Welcome

Welcome to my investment blog where I share with you my analysis of REITs in Singapore.

I hope that my investment philosophy will bring me a steady stream of income apart from my job. I am aiming for at least $3,000 per month which can sustain the current expenses of myself and my family.

Do enjoy reading my blog and post any comments that you have. I welcome them because it is a time to learn from each other.

When I am looking at investing in REIT, here are some of the guidelines that I am looking at. Feel free to comment on it. I am willing to listen to ideas.

-> at least 8% yield.
-> Price that is lower than its NAV.
-> Low gearing (if possible)
-> High secured NAV.

Current Dividend income is $3,300/month.

Monday, May 4, 2015

Decision to take more risks...

Hi everyone,

I have decided to take more risk through using a margin account and borrow some money to invest. Here are the reasons why.

With an average dividend yield of more than 8% in my portfolio consistently, I was thinking that I can borrow money at a lower rate of 6.5% through margin account and earn the difference (provided that the trading price doesn't drop).

Thus, I set some criteria for myself when I uses my margin account which I have set up recently to make sure that risk to my capital is minimised.
  1. It must be trading at at least 8.5% yield (Exit at 7.5% yield)
  2. As far as possible, price-to-book ratio is about 0.9 (Consider exit when price-to-book ratio is at 1.1)
  3. Gearing has to be as low as possible.
  4. High secured NAV.
Of course, yield is a must-to-have, and price-to-book ratio is a best-to-have and others are good-to-have.

With these criteria, I have purchased the following on 27th April

Viva Industrial Trust - 60,000 shares at $0.84 (8.9% yield, P/B ratio = 1.085)
Accordia Golf Trust - 64,000 shares at $0.795 (9.94% yield, P/B ratio = 0.902)
Croesus Retail Trust - 56,000 shares at $0.945 (8.8% yield, P/B ratio = 1.145)

For Viva Industrial Trust, I am re-attracted by the high yield and the fact that it is Singapore-based. With proper management, the valuation should rise to a level which is similar to other industrial REITs like AIMSAMP and Cambridge.

For Croesus Retail Trust, I am expecting their valuation to rise soon as according to their reports, their capitalisation rate is undemanding. So P/B ratio should drop by either the upcoming report or the next report.

It is a big risk that I am taking. I am not very sure whether I am right but definitely this is going to be a learning curve for me. For now onwards, I will be launching my "J5Investment Fund" page to show the current investments that I have plus the loans that I am taking. Thus, my investments now would add a dimension which is capital management.

15 comments:

  1. tempting idea but I think the risk/spread is not quite worth to me, you may consider getting external financing to try this way of investing. for example hong leong finance. I think you can borrow for less interest. good luck!

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  2. Mathematically sound but believe in Good luck!

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  3. I won't be taking this type of instrument, interest rate at 6.5% is high. Wish you luck.

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  4. I think you probably know yourself that the stocks you are buying do not meet part of your criteria. Just wondering with the existing you have out there,why taking the risks for this one??

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    Replies
    1. Thanks! and yes you are right as I have chosen to buy investments which are at a premium.

      Which one would you consider?

      Delete
  5. i think most singaporeans are not educated on margin accounts.

    when it comes to buying on margins, it is not about the yield. it is about the price and the margin you buy on. hence, it is not a simple arithmetic of plus/minus.

    you must have been reading too much bill gross https://www.google.com.sg/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=bill%20gross%20leveraged%20fixed%20income

    My take is that if you insist on borrowing money to buy/sell (I will not even qualify it as investment since it is the domain of trading), you should learn it properly:
    1. position sizing/risk management
    2. technical analysis
    etc..

    the rates are lower too (see http://www.phillipcfd.com/markets-products/commissions-and-finance-charges/)

    finally if you insist that you are an "investor" (as if investors take such actions), the better option is a term loan (3.5% p.a.) and take profits on timing CD XD dates.

    buying on margin are for traders.

    there is no free lunch, let's not be lazy.

    please find out more or ask our SMOL blogger. I am just worried you blow yourself up with the dynamite you are intending to fish with.

    margin calls are no joke.

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    Replies
    1. Thank you for your kind advice.

      Just like to ask what are the available options for cheaper loan. Although I have been researching on these investments, I have been investing with excess cash and moving on to debt management is something new.

      Delete
  6. I don't quite agree with the post above. I think you can use leverage (diligently) on yield instruments to amplify an outcome of which you are fairly confident.

    Do we not use leverage to amplify our real estate investment returns? That is not to say that leverage is not risky. Sure, margin calls are no joke and you need to be thoroughly familiar with the mechanisms and your investments.

    That said, 6.5% interest rate is suicidal. There are plenty of 3.5% opportunities. Check UOB KH's Yield Max account, OCBC etc.

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  7. This comment has been removed by the author.

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  8. seems i posted too soon. after writing a reply, i went over to http://www.sreitinvestmentblog.sg/p/my-current-investment.html
    and it looks like you can take at least a 20% correction.

    just be careful, equity calculation is not just your actual holdings but also any losses on your leveraged holdings.


    --------- previous posted -----------


    i concur on the suicidal part.

    and agree on real estate leverage. reits are already leveraged.

    i agree on borrowing money to buy a home. i dont agree with borrowing $2m for condo on a $70K annual salary.

    when VIX is low, like over the past few years, it seems almost foolish not to use leverage. when it is high and your margin required moves much higher, reversing your positions when the market goes against you almost always results in a wipeout.

    what is the collateral for $2m condo? your condo
    what is the collateral for margin? your total equity

    can you lose more? yes

    when rates change, it isn't just your financing rates change. REITs and any other leveraged entities are just going to tumble. case in point 2013 taper tantrum.

    should you not use leverage on yield instruments? you can but there is a difference between people like bill gross and yourself. and the % of networth allocated to equity on margin account they use is probably lower than what you would think.

    now if you are buying a $2m condo on a $200K, there's plenty of wiggle room, isn't there?

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    Replies
    1. Thanks! I think it is a strong reminder which is timely and kept me thinking of the risks that I am taking. :-)

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  9. When interest rate moves, your REIT companies will suffer. Your interest rate on your margin account will also move. I think borrowing for fixed income instruments like bonds is safer.

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    Replies
    1. That is wrong.

      Likely a double whammy.

      rates rises, bonds sell off. See april global bond rout.

      Delete
    2. I should qualify further.
      The above is true for long dated bonds or not intended to hold to maturity.

      even if you hold bonds to maturity, be it long dated or a short 7 year bond, you have to be wary of defaults.

      if you go for a AAA rated bond, the likely chance is that the coupon payments will be wiped out by the margin account interest.

      if you got for high yield bonds, there is a good chance they might just default or close down.

      Delete
  10. When interest rate moves, your REIT companies will suffer. Your interest rate on your margin account will also move. I think borrowing for fixed income instruments like bonds is safer.

    ReplyDelete