Hock Lian Seng: Won a $221.8 million contract.

Despite a major contract win amounting to $221.8 million recently, Hock Lian Seng has not managed excite Mr. Market. Add this recent win to the $105.5 million win in February, Hock Lian Seng now has a very healthy order book.

If I were to hazard a guess, I would say that the lukewarm reception by Mr. Market stems from concerns about Hock Lian Seng's JV condominium development with King Wan and TA Corp, The Skywoods, which has seen a very slow take up rate. From what I know, it is less than 20% sold and it has been half a year since it was launched.

With the recent action by CapitaLand to implement a 15% discount on prices for its hard to sell Sky Habitat in Bishan, it is possible that more developers with hard to sell condominiums for various reasons might follow suit.

Analysts have estimated that The Skywoods has an average breakeven price of some $1,100 per square foot. Hock Lian Seng et. al. reduced the launch price to an average of $1,300 per square foot in September 2013, taking into consideration the more difficult conditions. So, the margin is less than 20%.



Source: www.stproperty.sg

However, given that things could get worse, prices could be dropped again. If it should be a 15% drop like what happened at Sky Habitat, then, average price falls to $1,105 per square foot. This is at break even price which means that Hock Lian Seng would spend a few years being busy on the project for nothing. In my opinion, this is an optimistic scenario and I hope that it would not get any worse than this.

So, if we think of The Skywoods as a zero contributor but, at the same time, being able to cover its own development cost (i.e. able to break even), then, we just have to focus on the rest of the business and see if Hock Lian Seng is still a good investment.

With the recent big contract wins, the civil engineering segment now has earnings visibility till 2020.  I have said a few times before that Hock Lian Seng, like Yongnam, is a natural beneficiary of the increased spending by our country on infrastructure development till 2030. So, more wins are likely in future. A stronger order book over time will overshadow Mr. Market's concerns about The Skywoods, perhaps.

Hock Lian Seng also has two development industrial properties which are mostly sold and these are due to obtain their TOPs sometime in late 2014 and early 2015. In the latest annual report, it has been stated that these will contribute significantly to Hock Lian Seng's results then.

The Skywoods is the burr in the side for Hock Lian Seng but even with a 15% reduction in asking prices, it could turn out to be a non-issue. Hock Lian Seng's business is more than just The Skywoods.

EPS, which has been declining, is likely to improve again with a healthier order book and with the obtaining of TOPs for its two development industrial properties in the next 12 months. Although a special dividend could be declared then, I would be quite happy if the conservative management continues to pay a dividend of 1.8c to 2.0c a share, which I believe is sustainable. NTA per share could increase by another 3c or so which would bump NTA per share to above 30c.

Hock Lian Seng is a sound investment for income although not a very exciting one for growth. For me, it has been a good investment so far and looks like a reasonably good investment for the future. The last time I bought more was in February this year at 25.5c a share. If share price should decline by 10% or more upon the counter going XD, I would probably add to my long position.

A 7% dividend yield? An investment that is likely to grow to be more valuable in future as NTA per share grows? Sounds good to me.

Related post:
Hock Lian Seng: DPS of 1.8c.

FSL Trust: An Asset Play with 80% discount to NAV?

FSL Trust was an investment in my portfolio that I considered to be a mistake and I blogged about it a few times before. I collected quarterly dividends when I was vested and I also made some money by using technical analysis to trade the stock but, overall, the investment performed badly.

However, always bearing in mind what Peter Lynch said, I looked at FSL Trust again as its unit price plunged to about 6c a unit before recovering to about 10c recently after its trading suspension was lifted. All investments are good at the right prices. So, the question is whether FSL Trust is now at the right price.

Going through the latest annual report with numbers correct as of 31 Dec 2013, there seems to be plenty of optimism with a dose of caution on the part of the management. They took on more impairment to more accurately reflect the values of the assets held by FSL Trust and they also bought units in the open market as the price plunged, believing that the future of the Trust is now brighter.




Looking at the numbers, however, I believe that FSL Trust, at the moment, is attractive only as an Asset Play. With a NAV/unit of US$0.41 and a unit price of about S$0.10, it is trading at more than 80% discount to valuation. However, we have to bear in mind that ships are depreciating assets. So, their values have been and will continue reducing.



Click to enlarge.

When Peter Lynch invested in Asset Plays, he asked:

1. How much debt is there? This is important because creditors are first in line.

2. Is the company taking on new debt, making the assets less valuable?

3. Is there a raider in the wings to help shareholders reap the benefits of the assets?




To address the questions:

FSL Trust's NAV/unit of US$0.41 suggests that if the ships were to be sold at 20% discount to their book values now, after paying off all debts, we could see S$0.25/unit distributed to unit holders. This is a huge 150% premium to current unit price.

FSL Trust is not taking on new debt. In fact, it has been paying down its debt.

In recent months, we have seen some analyses on how the shipping cycle could be bottoming although conditions are still difficult. If these analyses are correct, then, could there be a corporate raider or two who might be eyeing a possible Asset Play like FSL Trust?

With revenue already in decline and with more charters expiring, possibly not to be renewed, FSL Trust is unattractive as an investment for income at the moment or even in the next 12 to 24 months.




Even if FSL Trust were to resume a quarterly distribution of US$0.001, at S$0.10 a unit, we will get a distribution yield of about 5% only. For an investment with assets depreciating at about 5% per annum and with useful life of 25 years when newly acquired, a distribution yield of 5% per annum is sorely inadequate.

Without any improvement or deterioration in revenue, FSL Trust will take about 16 years to pay off the bank loans. 16 years is a long time and given the relatively short useful life of ships, as income generating assets, they would be more or less spent by then.

Of course, one could argue that it is unrealistic to assume zero improvement in economic conditions in that same period. Indeed, FSL Trust could become a compelling investment for income again if its revenue were to improve significantly.

To continue, at the end of the hypothetical 16 years, taking into consideration depreciation and if we are somewhat conservative, FSL Trust's portfolio of assets could still give us a NAV/unit of US$0.20. So, if no corporate raider came along, for someone who decided to invest in FSL Trust at 10c a unit today, he could possibly see a capital gain of 150%, all else remaining equal, if the ships were to be sold away at book value then. Is this realistic?

This leads us to another question we have to answer and that is how realistic are the valuations of the assets? FSL Trust has already taken on more impairment but will there be more to come? More impairment could happen if shipping rates were to decline again. Experts are of the view that this is unlikely to happen as the global economy improves ever so slowly.




For investors for income, FSL Trust is a rather poor choice now and in the near future. As an Asset Play, however, it could be rewarding. However, we wouldn't know whether the unit price will reflect more closely the value of the underlying assets and, if it should happen, when.

Remember that the assets are depreciating in nature. So, the longer we hold, the lower their values. As I would like to be compensated adequately while I wait, I will need a much higher distribution yield than 5% from FSL Trust before considering re-initiating a long position, all else remaining equal. What about 10% which was what Rickmers Maritime Trust offered a year ago during its 1 for 1 rights issue, all else remaining equal?

Bearing in mind that all else will not remain equal and that things could get worse with expiring charters, investors attracted to FSL Trust as an Asset Play should demand an even higher distribution yield. Therefore, without any chance of revenue improving in the near future, as an Asset Play, FSL Trust will become attractive only at a unit price that is much lower than what it is today.




Suggested reading:
"One Up On Wall Street"
by Peter Lynch.
The last I checked, they have 7 pre-owned copies left at US$6.98 each. Free shipping worldwide.

Related posts:
1. Rickmers Maritime Trust: 1 for 1 Rights Issue.
2. FSL Trust: Sold some at 48c.
3. FSL Trust: Reduced DPU to US 0.10c.

Yummy yum yum ($1.10) lunch.

I recently discovered this and I like it so much! What is it?

Chinatown brand spring onion pancakes!

$8.20 for a pack of 25 pieces.

Made in Singapore!

I patriotic or what?

Today, I pan fried 2 pieces for lunch:

Waiting...

Flipped! Nice!

To each piece, add 2 tablespoons of baked beans. I like the NTUC Fairprice brand's because it is only 90c a can but it was sold out and I had to settle for Ayam brand's which costs slightly more than $1 a can.

This was piece number 1.

Tucking in while piece number 2 was still frying in the pan.

Yummy yum yum and the price of lunch? About $1.10.

Which supermarket did I go to?

NTUC Fairprice, of course.

Oops (Added at 5.45pm):
A friend SMS me and asked me how did I get $1.10? Shouldn't it be $1.00 + $0.66 = $1.66? Er... It is $1.10 because I still have half a can of baked beans left!

Related posts:
1. Yummy yum yum breakfast.
2. Restaurant quality ramen at home.

Old fashioned or growing older?

I was chatting with a reader on FB and I said how I prefer the newspapers in paper form and not digital form. 

I am very old fashioned. I like to be able to make notes in the margins, underline, tick or cross sections and sometimes draw funny faces (yes, I like to think that this is old fashioned too).

This is a reason why I really dislike annual reports being sent to me in CDs! See these?

I like to be able to do this:

This is quite clean actually. For some annual reports, I could write paragraphs, penning down my thoughts while they are still fresh in my mind. 

I have grown more forgetful of late and I am more easily distracted too. So, it is important that I pen my thoughts down quickly.

Annual reports in CDs? They are really off putting for me.

Related posts:
1. Invest and get back the money spent.
(Old fashioned? Growing old too.)
2. What I do before I buy or sell a stock?
(Old school or old fashioned? Different?)

Totally unrelated post:
Save money with low prices (Go shopping with AK).
- Just updated. All the links were dead.
Thanks to a reader for alerting me.

Old Chang Kee: Curry Times.

Talented OCK supporter! LOL!
I have always wanted to try the Fried Laksa and the Ngo Hiang in Curry Times by Old Chang Kee. However, each time I walked past the outlet in Westgate, I would see a long queue and I really dislike waiting in queues. So, I would walk away.

Today, I got to Westgate a bit earlier in the evening and the restaurant was only half filled. I didn't have to queue. Lucky!

I didn't have to wait too long for them to serve me my orders. Thumbs up!

Fried Laksa:

Ngo Hiang:

Yummy! I like!

As I was tucking in, a queue formed outside the restaurant. Wow! That improved my appetite! Old Chang Kee is doing well!

Photo taken after I left the restaurant. 
It was about 6.45pm.

You know how we get mints from some restaurants after dinner? At Curry Times, we get some nice old fashioned biscuits. I really like the ones similar in size to 5 cent coins with the little coloured sugar tops. Diners get to help themselves to a cupful when they pay at the cashier!

See the big jar of colourful biscuits?
Click on the photo and see if they bring back memories.

I will have to bring my mom next time. I think she will like the Chendol.

Related post:
Old Chang Kee: Lessons from Mr. Han.

InvestX Congress 2014: AK's first public appearance.

By now, many probably know that I have agreed to be a guest speaker at a one day investment education event that is happening on 14 June 2014 (Saturday) in Suntec City. It is an event that is organised by a bunch of friends who formed a company called "The Fifth Person".

These same friends organised an event which I blogged about earlier and a guest blogger, Solace, did a review of it. I think it is safe to say that Solace was impressed. Well, the event on 14 June 2014 will likely be more impressive.

I know my friends managed to get a couple of industry professionals to be guest speakers as well. So, apart from what you see in the marketing material, you are likely to get some bonuses on the day of the event.

Price of ticket? $99 per person. However, early birds pay $79 per person. This special offer is good till 21 May 2014.

Now, I know that probably quite a few readers will want to go to the event because I am going to be a guest speaker. If that is your motivation for going to the event, please consider not going. Why? The reason is quite simple.

I won't be saying anything you have not heard me said in my blog for the last 4 and a half years. I would be surprised if you have not grown tired of me repeating myself once every so often.

I will, however, tell you why you should go to the event.

You should go to the event to listen to Victor Chng and Rusmin Ang, two brilliant young minds. Those stocks listed in the marketing material are not just stocks that they picked out to show how well we could have done on hindsight. They actually invested in those stocks after doing thorough due diligence earlier on and if you were to listen to them, you would be impressed and, more importantly, enlightened.

You should go to the event to listen to industry professionals. I cannot reveal too much at this point but I think it will be a fun and rewarding experience no matter your level of accomplishment as an investor. Ok, to be fair, I feel that if you are already a very accomplished investor, you might find the event dull at times (mostly during AK's segment).

Finally, you want to go to the event to help raise funds for charity. Yes, a meaningful percentage of the proceeds will go to a charity. My friends know that I have a soft spot for Singapore Children Society and I hope that the donation will go to the charity of my choice. (I am being sneaky because the recipient has not been decided yet. Hey, guys! I win!)

I believe that this is going to be a value for money event. So, if you have the time and $79 to spare, block the 14th of June and reserve your place. It is not a big event like the one I blogged about earlier this year in Kallang Theatre which sat 1,200 people. For this event, there are only 400 seats available. So, if you decide that you want to attend, don't wait too long to get your ticket.

Get your early bird ticket at: InvestX Congress 2014.

Now, I will have to decide on a disguise.

P.S. Supporting this event could indirectly raise the profile of Suntec City Convention Centre which could benefit Suntec REIT. This could benefit the writer who has been a Suntec REIT shareholder since 2009. OK, now, you have been warned.

Related post:
Tea with Solace: A review.

AIMS AMP Capital Industrial REIT: $1.425.

There is no accounting for Mr. Market's behaviour and the recent strength in the unit price of AIMS AMP Capital Industrial REIT is, to me, inexplicable.

At a pre-rights unit price of $1.415, the REIT was trading at a discount to NAV which was at $1.52 per unit. Post rights, however, the NAV is closer to $1.29 a unit. So, the recent high of $1.43 is actually a 10.85% premium to NAV.

Of course, with the funds raised from the rights issue not being used for yield accretive purposes, I also expect a 15% dilution to DPU in the near term. Not very supportive of a higher unit price, wouldn't you say? Eventually, DPU should recover but probably not to the pre-rights level and not in a jiffy.

Having given due consideration to all the above reasons, I decided to reduce the size of my long position in the REIT which is now larger after the recent rights issue. How big was the divestment? Not a big one but a rather small 14% or so. Who knows? Unit price could go higher.

The units divested are those I bought in late 2009 and mid 2010. Time really flies.

I estimate the return on investment, including income distributions over the years, to be about 17% to 18% per annum.

With this divestment, I have taken back the money I used to participate in the recent rights issue (at $1.08 per rights unit) and a bit more. A bit more? With a theoretical ex-rights price (TERP) of $1.365 then, it means that my partial divestment has a nice little capital gain to boot.

After this, my war chest will be beefed up but, everything else remaining equal, my passive income from S-REITs this year will be lower. I will have to wait patiently for opportunities.

ERRATA:
Post recent rights issue, NAV/unit should be about $1.45. A thousand apologies. My brain no good. Thanks to Louis and Capricon for the nudge. So, it means that at $1.43, there is still a 1.5% discount to NAV.

Related posts:
AIMS AMP Capital Industrial REIT: Rights.
AIMS AMP Capital Industrial REIT: Good price?

Save money by having restaurant quality ramen at home!

This blog post is dedicated to a kindred spirit, SMOL.

I love eating Japanese style ramen. A bowl with hot soup is to die for.

However, it is not cheap to have a bowl of Japanese style ramen in Singapore and I am sure a huge portion of what we pay goes to rents and salaries. This is especially obvious when I found that I could have 4 bowls of restaurant quality ramen for only $3.85. Yes, not 1 but 4 bowls!



They come in packs of 4. There are 2 flavours. I prefer this one.

Recently, I bought more because there was a special offer in NTUC Fairprice. $3.35 per pack of 4.

Here is AK in action:



I tried this flavour for dinner recently.

Cook for 4 minutes, stirring often. Then, turn off the fire and add seasoning. Mix well.

Restaurant quality ramen at less than $1 a bowl. Really, really good!

If you are thinking of going out for a bowl of good quality ramen at Ajisen Ramen, for example, think again.

Think of how much money you could save by cooking at home. The taste of this instant ramen is really authentic and the money you save is very real too.

If you like ramen but have always hated instant noodles, this will change your mind. I am sure.

Oishi and in more ways than one too!

Related posts:
1. Korean noodles for lunch.
2. AK brand cup ramen!

Sabana REIT: Should I sell at a loss?

This blog post is in reply to a reader's comment: here.

Hi Kim,

You have asked one of the most difficult questions ever. :)

I wouldn't buy at the current price because I believe that Sabana REIT should offer a bigger premium in distribution yield compared to A-REIT, for example, because of its spotty track record. So, chanting to myself a familiar mantra which is "buy at a price I would not sell at and sell at a price I would not buy at", I should sell.

Of course, if we have to make a loss in selling an investment, it becomes a bit tougher. I never like selling at a loss. Who does?

However, if selling makes sense, we should sell even if it is at a loss and it makes sense if:

1. The business fundamentals have changed for the worse and the reward for staying invested has been drastically reduced or is, in some instances, non-existent.

OR

2. We have found a better investment with stronger fundamentals and better returns.

Of course, if we believe that Sabana REIT's distributable income of 1.88c or so per unit per quarter sufficiently compensates us for being invested at the current price, then, stay invested.

Personally, I would be more comfortable with at least an 8% yield which is what I am accustomed to getting from Sabana REIT. So, a unit price of 94c, all else remaining equal, would be more enticing.

If I were holding on to a loss making position in the REIT but if it is not a big position, I will probably continue to hold on. If it is a big position, I will sleep better at night if I sell half of my investment and take the loss as a fee paid to Mr. Market. If it is a very big position, I might sell 80% of my position. I will most probably not sell everything.

Not selling everything also gives me an incentive to keep monitoring the REIT as I still like the high tech industrial buildings which form about half of the REIT's portfolio. After all, it is not as if Sabana REIT is going to do a Titanic in the next 12 months.

All investments are good at the right price and there could be a chance to buy into the REIT again with a good margin of safety.

That is an imperfect approach that gives the imperfect me peace of mind. :)

Related post:
Sabana REIT: 1Q 2014.

Yummy yum yum (60c) breakfast.

Happy Good Friday!

This is my yummy western style breakfast! Looks good! Tastes good!

Kids, don't do this at home although I am sure you would love it.

Cost? Er... 60c, maybe.

Related posts:
1. Gourmet sandwich.
2. Have a break!
3. What's for lunch?

Croesus Retail Trust: AK makes a suggestion.

This blog post is in reply to a reader's question on Croesus Retail Trust: here.

Hi Capricon,

Not that I know of, no. Of course, I could have missed it. -.-"

I know the management is caught in a situation where they really want to seize acquisition opportunities because commercial property prices are rising fast in big cities in Japan.

However, the biggest advantage of being a business trust has been blocked by the management's own promise not to gear beyond 60%. After their recent two acquisitions, they don't have much left in terms of debt headroom.

I do not see how a higher unit price will help them to borrow more money since gearing is calculated based on the value of the properties in the Trust and not its market cap.

If they want to do another acquisition without having gearing cross beyond 60%, the way is to do equity fund raising either through rights or placement.

Actually, Jeremy Yong could consider something else. The Trust could issue perpetual bonds because they are treated as part of the equity structure. So, gearing would actually drop and the Trust would have the money to do more acquisitions. As long as the NPI yield is higher than the coupons to be paid on the bonds, unit holders will benefit. However, if the Trust does this, I hope the bonds are in JPY and not in S$.

Do you have Jeremy Yong's contact details? If you do, send him an email and tell him what AK suggested. Of course, I do not know if it is practicable or not. Just a crazy idea, perhaps. ;p

Related posts:
1. Croesus Retail Trust: Luz Omori and Liz Wave I.
2. Perpetual bonds: Good or bad?

Sabana REIT: 1Q 2014 DPU 1.88c.

Although I expected a decline in DPU from Sabana REIT, the decline to 1.88c is rather drastic. Based on a unit price of $1.08, this gives us an annualised distribution yield of only 7.05%.

Remember I made an assumption in an earlier blog post on Sabana REIT regarding how Mr. Market might demand a premium in distribution yield from the REIT compared to A-REIT? At that time, I said that Mr. Market might send the unit price down to $1.03 if it should demand an 8.5% yield. In fact, it touched a low of $1.005.

With distribution yield now at 7.05%, to get to an 8% yield, unit price might fall to 94c. Well, a drastic fall in DPU might just be accompanied by a drastic fall in unit price. I am not saying that it will happen but I won't be surprised if it should happen.

If we look at the numbers, it is really the almost 400% increase in property expenses that has resulted in a huge reduction in DPU. Of course, there is also the issuance of new units in payment to the management of the REIT as well as a higher vacancy rate.

As investors, we want to know if the increase in property expenses is temporary or permanent. So, we have to look at the details. These expenses are:

(i) Property and lease management fees incurred for the Acquisition Property;

(ii) Higher property tax, maintenance, utilities and applicable land rent expense, in line with the increase of directly managed multi-tenanted properties from one in 1Q 2013 to six in 1Q 2014;

(iii) Higher property management fees in line with the higher revenue from 151 Lorong Chuan; and

(iv) Lease management fees being charged to the 15 properties acquired during IPO, following the expiry of the three-year waiver period in 4Q 2013

 

Source: 1st Quarter Financial Statement.

From what I can see, all four expense items are here to stay. So, even if the REIT should achieve 100% occupancy once again, it will be difficult for it to achieve a DPU that is even close to that of last quarter's.

The much lower DPU this quarter and a weaker outlook for industrial properties, together with my belief that the management's interests are not strongly aligned with minority unit holders', have pushed me to look into possibly making another partial divestment.

The good news? We now know what is probably a realistically sustainable DPU for Sabana REIT, everything else remaining equal. Things could worsen, of course, if the one Master Lease expiring end of 2014 is not renewed but it would be unlikely for things to worsen considerably. Having baseline information like this will help us in deciding when it could be a good time to buy into the REIT again with a greater measure of confidence.

See presentation slides: here.

Related posts:
1. 4Q 2013 results.
2. Reduced Sabana REIT.
3. Buy but remember the Sukuk.

Commonwealth Towers: Average price $1,600 - $1,700 psf?

After so many rounds of cooling measures, the heat is still on if the response to Commonwealth Towers is anything to go by. Apparently, more than 1,500 people turned up at the preview.

This is going to be one densely populated piece of land. The land area is a little more than 130,000 square feet which is decent enough but what is the plot ratio? 5.38!

Imagine that this was where Queenstown Test Centre was located. People went there to take their driving theory tests years ago. I remember. I took my test there too.

There will be 845 units with 11 units per floor in two towers. I wonder how many lifts they have per tower? My guess is 3 lifts per tower. This means 141 households share one lift, more or less. I think there might be problems if the experience shared by people who stay in the condominium across the road (i.e. Queens) is anything to go by.

Well, maybe Commonwealth Towers will be generous and will have 4 lifts per tower, the ratio improves to 106 households per lift. Still, people who stay in HDB 5 room flats in point blocks should smile since, in their case, 96 households share two lifts.

The location is good but I just don't know about living in such a densely packed project. Oh, if you are interested, you want to consider buying units facing away from the MRT tracks. Commonwealth MRT station is an above ground station.

Oh, what about the price?

It is estimated that the average price could be in the range of $1,600 to $1,700 psf! So, for a 441 sq ft one bedroom unit, I would not be surprised if the price is even $1,800 psf which means a price tag of $793,800. Almost $800K and this could be the price for the low floor units!

Mind boggling!

I don't know about you but I am perspiring from the heat. More cooling measures, please.

Related posts:
1. To rent or to buy: Rule of 15.
2. Make your first million in real estate.
3. Buying a private property?
4. Slaving to stay in a condominium.
5. Never lose money in real estate?

CapitaMalls Asia: Being offered $2.22 a share.

I have been a CapitaMalls Asia shareholder since middle of 2011 and when I found out that the parent is offering to delist the company, I had mixed feelings.

The positive is that at $2.22 per share, the offer price is fair. The NAV/share is $1.84. So, this offer is a 20% premium to book value. NAV grew 10% year on year. So, being paid $2.22 a share, it is like getting paid in advance for growth that is likely to happen in the next couple of years.

The negative is that I will lose the chance to buy more of a stock which I believe was going through a period of price weakness, given the concerns about China. So, I was looking forward to accumulating with a greater margin of safety (i.e. buying at a bigger discount to NAV). Well, not going to happen now.

With an IPO price of $2.12 a share in late 2009, privatising CapitaMalls Asia with an offer price of $2.22 a share makes sense. It is like borrowing money from the public and paying an interest of only 1.05% per annum over a 4 and a half year period.

This is, perhaps, a good time to remember what Warren Buffett once said.

The idea that an IPO, offered with significant commissions, with all kinds of publicity, with the seller electing the time to sell, is going to be the single best investment that I can make in the world among thousands of choices is mathematically impossible.

Buffett is the reason why I have not bought into any initial public offerings in many years.

Anyway, I will probably channel the funds from this divestment into a war chest and wait for Mr. Market to feel depressed again. There is no hurry to buy anything.

Read press release: here.

Related post:
A strategy to grow wealth and augment income.

Tea with Vic: Transferring funds from OA to SA?

This is a guest blog that originated as an email from a reader, Vic, who would like to share his concerns with regards to the transfer of funds from OA to SA:

I was quite alarmed by the 34 year old who transferred all his funds in his OA to his SA.

 

a) transfer is not reversible. (Is he aware or are readers aware?)

 

b) by doing so, he has cut off a pool of funds for the purchase of housing in the future. I am not sure if that is a good idea since there are opportunities for housing investment. I assume that this man must be single at this point in time.

 

c) there is a limit to the amount of money that can be given out under CPF Life. So, any amount put in beyond minimum sum, at the Retirement Account (RA) level, you still get 4%. If you do not withdraw money at 55 years of age, the money is stuck there. This happened to my father who is 66 years old.*

He has $144,000 in the RA but can only be given $620 per month. He cannot withdraw the excess. At 4% per year, the interest from the $144,000 is $5,760 but, every year, he can only get $620 X 12 = $7,440.  Net reduction is only $1,680 per year! In spite of this, he is not allowed to withdraw since he skipped the chance at 55. Medisave is full and untouched.

 

Based on this, my father has to live at least 50 to 70 years more to fully benefit from his CPF retirement funds.

 

Some background:

 

1. My father has faithfully contributed the maximum CPF amount every year, partly as a means of tax reduction ever since he was a young man. He is a CPF believer!

 

2. He has withdrawn $800,000 for purchase of condo in 2006. Condo is fully paid up by his CPF funds.

 

Related post:

Tea with Klein: CPF, SRS, HDB Housing Loan.

 

* AK is a bit kaypoh and checked CPF's website on this.
Check it out at: Withdraw CPF savings at age 55.
And also: CPF Life.

So, what we want to do is to withdraw from our CPF account all that we are allowed to withdraw at age 55 and what is left is the required CPF minimum sum which currently stands at $148,000. This will be transferred into our Retirement Account (RA).

Using the CPF Life pay-out estimator provided, assuming that the annual value of our place of residence is less than or equal to $9,500 and that our annual assessable income is less than or equal to $27,000, we could get the following benefits from the Life Standard or Life Basic plans.

Looks good to me as a minimum safety net.

What do you think?

A car loan is different from a home loan (updated in June 2018).

Gone are the days when someone could walk into a car showroom, put down a $1 deposit and borrow the rest.




How many car buyers actually give the topic of car loan some serious, in-depth thought before signing on that dotted line? 

Most don't think much more than "How much is the interest rate?" and "How long can I borrow for?"

Unlike a home loan which is amortising in nature which means that the interest payment for each subsequent instalment is based on a reducing loan amount, a car loan's interest payment for the entire duration of the loan is based on the initial loan amount. 

A car loan isn't amortising in nature.






So, if a person were to buy a $100,000 car and if he were to take a loan for $50,000 at an interest rate of 2.5% per annum for a period of 5 years, he would be paying $1,250 x 5 = $6,250 in interest or $104.16 per month. 

Total monthly repayment: $937.49.

Now, if a car loan were to be amortising in nature, just like a housing loan, the total interest paid over a 5 year period would only be $3,242.20. 

Total monthly repayment: $887.37. 

This is more than 5% lower than $937.49!

Imagine the good old days when someone could have walked into a car showroom, paid $1 and borrowed the rest for a $100,000 car to be paid over a duration of 10 years.  

How much would the interest payment be assuming a rate of 2.5% per annum? 

$24,750! 

Monthly repayment: $1,031.25! 

How could this not be wealth destructive?





This is why, for years, I keep telling friends and family that if we want to buy a car and if we cannot afford to pay for the car without a loan, try to keep the loan quantum to a maximum of $20,000 and a repayment period of 3 years. 

Assuming the cost of debt is 2.5%, this would mean paying a total of $1,500 in interest payment which is what I personally find acceptable. 

Total monthly repayment over the next 3 years: $597.22.






So, if, for some reason, you are looking to buy a car now or sometime in the future, you might want to keep this in mind. 

Know how expensive a car loan actually is and try to limit its use to the absolute minimum.




Related posts:
1. Car dealers unhappy with LTA.
2. Lease cars, don't buy. (more calculations)
3. Cooling measures for cars.
4. Cooling measures for cars spurned.
5. A new car for $75,000? (depressing!)

We are not perfect but we can improve our lives.

Hi AK,

I am also pessimistic, actually. The thing I realised these couple of months is in life things can be unfair or by a stroke luck fate deals a bad set of cards or bad things happen because of my incompetence.

However, whatever situation one is in, the cliche of being optimistic that's sold by people may not be too practical. What's practical I find is to be able to do something even a small little thing to be better off. Because I believe little things do add up. Of course, sometimes trying to improve can backfire or backslide but it's just part of life. No one is immune to failure lest they do nothing at all.

When I go out, I do see people working in jobs they cannot extricate themselves from and bosses that exploit people. I mean if they could they would have changed jobs or found a way to have a higher salary. So, not all people are fortunate enough to move into a better situation. I think they call it social mobility.

On the part of feeling very pessimistic, I can understand that. Take, for example, the guy that works at the train station control or the driver or technician or maybe even the engineer. 

Faced with stagnating wages and rising costs and the worst part is the company they work for has long ago categorized them into the lowest ranks in the company. Their advancement may not be existent. So, there is not much hope if u look at it. 

Who is going to help them? 

So, when they start thinking about retirement or old age it can look very bleak for our current generation. The government may look rich but they have other issues to think about as well. The countries around the world may not be as friendly as they seem to be.

But through proper planning and use of excess funds, however little, or to restructure the way their resources are being used or allocated, I believe people can improve their lives. The problem is, I feel, nobody told them how to do it. So, since no ideas were planted, nothing can grow.

So, I think if the SGX changes the board lot size to 1 share come next year, it can really help people who don't have much. Finally, they can own blue chips and, hopefully, reduce their risks. 

People would just have to pay a one time charge with Standard Chartered that's only 0.2% with no minimum fee.  At the very least, they can grow with the economy. 

Even people who don't know anything about stocks, they can just create their own index rather than depend on the ETF which has additional expense or blue chip share building program which I feel is restrictive.

A peeve I have with the STI ETF is that it is hard to sell. I bought the Nikko once and took a long time to get rid of my 100 shares and the pricing wasn't good. So, I gave up on that and just went to buy the blue chip instead. U know in some blogs people sing praises of it but I am not sure if they actually tried to sell it. 

I personally feel there's a bit of untruths to the STI ETF. When they took the 8% y-o-y growth, they were measuring the years where there was a nice increasing slope. However, if one bought at other periods, the return just doesn't look that good.

The flip side of the coin is people, by nature, want quick solutions. 

If I tell people u know u get 1.5% extra or u can save 100 dollars in tax every year, nobody is really going to take notice. But they are very interested in TOTO and 4D and making a quick buck in the financial markets, university graduates included. 

It is only after a long time, through some event happening, that some of the lucky ones will start to work on their lives and the extremely lucky ones meet someone who would hold their hands.

My reply:

....

Till today, I tell people that my ideas are simple but to really see them through might not be easy. I also tell people that I have been lucky and, in life, we always need a bit of luck, investments included. Sometimes, things do go wrong, like you said, and it could well be due to my incompetence too. No one I know has had a life that is smooth sailing always.

I do share your concerns and I do want to help people, especially those of able body and mind who think that it is impossible ever to be financially free. This has been a driving force behind many of my blog posts.

For sure, every little bit adds up. We just need discipline and time for results to show. Problem, like you said, is that people cannot seem to wait.

When I tell people that 4% is a whole lot more than 2.5%, they usually tell me that it is only 1.5% more. I would tell them that they are wrong. It is actually 60% more! It is simple that way but they could not see it. Some saw it and their eyes lit up but some just chose to be fatalistic and ignore the revelation.

I like it when you say how people can improve their lives and I always say that everyone's life could be and should be better.

.....

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
– Warren Buffett

Read Klein's earlier emails to me:
Tea with Klein: CPF, SRS and HDB housing loan.

Related post:
Take your time to pay down your HDB housing loan.

Take your time to pay down your HDB housing loan.

In the guest blog by Klein recently, he offered his reasons why we should not repay our HDB housing loans too quickly. One of the reasons is that we would be losing more in interest income from the CPF-OA than we would be saving by avoiding the 2.6% HDB home loan interest rate.

Now, this is unconventional thinking, at least to me, which seems to make sense. This was another reason for me to share it here in ASSI with everyone. Of course, it does not mean that I think it is the way to do things but it does offer an alternative which is worth considering.

In my reply to a reader on this matter, I have offered some numbers which could make things a bit clearer, I hope.

Let us assume that a person had an outstanding HDB home loan of $100,000 which was meant to be repaid over a 10 year period and let us assume that he chose to pay down this $100,000 in loan using money in his CPF-OA in one lump sum. How much would he be saving in interest payment?

Using an amortising calculator, $13,670. This would have been the total interest payment of the loan over the 10 year repayment period.

Now, if this person had not repaid the $100,000 loan in a lump sum but instead chose to leave the money in his CPF-OA to earn 2.5% in interest income per year, how much would he be able to accumulate over a 10 year period? Compounding 2.5% a year, $28,008.

Of course, I am assuming that this person stays in active employment over the 10 year period and that his monthly CPF-OA contribution is able to cover the monthly repayment of $947.25 to HDB.

Naturally, this person would not be receiving any interest income for this $947.25 that is paid monthly to HDB but he would still benefit from interest earned by that $100,000 in his CPF-OA that is left untouched. Isn't this a better arrangement than not having that $100,000 in his CPF-OA and having to start accumulating funds again in his CPF-OA at the rate of $947.25 a month?

This perspective offered by Klein, if I have understood it correctly, is an interesting one for me as I have never bought a HDB flat before and have never been faced with a choice like this.

When I bought a private property some years ago, I had to pay an interest rate of 5.1% on my home loan while money in my CPF-OA was earning only 2.5% and money in my savings account was earning 0.125% per annum in interest income. In my situation, it made sense to pay down the housing loan as soon as possible, of course.

So, does it make sense for you to take your time to pay down your HDB housing loan?

(Please read the comments that follow this blog to gain a better understanding of the issues involved here. In particular, please read comments by PSTan, kael1n and SnOOpy168.)

Related post:
Tea with Klein: HDB Housing Loans.

Sabana REIT: $90 million 4% certificates.

Someone asked me what do I think of the $90 million 4% certificates due in 2018 being issued by Sabana REIT. Well, it is a good thing. Why?

Sabana REIT has $100 million of debt due this year. So, the money raised will come in handy.

OK, there is another thing good about this and that is the cost of debt which is lower than the 4.5% paid on the $80 million convertible Sukuk due in 2017. Faced with the spectre of higher interest rates now and in the future, the fact that Sabana REIT is able to issue debt with lower cost is a good sign.

In fact, if we look at Sabana REIT's all-in average borrowing cost, it has been reducing. This was from 4.4% in Dec 2011 to 4.3% in Dec 2012 to 4.1% in Dec 2013. Seems like the management is doing a good job at least in this department.

Related post:
Sabana REIT: Buy but remember the Sukuk.