs.

Morgan Stanley says that S-REITs will benefit from low borrowing costs and a stronger S$. The high dividend yields make S-REITs attractive with limited downside.

Singapore’s high-yield REITs attractive. Yield spreads for REITs will remain high while interest rates are low, meaning cheaper funding costs for the trusts, Morgan Stanley says
Monday, 04 October 2010

© 2010 - The Edge Singapore

Although Morgan Stanley specifically mentioned Mapletree Logistics Trust and Ascott Residence Trust as being upgraded to Overweight, I believe that smaller S-REITs with even higher yields will get some attention soon as well. It is a matter of time and I will be patient.

Today, Saizen REIT saw its 15.5c sell queue bought up to the tune of 6,068 lots. There were three trades which were buy ups of 1,000 lots each. Could this REIT be attracting the interest of some deep pocketed investors?

Incidentally, I have accepted and paid for the rights of AIMS AMP Capital Industrial REIT this evening. I also applied for some excess rights.  Hope I get some. To fellow unitholders, please remember that the deadline is 7 Oct (Thu), 9.30pm for applications by ATM.

Related posts:
Office S-REITs VS Industrial S-REITs.
AIMS AMP Capital Industrial Trust: Rights issue.
Saizen REIT: Better than expected DPU.

Hope this helps to refresh your "A" Level Economics!

The title of this blog post is exactly the same as the title of an email sent to me by a reader, Paul.  I like how it neatly encapsulates his good intention with a dash of cheekiness. I try not to take myself too seriously most of the time. Haha... I have reproduced his email with his permission:

Ways to Boost National Income

As we have learnt in basic economic theory, C+I+G+(X-M)=Y, I will now discuss issues which are restricting the major economies such as US and the EU to grow, and some of the policies which have been undertaken by them.

C stands for domestic consumption. In recessions, consumption is usually hit badly. As the consumers are busy deleveraging to pay off their debts, they cut down on their income elastic consumption which is normally the luxury goods.

I stands for investments, aka private sector. During recessions, there is a lack of incentives for investment by the private sector due to excess capacity therein. Furthermore, margins could thin due to lack of pricing power in times of recession. In addition, due to consumers deleveraging, there could be a lack of demand from consumers.

G stands for government spending. In normal recessions, a country's government is able to execute expansionary fiscal policies through spending in sectors such as infrastructure, education, health or military. These deficits could be financed by previous budget surpluses (which many of these big countries do not have), or borrowings through issuance of government bonds. Most countries adopt the issuance of government bonds approach to finance their government spending. However, as mentioned in an earlier post, governments in major economics like the UK, Japan and the USA have been incurring budget deficits for the past few years, which limit their ability to borrow more money. In the case of the US, the government debt is expected to double over the next decades, with majority of the debt caused by interest payment. The austerity program adopted by the major economies limit the governments' ability to prop up growth.

(X-M) is net export. One of the most basic ways to boost the (X-M) component is to have a weaker currency, which would make a country's exports relatively cheaper compared to other countries. Currently, governments worldwide are turning to this as a solution. Instead of focusing on productivity to boost exports, governments take the easy way out, by “manipulating” the strength of their currencies. For example, USA forced the revaluation of the Japanese Yen in 1985 to boost their exports. Currently, USA is trying to do the same to the Chinese RMB.

In this world, there is never a case of a balanced trade accounts, there will always be imbalances, some countries having surpluses, some having deficits. Trade account surpluses and deficits are not a problem in economic studies. But for political reasons, it has been a problem. Recently, Japan central bank also intervened in the FOREX market to weaken the yen. This has led to what is called "competitive devaluation", a race to the bottom, where countries will try to make their currencies relatively weaker to boost exports.

Another method to boost (X-M) is the implementation of trade barriers, which would again result in trade wars. Already, there are signs of protectionist measures in the USA through the “Buy Made in US” campaign. Trade wars would hamper global economic growth, especially those of emerging markets which are reliant on exports.

When there is a recession caused by a financial crisis, it takes longer than usual to recover due to the freeze in credit lines and financial system. Actually, US is doing comparatively better than the recovery from previous financial crisis led recession.

In the case of Singapore, we are fortunate enough to have a good public financial system. Any sales of Singapore assets such as land are being kept in the “treasury” under the care of the President and not the government. 50% of the returns from investments such as those from GICs are also channeled into this “treasury”.

Hence, when the Singapore government want to tap into this reserve in 2008 or 2009, it had to seek permission from the President. The budget surpluses which are usually stated by the government, do not include the increase in the reserve funds. Therefore, “short term pain, long term gain” has served Singapore well in saving for the rainy days and having the fiscal policies to help the economy. Most western economies do not have this privilege due to the asymmetrical nature of fiscal policies. Easy to cut taxes, hard to raise taxes, which sort of validate Singapore government's stand on retaining the GST even during the economic hard times.

Related post:
USA, a rock and a hard place: Paul opines.

Gold nearing US$1,300 an ounce.

Gold is currently at US$1,293.50 an ounce and silver is at US$21.05 an ounce, even higher than just a week ago when I said "I see immediate support for gold at US$1,260.00 an ounce and immediate support for silver at US$20.20 an ounce.  Gold is now challenging resistance at US$1,270.00 and if it does break this, it could go much higher."

The Fed seems ready to increase liquidity in the US economy and this could possibly cause the US$ to depreciate further. What this might translate into is greater inflationary pressure in the USA in time and I have been a staunch believer of this eventuality as informed by Dr Marc Faber and Mr. Jim Rogers.

The worst thing to invest in would be the US government bonds (treasuries) as bondholders would basically be seeing their wealth eroding away as the US$ depreciates in value.  This is precisely why the Chinese government is so concerned since they are the world's largest holder of US$ debt, after Japan. However, in the short term, they could see bond prices bumping upwards because the Fed would buy bonds to keep interest rates low in an effort to encourage borrowing by the private sector.

Could gold go much higher?  It is my believe that it would but it would not be a straight line up.  The real value of gold is closer to US$2,000 an ounce and this would take time to materialise. So, for anyone who is thinking of having some exposure to the precious metal, it is my opinion that buying on pullbacks as supports are retested would be the way to go.

Related posts:
Gold and Silver highest in the last 12 months.
Real value of gold.

A new year and a new decade. Strategy for 2010.

Firstly, Happy New Year! It's the beginning of a new year and a new decade. Many countries in the world still have huge debts to deal with but let's hope things will be better the next 10 years.

This is extracted from the latest issue of NEWSWEEK magazine:

The American goverment may owe China US$799 billion but when it comes to foreign debt per capita, the US is relatively prudent. Which nationality has the highest foreign debt per capita?

Greeks US$ 27,746
Belgians US$ 27,023
Austrians US$ 26,502
Irish US$ 24,247
Norwegians US$ 21,402
Italians US$ 21,089
Dutch US$ 20,412
French US$ 18,946
Germans US$ 15,574
Finns US$ 13,617
Americans US$ 11,094
Danes US$ 9,410
Spaniards US$ 8,715
Swedes US$ 7,058
Brits US$ 6,526

Now, this puts things in perspective. Many countries are still not out of the woods. This gives the idea that we will see the global economy going into a tailspin again in the next 2 or 3 years greater credence. We are experiencing a cyclical bull in a secular bear market and not the beginnings of a secular bull market.

My strategy for 2010?

1. Gold
I am keeping an eye on the price of gold. If it goes closer to the psychologically important support level of US$1,000 an ounce, I will buy more physical gold as a long term hedge against inflation. Gold also acts as an insurance for my other investments. I buy physical gold from UOB.

2. Crude oil
I believe that demand for crude oil will continue to strengthen through 2010. However, it will not go up in a straight line. It will climb a wall of worries and we will have plenty of worries in 2010, no doubt. I would trade counters which are leveraged to the price of crude palm oil (CPO) as a proxy to the price movement of crude oil. I like Golden Agriculture.

3. Japan
As a contrarian play, Japan might outperform after almost two decades being in the doldrums. I like the Japanese Yen. I like Japanese real estate. I like Saizen REIT.

4. Indonesia
A strong emerging market, Indonesia did not suffer negative growth in 2009. I like LMIR and First REIT for the low gearings and the high yields.

5. Healthcare
There is greater demand for quality healthcare with increasing affluence and an ageing population in Singapore. I choose Healthway Medical.

6. Tourism
2010 will be a year where tourist arrivals balloon in Singapore with the completion of the two integrated resorts (IRs). Looking for value and high yield, I like Suntec REIT and SPH.

There are many other counters which will do well in 2010 but I will concentrate on these I've highlighted. The choices here are based on FA. Remember to use TA to identify entry and exit prices. Good luck in 2010.

Gold as an insurance against inflation

Why buy gold? For me, gold is just another form of insurance against inflation. Real assets such as crude oil, Asian real estate and commodities are also used to hedge against inflation.

Gold will hit US$2.5k eventually and, probably, go higher in the years to come. The current inflation adjusted value of gold compared to the high achieved in 1980 should be about US$2.4k now. We are about halfway there. If we believe that inflation is going to be a big issue in the coming years, it's a no brainer that gold is on a long term uptrend. Real value of gold

However, I'm not overzealous about gold because I am not living in the USA or HK, making US$ or HK$. I am living in Singapore and making S$ which will appreciate against US$ and HK$ in time. This makes gold investment less compelling for me.

Frankly, I still prefer trading in the stockmarket and buying undervalued and/or strong dividend paying stocks for now. My gains in the stockmarket so far this year have outperformed gold or silver. Cashflow is also something I get from my stockmarket investments that I do not get from gold. However, all parties will come to an end. Will have to know when to exit the stockmarket.

Gold: to buy or not to buy?

Technically, gold was overdue for a correction and the charts show it. Technically, the US$ was due for a rebound as it's oversold and short covering must take place at some point. The market just needed an excuse.

Fundamentally, gold is an asset and still a hedge against inflation as the US$ will continue its long term slide due to oversupply, this is after a brief rebound (which could last up to several months).

At this moment, we can only identify price levels which are strong supports and see if they hold or break. Currently, the next band of strong support is US$1,020 to US$1,040. If that breaks, it would be US$990 to US$1,000. We want to see price bouncing of a support and closing convincingly above it. It needs to be confirmed in the following sessions, hopefully forming higher lows and higher highs till the next resistance level is broken.

If gold does go below US$990, it might be a whipsaw as I feel that US$990 is a level that should hold as it is a level that was a many times tested resistance and should be a strong support. If US$990 breaks convincingly, gold would be headed much lower. It would spell the end of the uptrend for gold, for quite a while at least.

However, the longer term trend of gold is up and the longer term trend of the US$ is down. I do not doubt that.