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REITs lower portfolio risk.

Sunday, November 7, 2010

Apart from the attractive combination of income and capital return, REITs also offer diversification advantages. Real estate securities have a low correlation to general equities. This creates significant benefits when it comes to improving the efficiency of investors’ portfolios. It means the increasing of potential returns while at the same time lowering the level of risk, which is the underlying aim of every investor.

Unlike other sectors like tech or commodities, there is also a low correlation between the real estate markets across different countries. While global stock and bond markets tend to move together, real estate is basically determined by local factors and what affects the real estate market in one country will not necessarily affect the markets in other countries.

What is likely to have an impact on all REITs is the interest rate environment. As bond yields rise, the relative attractiveness of REITs tends to fall. This is because many investors, especially institutional ones, value REITs by comparing them with long term interest rates.


Source: UOB Asset Management.

Related post:
High yielding REITs.
Increasing demand for S-REITs.

REITs, depreciation and FFO.

The REIT business model is simple. REITs own real estate and they collect rent. For an investor to determine the investment potential of a REIT, one factor he would need to consider is earnings.

Asset value diminishes over time. Real estate is however a special class of assets because land and buildings are not like machines. Their values do not necessarily decline over time but tend to rise or fall depending on market conditions even if they are leasehold properties.

The concept of 'Funds From Operations' (FFO) gets around this problem. FFO excludes historical depreciation costs from net income. FFO has become the industry standard for measuring a REIT's operating performance.

Source: UOB Asset Management.

FFO is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis. The FFO-per-share ratio should be used in lieu of EPS when evaluating REITs and other similar investment trusts.

Source: Investopedia.

Related post:
Replies from AK71: REITs and their assets.

Asterisk Realty: Advisory for Japanese real estate.

This is a Japanese real estate brokerage that I came across. Its website provides views of the real estate market in Japan from within.  It is a perspective which I find bracing.  

From the beginning of fiscal year 2010 in April, we expect CMBS and lenders to offer some excellent properties one by one throughout the year. 

With more confident buyers, we may see a gradual rise in market level. In 2009, there were a couple of very attractive properties that were on sale at discount prices in order to take precaution against oncoming financial pressures, however many properties were unsold due to strict financing conditions during recession. 

This year, a number of these properties successfully underwent transactions as a result of optimism that the worst of the recession has passed. Economic recovery is imminent and the overall attitude towards buying seems to be becoming optimistic. 

Many non-Japanese Asian investors are taking initiative to acquire Japanese prime trophy properties. They are expected to have a significant future presence in the Japanese prime asset market. Japan real estate market generates strong demand from global buyers for its maturity, stability and one of a kind trophy assets in all of Asia.


Due to stable and high occupancy rate, residential is still the most popular investment sector for all investors relative to office, retail, and hotel markets


 We are recently seeing less opportunities of residential opportunities of 300 million to 1 billion JPY in Tokyo. Large size  residential properties (above JPY 3 billion) will be available one by one from loan lenders and merged REIT for downsizing debt. 

Middle class residential occupancy remains stable due to sustainable demands and some upper class residential occupancy start recovering due to an overall decrease in rent prices.


Related post:
Saizen REIT's properties: Would I buy?

Tea with AK71: A couple of thoughts.

Saturday, November 6, 2010

Thought number 1:

Most of the time, I am so self absorbed that I do not think about socialising. Blogging has given me a means of socialising with many more people than I could ever imagine possible while remaining self absorbed. The internet is truly an amazing place. Virtual reality it might be but it is still a form of reality.


Thought number 2:

I spend a lot of my time thinking about things. I have always been a thinker. I remember those long bus rides between home and school and how I would spend time thinking about stuff. I was not a physically active kid. The ECAs I joined were rather bookish in nature: English LDDS, Chinese Society and the Library in secondary school; Drama Club and Chinese Society in JC.

I have always believed that the pen is mightier than the sword but perhaps I am just hiding my indolence.

Tea with AK71: Envious? Find our own way.

I recently had a conversation with a friend about how a friend of his keeps saying that he is envious of how rich my friend is and so on.

My friend keeps telling his friend that he is not rich and that he is using leverage to improve his cash flow.  My friend got fed up with his friend on one occasion and told him to stop whining and to do something about his life.

Make changes and be richer. 

This calls to mind a recent blog post of mine which asked "Do you want to be richer?"

Apparently, this person in question is in his early 30s and has a comfortable salary of $6K a month.  He is single, stays out and spends quite a bit of money having a good life.

So, to me, for him to become richer, he does not really have to work much harder to increase his income. He should work at reducing his expenses. He should think of planning for the next stages in his life.

For a person like him, if he is willing to listen, I would tell him that there are many roads to Rome and there are many roads to becoming richer. I have a couple of blog posts which were written with this in mind: "Roads to wealth creation in the stock market" and "Seven steps to creating passive income from the stock market".

For sure, there are many more ways to make money and my friend has found his own way to do so and that is to invest in real estate and renting them out for cash flow, taking advantage of the very low interest rate environment. It is something he does well and something he is comfortable with.

For me, a personal experience at a very young age of twelve when my family was on the verge of bankruptcy taught me that banks are fair weather friends and I try my best not to owe the banks large amounts of money if I can help it.

I do understand the need for leverage sometimes in order not to miss out on money making opportunities but I would try to repay my debts in the shortest time possible.

What am I saying? Everyone is different. Certain methods which are comfortable for some might not be so for others.

Finding the most comfortable path which would meet our goals in life is most probably a journey of self-discovery. Having reliable guides on this journey would be most helpful but decisions have to be made ourselves.

Ultimately, we have to find our own way.

NOL: Multi-month uptrend.

On 1 Nov, I suggested that "Taking in the Fibo lines, we could see 138.2%, which coincides with the high of 15 April, retested.  This is at $2.35. This, of course, is based on the assumption that the current bullish momentum follows through."


On 3 Nov, the counter hit a high of $2.32 before closing at $2.30. So, the closing price was just 5c shy of the 138.2% Fibo line. Volume expanded significantly, providing the fuel which created an impressive white candle. With the MACD rising strongly above the signal line in positive territory and the MFI yet to break into overbought territory, it looked as if it would retest resistance at $2.35.


On 4 Nov, price action formed a hangman (a black hammer at a peak) which suggested the presence of selling pressure. However, the relatively low volume suggested that the selling pressure was weak. Indeed the OBV confirms a lack of distribution. With MFI and RSI both in overbought territory, this counter could face some short term resistance in moving up further in price. A pullback to $2.16 would be a good price to accumulate if we believe in the multi-month uptrend.



Related post:
NOL: $2.21 and moving higher?

Japanese real estate: Has it bottomed?

Friday, November 5, 2010

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.

Tea with AK71: Advertlets, owe money, pay money!

One way we bloggers get some income from blogging is through the selling of ad space in our blogs. Advertlets is an online advertising agency based in Malaysia which I signed up with in the early days of my blog. All their ads were metered which means that the higher my blog's traffic, the more they pay.  No clicking on ads required. 

I lost my Glitterati status (aka exclusive status) with Nuffnang, another online advertising agency, by signing up with Advertlets, thinking that it made more sense. The earnings from Advertlets grew quickly and even though I could cash out at every RM100, I chose to wait.  In March this year, I decided to cash out after reading some negative comments regarding Advertlets and how they did not pay.  I waited the requisite 45 to 60 days and did not get any payment.  So, I sent them a ticket (an online enquiry) but did not get any reply, confirming my fears. 

Date          Username Amount   Status

Mar-16-10 AK71        159.42     Unpaid


Removing all ad space for Advertlets, I recovered my Glitterati status with Nuffnang shortly.  Since then, Nuffnang has given me a few metered ads which usually run for 4 days to a week on top of the usual pay per click ads.  Nuffnang also got me to do an advertorial for a financial seminar by an Australian bank a few months ago. I have yet to cash out because every time I cash out, I have to pay a small fee.  Hearing very good things about Nuffnang from fellow bloggers makes me confident that Nuffnang would pay when I choose to cash out. Not worried.

Why did I wait so long before blogging about my negative experience with Advertlets? Honestly, I didn't think of blogging about it. Just another bad experience in life was how I thought of it. However, while chatting in LP's cbox a couple of days ago, I learned that other finance bloggers also didn't get paid by Advertlets! So, I am taking up LP's suggestion to blog about it and tell the world! We should not let Advertlets off so easily! Grrr! 

I found this very creative artwork on WayangTimes.com, another victim of Advertlets


Really apt! Owe money! Pay money! O$P$! Ok, ok, I shall stop here.

Golden Agriculture: Toppish.

On 1 Nov, I asked "Would the rising 20dMA be able to push the price higher? My suspicion is that sellers would turn out in force if price moves closer to 70c as it is a thrice tested resistance in recent memory.  Therefore, 70c remains the resistance to watch."  That resistance was breached on 3 Nov, the second time in 7 sessions. It suggested that 70c was no longer as strong a resistance as before.  However, closing at 70c means that it was still the resistance to watch. With the 20dMA still rising, immediate support moved higher to 66c from 65c.


Although volume improved, the picture of a negative divergence between price and volume was still obvious. The MFI and RSI were both descending and suggested that they could go lower to retest their respective uptrend supports. Momentum was weakening. The long upper wick on the white candle suggested some selling pressure beyond 70c.

On 4 Nov, the following session, this counter traded the whole day at 70c or higher. Closing at 70c seems to have confirmed it as the new support. The very low volume suggested a wait and see attitude ahead of the long weekend. Could we be seeing the formation of a rising wedge? This pattern could be valid if volume keeps decreasing which seems to be the case thus far and the downside target would be 61c.


With improving CPO price now a reality, it seems less risky loading up on CPO counters and that is precisely what market participants have done. Loading up on a pullback would be the prudent thing to do, however.



Related post:
Golden Agriculture: Up or down?

LMIR: Foreign exchange forward contracts.

LMIR reported stronger earnings for 3QFY2010. Distributable income at $11.7 million. DPU at 1.09c is higher than the 1.04c in the last quarter. This represents a marginal increase of 4.8% over the previous quarter despite revenue increasing 53% year on year. LMIR also managed to have rate increase in rental renewals to the tune of 16%! Indonesia is doing well, as I expected.

Unfortunately, the management lost $2.9m in foreign exchange forward contracts. Without these contracts, the distributable income would increase by 24%! A DPU of 1.35c for an annualised DPU of 5.4c? Now, that would be in line with its actual performance on the ground!

The management is singing the old tune that these contracts are a prudent measure to protect its income denominated in the Indonesian Rupiah. The very strong Rupiah has caused it to lose money quarter after quarter on these contracts. Who is making money, I wonder?

What do they expect from an economy that actually weathered the last financial crisis unscathed? Indonesia was one of only three Asian economies that did not go into a recession, the other two being China and India! These contracts should have been reduced significantly in the last three quarters! I have wondered on various occasions why the CFOs of LMIR could never last very long. Did they go against the idea of having foreign exchange forward contracts? I keep wondering.

Having said this, the REIT remains a relatively safe investment that should generate consistent income for unitholders although its inability to deliver significantly higher DPU is galling, given such impressive growth in revenue.




Related post:
LMIR: DPU reduced 20%.

Saizen REIT: Huge sell down in consolidation phase.

Just as I said on 2 Nov, "I noticed that there seems to be more buying interest in Saizen REIT today too. Of 3,260 lots that changed hands today, 2,968 lots were bought up at 16c. This could just be an anomaly or this could be the beginning of something bigger. Who can say for sure? A crack in the wall of worries? Perhaps.", the counter experienced heavy volume sell down on 3 Nov. The wall of worries was very much intact.


The golden cross between the rising 20dMA and the 50dMA failed to materialise as 20,291 lots were sold down at 15.5c out of 24,231 lots traded. MFI sank deeper into oversold territory, suggesting very weak demand.  This is confirmed by the OBV which showed extreme distribution activity that day. The consolation seemed to be that the selling at 15.5c was very well absorbed, considering that volume was at least 6 times more than the previous session which in itself was a rather high volume day for such a thinly traded counter.


On 4 Nov, I was kind of disappointed that the volume dried up.  I was hoping for more panic selling which might allow me to buy some at 15c.  Wishful thinking, it seems.

Related post:
Saizen REIT: More buying interest.

The best way to trade the Singapore Index: SiMSCI warrants.

Wednesday, November 3, 2010

Macquarie introduces a new warrant to the Singapore market. Macquarie's SiMSCI warrants allow investors to take a leveraged view on movements in the broader Singapore sharemarket.

Macquarie's warrants allow you to take a leveraged exposure to the SiMSCI with no margin calls or forced selling, thus limiting your capital at risk. Macquarie has listed both call and put warrants, so you can potentially profit from both rises and falls in the market.

99.9% correlation with Straits Times Index (STI)
The MSCI Singapore Index has a basket of 30 stocks and tracks the Straits Times index (STI) very closely. In fact, the MSCI Singapore Index has a 99.9% correlation with the STI over a period of two years, and a 99.6% correlation over five years.

SiMSCI - the only liquid alternative to the STI
The SiMSCI is the name for the futures over the MSCI Singapore Index, and tracks it closely. The SiMSCI is much more liquid than the STI futures in terms of volume traded. In fact, the SiMSCI is the only liquid alternative to trade a Singapore sharemarket index.

For both futures expiring in August, the SiMSCI had 228,287 contracts traded (for the month of Aug 2010) while the STI futures only had 6 contracts traded over the same period of time.

Why SiMSCI warrants?
As the SiMSCI is a liquid and efficient futures market it provides a live tradable market reference price for the warrants to track, this makes it a more transparent and easy reference point for warrant investors. Investors can now see the live SiMSCI price at this website and also the dedicated live SiMSCI pricing page which includes a list of the current warrants.

Read more about it at http://www.warrants.com.sg/en/warrants/simsci_live_e.cgi


FAQ: What are warrants?
A warrant is a powerful investment tool that enables you to gain exposure to a security for a fraction of its price. Warrants can be used to either increase or decrease your level of risk and, unlike ordinary shares, they can be used to profit from both a rise and fall in asset price.

Macquarie Warrants are available over individual shares or indices, they are listed on the SGX and can be bought and sold like ordinary shares.

A warrant gives the holder the opportunity to buy or sell a share at a future date for a fixed price. The two basic types of Warrants are "Call Warrants" and "Put Warrants". Call Warrants give investors the potential to profit from share price rises. Put Warrants give investors the potential to profit from share price falls.

A Call Warrant gives the holder the right, but not the obligation, to buy the underlying share at a fixed price known as the "exercise price" at a future date or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share is above the exercise price. A Put Warrant gives the holder the right, but not the obligation, to sell the underlying share to the Warrant Issuer at the exercise price, or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share price is below the exercise price.

The price at which a warrant holder may buy or sell the underlying shares or the price used in determining the cash settlement amount is known as the exercise price.

A call warrant is said to be out-of-the-money when the exercise price is higher than the share price and in-the-money when the exercise price is lower than the share price.

A call warrant will be worthless if the share price is lower than the exercise price on the expiry day. However, with upward movements in the share price, the holder can still earn excellent returns trading the warrant prior to the expiry date.

The opposite occurs for a put warrant. It will be in-the-money when the exercise price is above the share price and out-of-the-money when the exercise price is below the share price. With downward movements in the share price, the holder can make profits trading the put warrant prior to its expiry date.

Advertorial

Asian REITs 1H 2010.

Tuesday, November 2, 2010

The report by CBRE RESEARCH (ASIA) titled REITS AROUND ASIA 1H 2010 makes for interesting reading. See the following two paragraphs from the report regarding S-REITs:

The total market capitalisation of S-REITs stood at US$21.1 billion as of the end of the first half, making it the second largest REIT market in Asia after Japan. The outlook for S-REITs is stable as the sector continues to be supported by the strong rebound in Singapore’s economy, the stabilisation of rents across the retail, office and industrial property sub-sectors  as well as the steady performance and lower refinancing risk of many S-REITs.

The simplicity of S-REITs as an investment instrument, their strong underlying fundamentals and relatively risk averse nature continue to make them an attractive option for investors. The S-REIT market has developed and matured over the last eight years, in size as well as in complexity and depth. S-REIT portfolios now cover a wide array of assets in retail, commercial, industrial, healthcare, hospitality and residential sectors, all of which are situated in diverse locations around the region. Investors in REITs have also evolved and now look towards the potential of a REIT’s property portfolio. These include factors such as asset type, geographical location, occupancy rates, demographics, lease terms, tenant quality and diversity, all of which combine to provide support for the portfolio’s aggregate rental income and in turn the sustainability and stability of the REIT’s distributable income. Investors also consider the REIT manager as this directly involves the development and implementation of the REIT’s investment strategy, the management of its portfolio and capital structure to foster long-term profitability.

Read complete research paper here.

Saizen REIT: More buying interest.

I received an email from a reader today saying:

"Seems like u like japan. Saizen see pick up in vol today and yesterday"

My reply:

"I like Japan a lot. Beautiful country, nice people, good food. Everything works. It is like Singapore but costs more.

"Saizen REIT is very undervalued. It is a matter of time that more investors take notice. It also takes time for its troubled past to fade. I have been holding for a year. I can wait a few more months."


Reader's reply:

"About one of your question, if the yield at 6.5% is attractive. I think the current yield is not attractive, and if the price goes up, the yield will fall further?

"Even though it has upside potential due to the NAV, it may be cap by the yield, unless the revenues improve?"


My reply:

"6.5% is attractive because the properties are Freehold. It is perpetual. If the properties are leasehold, then, it is not very attractive.

"For such a portfolio, a fair yield should be 5% which means unit price should be about 21c."


This reader is not the only person with negative perceptions or reservations about Saizen REIT, I am sure. There are also those who are worried about Japan's future which includes its debts and its demographics. I have voiced my opinion about these concerns before and you might want to read it here.

How do I feel towards these negative feelings and perceptions? Glad. Yes, glad.  There are still many doubters and the wall of worries is still intact. When everyone is bullish about something, that is a sign that we should think of exiting.

However, I noticed that there seems to be more buying interest in Saizen REIT today too. Of 3,260 lots that changed hands today, 2,968 lots were bought up at 16c. This could just be an anomaly or this could be the beginning of something bigger. Who can say for sure? A crack in the wall of worries? Perhaps.

The very thin trading volume of this counter makes TA unreliable but, for want of a better tool, let us look at the charts anyway. In end May and early October, Saizen REIT touched a low of 15c. It is interesting to note that the MACD has formed a higher low in early October. This is interpreted as a positive. The MACD has, in fact, moved higher into positive territory which suggests the return of positive momentum.


The MFI, a function of volume and price, is in oversold territory. The OBV does not show any big moves of accumulation or distribution. All the daily MAs seem to be bunching together. I have seen such a gathering before and likened it to a spring coiling up with tension. The 20dMA is set to complete a golden cross with the 50dMA. Immediate resistance at 16c.  Immediate support at 15.5c.


Let us now look at the weekly chart which could be revealing for a counter with such thin trading volume like Saizen REIT. It is immediately apparent that 16c is a formidable resistance level as that is where we find the merged 20w and 50w MAs.  However, the gently upturning 100wMA and the rising MACD which just did a bullish crossover with the signal line suggests that the longer term trend of Saizen REIT is positive.

Related post:
Saizen REIT: AGM on 19 Oct 10.

Golden Agriculture: Up or down?

Monday, November 1, 2010

Golden Agriculture's share price staged a recovery today, forming a short white candle, closing at 68c. Note that the price moved higher today on relatively low volume. Since 18 Oct, this is the counter's second attempt to move higher. We need to see volume expansion to have a meaningful upward movement in price that is sustainable at the same time.


Would the rising 20dMA be able to push the price higher? My suspicion is that sellers would turn out in force if price moves closer to 70c as it is a thrice tested resistance in recent memory.  Therefore, 70c remains the resistance to watch.

Critical support is at 65c. If this were to break with high volume, we could see price retreating to 61c, a possible resistance turned support and this is also where the rising 50dMA is approximating soon.


NOL: $2.21 and moving higher?

NOL's share price pushed higher today, forming a nice white candle, to close at $2.21, just 2c shy of the intra day high at $2.23. Volume expanded nicely as well.


All technical indicators show that the uptrend has positive momentum: MFI has formed higher lows suggesting a sustained demand and this is reinforced by the OBV which shows consistent accumulation. Every single pullback in NOL's share price in the past few months was an opportunity to accumulate, it would seem.

Taking in the Fibo lines, we could see 138.2%, which coincides with the high of 15 April, retested.  This is at $2.35. This, of course, is based on the assumption that the current bullish momentum follows through. With the MFI poised to enter overbought territory, taking some profits off the table in such a situation is not a bad idea although in extremely bullish conditions, the MFI could stay overbought for a long while.


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