Saturday 29 April 2023

Why are HDB Resale Flats So Expensive?

35 is the magic number I have aged into. And with it, my eligibility to buy a flat as a single Singaporean starts!

However, sieving through the numerous "catalogues" of houses on resale, one thing stands out- HDB resale flats are expensive!! For a 2017 completed 4 room flat (94 years lease remaining) at Tanah Merah, it is going at $800,000; a similar flat with remaining lease of 60 years is being offered at $560,000.

No small numbers to contend with.

Why are HDB Resales Expensive?

Its simply due to the factor of the rental income these flats can obtain. A 4 room HDB flat (based on latest HDB rental data as of end 2022 of that area) can command a 3k monthly rental if a foreigner rents it from a Singaporean; factoring taxes, period of idle and comission which at most will incur 2 months of rental (usually it is only 1 month in cost). The HDB flat is an impressive "dividend" machine of $30,000 per year. 

When compared against local stocks, it is a steal and there are a large number of foreigner who will eagerly rent from you. Add to that, HDB rentals are escalating as foreign workers are priced out of condos and moving to rent HDB flats instead. 

Effectively the HDB resale is a REIT machine with escalating rents! Who needs REITs when a HDB flat is such an impressive dividend machine. No wonder property blogs are more popular than investment blogs.

Low CPF OA Rates will mean Housing Prices Remain Sky High

In addition, Singapore has been able to maintain the home loan interest rates at a low level of 2.6% or 3+% (if one is taking bank loans) currently. Hence, there is a positive leveraged multiplier effect. 

The chief culprit is CPF Home Loan rates which are set at CPF OA Rate + 0.1% (currently it is at 2.6% per annum). Financially, taking 60% of loan at 2.6% interest while renting out a flat means prospective owners are going to nett 5-6% returns; if one borrows more, the returns is even higher.

(A) Housing Price: $800,000

(B) Loan: 60% ($480,000); Invested Capital (40%): $320,000

(C) Rental Income: Assuming 2 months of rent netted off for property taxes, commission and idle costs - $3,000 * 10 = $30,000

(D) Interest on Loan based on CPF OA Rate: 2.6% * $480.0000= $12,480

(E) What Owners Get From Renting [D-E]= $17,520

(F) ROIC [E divide by A]= 5.4%

5.4% for a dividend machine with prospect of appreciating in price is darn right attractive and this is probably why HDB resale prices are high.

Will it Last?

This is a question people may wonder. In my view, as long as HDB allows the rental of flat space to foreigners as opposed to its pre-1990s policy where the rental of flats were restricted to only Singaporeans and their family members; I expect HDB resale prices to remain sky high. This is because a 5-6% "dividend machine" is impressive in Singapore's investment landscape. 

Secondly, the CPF OA rate must continue to remain below 4%. In my opinion, for CPF OA rate to move to 4% is very difficult due to how it is computed. There are 2 local banks which are suppressing interest rates at very low levels. This in turn makes resale housing extremely expensive.

Thirdly, unless the property tax rate for the "annual value of properties being rented out" is raised, HDB resale prices will remain sky high

Affordable but not Accessible

HDB has tried to keep public housing affordable but due to its ability to control only BTO pricing, the accessibility of affordable public housing for its citizens is now at a stretch. Without more public houses put out for Singaporeans under the BTO scheme, buying a resale flat for the purpose of family planning is stretching people's finances precariously.

However, this is because the HDB resale market is subjected to the forces of rental demand. It is something for the agency to ponder. As for now, this blog is only able to explain why HDB resale flats are expensive and list one of the reasons behind it (from the perspective of investing)

Are SGX-listed Overseas REITs a better Value Proposition than SGX Listed Local REITs as Investments?

The below post posts is solely for informational purposes and not to be construed as a solicitation or financial advice as I am not a certified financial adviser. Below is my analysis on the current world situation and I encourage readers to do your own "due diligence" before investing in asset classes overseas.

Recently, a few have asked me on the observation where SGX listed overseas REITs are giving higher dividend yields than the SGX Listed local REITs.

The difference in yields is surprisingly wide. For example, the supposedly lowest US office REIT (Keppel Pacific Oak is expected to give a dividend yield of 15%). Below is a comparison of the same REIT sector but in different countries:

a) Keppel Pacific Oak (US Office Space) - 15.5%
b) Keppel REIT (Singapore Office Space)- 6.8%
c) Elite Commercial REIT (United Kingdom Office Space)- 12%

Why is it Happening?

There are two reasons:

1) Resilience of Singapore Property Sector

Unlike UK and US which has a large office supply glut, Singapore's office oversupply is at the low of 11.4% (as of URA latest stats end 2022)

2) Risk Free Rate in Other Countries are much Higher

Unlike what our economics textbook teaches, Singapore is not a taker of global interest rates (this violate the economic principle of the economic unholy trinity, Singapore has a semi fixed foreign exchange rate system which fluctutates within a policy band*)

In USA, the risk free rate is at 4.75%; in the UK, it is 4.25%. While Singapore's SORA is currently at 3.77%. Do note, the SORA rate in Singapore will be slightly above the offical risk free rate. 

Is Something Amiss?

In my opinion, 2) is a bit off and therefore, I do sense Singapore's risk free (and SORA) rate will start to climb higher. My expectations is that SORA rates will increase from 3.77% to about 4.75%, in in line with the UK's and USA's. This will mean investors will demand higher returns for our local REITs. In short, a negative downward pricing for our local REITs.

Strong SGD

Lastly, I have observed the Singapore Dollar has been unusally strong with the continous strengthening of the Sing Dollar band. My view is that it is a good time to buy overseas shares/assets given this. 


To summarise I do feel the SGX-Listed overseas REITs are of a better value proposition than the local REITs.

With the supposedly higher risk free rates demanded overseas, the prospect of investing overseas (not just in overseas REIT) is better than Singapore's. In addition with the strong Sing Dollar exchange rate, I am evaluating investments overseas.

New companies I am looking to invest in are those in the HK or US market where the Sing dollar is exceptionally strong against and where the risk free rate is a lot higher than ours. It seems to be a good time for Singapore investors to invest abroad and not locally due to the abnormally low risk free rate which will adversely affect returns.

Thursday 27 April 2023

Alibaba has lost all its gains since the "splitting" news, but it does not matter

For those who follow Alibaba news dilligently, it was announced a month ago that Alibaba will be splitting its conglomerate into 6 units.

It was a positive news which saw share prices rallying 20% over the next week. However, one month later, the 20% gain has since been wiped off and we are back to square one - at pre announcement prices.

Stock Market Voting Machine Short Term, Weighing Machine Long Term

There is a saying about the stock market:

"In the Short-Run, the Market Is a Voting Machine, But in the Long-Run, the Market Is a Weighing Machine"

This is dramatically true in Alibaba's case. The split up news made people exhuberent but once they realise nothing much changed about the business, the party ended (the downward movement in share prices is also partly attibuted to the US banking crisis which soured all stocks)

This comes to show how sensitive stock market paticipants are to the news and hypes. There is so much noise/traders that prices of a security can fluctuate; at times rally all the way up and then return all its gains later. Alibaba is only one such counter and we have seen such epsiodes repeating over the course of time.

As fundamentalists, such hype should never sway our valuation - Alibaba breaking into 6 units or remaining as 1 unit is business as usual. For me despite the news, my abscribed value of Alibaba remains unchanged at US$166.

Still vested but looking on to wonder should i add to my holdings as the current price is half of my target price.

Monday 24 April 2023

Higher Interest Rate Means Dividend Investing Becomes Better

Market is churning news on how with the rise in interest rates, stocks are going to go lower. 

While it is indeed hammering and lowering stock prices; what if we take an alternative point of view? With higher interest rates (a higher expected rate of return), the lower stock prices means dividend yields are now higher, especially in the REIT sector. If one is a new dividend investors, the yields we are obtaining is now of a higher return than before.

REIT Share Prices have Stagnated

Despite Singapore's reopening, many local REITs' share prices have stagnated nor moved up much. This is due to the worldwide trend in interest rates hikes which brings about a higher  rate of return demanded for holding dividend stocks. As a result, many REITs are now trading at 6% dividend level (e.g. Suntec is 6.2%), an increase from the past where there were at 4-5% levels.

So how do new investors come into the equation? Put it simply, in the past, investors were invesing in REITs which command a 5% yield; now the same REITs goes for 6% yield. Underlying properties behind the REITs have not changed much and the rental escalations are keeping pace with the rise in interest expense. Suntec REIT is an example where the reopening theme has seen diviends grow but its share price stagnate. The result is that the REIT's dividend yield has grown from the 5% to 6.2%.

Dividend Investor Paradise

For dividend investors, a $100,000 porfoilo will now nett approximately $6,000 in dividends as compared to $5,000 in dividends before.

Looking from the perspective of a "salary", you are getting a 20% pay raise due to the higher expected returns investors are demanding from stocks. Having a 20% pay raise is definitely a rare occurrence for many of us, so the increase in dividends is Paradise!

The Maths of Early Retirement

Mathematically with higher dividend yields, it is now easier for us to replace our work income with dividends. The maths as below:

Current Work Income= $100,000

Few years back (5% Dividend from REITs), amount needed to replace current work income (divided by 5%) = $2,000,000 porfoilo

Now (6% Dividend from REITs), mount needed to replace current work income (divided by 6%) = $1,666,667 porfoilo

In summary, one needs a smaller portfolio now.

Risks Involved

One risk is the increase cost in financing but as said, many of our REITs have experienced postivie rental escalations as well which more than offset this. Hence, I feel our local REITs are relatively okay. Secondly, while a downward revaluation will occur, most of our local REITs leverage ratio is far below the regulatory limit of 50%, so it is safe to say this is not a threat/risk unlike in the case of Manulife REIT

My view

With the rise in interest rates, it is a definite joy for REIT investors because the same amount of money invested gets more dividends. Personally, I have started REIT investing albeit in the higher risk US commercial REIT space. 

For others, the era of high yields for REITs its starting and if one intends to retire early, it may be an opportune time to start investing in our local REITs again as less money is needed to replace your current income flow.

Sunday 2 April 2023

Porfoilo Update for First Quarter: Buying more US REITs and Alibaba

Thanks to the run up in ISDN and Nanofilm to my fair value. I have sold and shifted the funds to 2 US Office REITs as I deem there are value in them. Keppel US and PRIME US reit are now valued at more than 13% of their dividends and I deem there is some mispricing. I expect PRIME US reit to reduce its dividends as it needs to conserve cash and I expect the managment may move towards collecting their fees in cash instead of taking shares at such low issue price.

The recent selldown in Alibaba shares was an opportunity for me to add more.  Interestingly due to the aggressive accumulation in US REITs, my portfoilo generates a 3.8% dividend yield despite 67% of it belining to non dividend companies who engage in share buybacks instead.

Yangzijiang Finance's falling short on its target to transfer $1 billion cash from China to Singapore gave me a bit of uneasiness and I sold off some of my holdings. I have a feeling there is some cash crunch in China where the government is preventing companies from moving cash out of China. 

Below is my portfoilo composiiton: