What's better than buying Singapore Property for Rentals? Overseas Stocks

Time and time again, we have been hearing from property agents that buying Singapore properties allows you to earn rental returns and capital appreciation.

Let's take this example, pay $1,000,000 for a condo unit, rent it out for 3.5k per month. Make a downpayment of $300,000 to get good returns. The maths will work out as follows.

Revenue

$3,500 x 12= $42,000

Cost

Interest on $700,000 (60% leverage) at 4.2% interest = $29,400

Rental Commission to agent= $3,500

Property Tax on 40k annual value = $4,000

Returns

$5,000 on $300,000 downpayment. Annual returns of 1.6% per annum

Capital Gains= Property Appreciation of 50% and above.

Good Financial Advice?

In my opinion, property agents using the above as financial advice are not giving the optimal solution. 

Look overseas and we have REITs that give 8%-10% returns and have potentially higher capital appreciation.

What are these REITs?

LINK Reit is pherhaps the best. It is one of the largest REIT in the world, one of the lowest leveraged and is diversified across many countries such as China, Hong Kong, Singapore and Australia. Its size is larger than Capitaland and is a blue-chip company

A standard bearer of what a REIT is, Straits Times has covered it and complimented on its value creation for its unitholders. See article here

In my view LINK REIT is better than any property purchase where it is currently paying out 8% dividend per year and has a potential capital appreciation of 60%. My valuation of LINK REIT is HKD$55.

UtdHampshire REIT- Another REIT which I think its good. I have covered on this US retail specific REIT. Utdhampshire REIT sports a 9% dividend yield and has a potential capital appreciation of 60%. Target price is USD$0.70.

Overseas REITs will perform better than local condo launches

Like condo launches, the above REITs will benefit as the interest rate cut cycles happen. For those who borrow to buy condos, the interest expense of your loan reduces when interest rate are lower. This happens too for these REITs.

Hence why go for condo purchases here, when overseas so many REITs offer better dividend returns and capital appreciation. Furthermore, you do not need to go into heavy debt when owning these REITs.

I am not a person who talks, but one who walks the talk. Over time, I have been purchasing REITs and trust such as Utdhampshire REIT, Link REIT, Asia Pacific TV Trust (APTT). I have not recommended APTT much because of its slightly higher risk profit. However, the first 2 offers great value now. LINK REIT is pherhaps the best choice because even Singaporeans would have visited its properties at Jurong Point and AMK Hub. It shows LINK REIT business is real and it provides far superior returns to buying any condo launch in Singapore now.

Disclaimer: The publication is solely for informational purposes and is not to be construed as a solicitation or financial advice as I am not a certified financial adviser. My analysis on companies covered are not an offer to buy or sell any stocks and I encourage readers to do your own "due diligence" before investing.

Trouble in Singapore REIT space: MapleTree and Keppel REITs Report Declining DPUs

In a flurry of results today, many Singapore REITs reported lower DPUs in their latest Financial Results

The reason is simple - due to the rising interest cost these REITs faces. Many of our local REITs interest expenses are now rising as their old debts are now being renewed at higher rates. Let's look at Keppel and Mapletree interest rate snapshot of their debt profile.

Keppel REIT Below

As it can be seen the magnitude of interest rate increase for many Singapore REITs have moved remarkably high. This is due to many of these REITs having hedged their interest rates. It is now only with the expiration of the hedges, do we see the true cost of interest on Singapore REITs.

Bearish on Singapore REITs

Based at where we are, I expect many Singapore REITs to face an eventual financing cost of 4% per annum. This means many REITs will face falling interest coverage ratio of 2.0-2.5 times. This is not good.

Investors in Singapore REITs should prepare to see falling DPU as time passes.

Will Reduction in US Interest Rates Help Singapore REITs?

Only to a small degree.

This is because Singapore interest rates are already comparatively low to US's and these REITs are already employing a strategy of borrowing from countries with low interest rates to finance their debts. 

Hence the reduction in US interest rates will have a small effect of their debt profile. In fact, despite USA starting to reduce debts, I feel Singapore REITs will start to see escalating interest expenses and face financial stress. This is due to their debt profile.

Avoid Singapore REITs, go for Hong Kong etc.

Outside of Singapore, REITs in US, UK and Hong Kong have gone through this painful phase; on the other hand, Singapore REITs painful phase has just started. As an investor, I feel that an avoidance of Singapore REIT should be considered now, foreign REITs such as LINK reit, Keppel Pacific Oak etc are better investment avenues. 

If I were to place a bet, LINK REIT (Hong Kong 0823 stock code) is the best in its class. It sports an 8% dividend yield and has a stronger balance sheet, lower leverage/debt than Singapore REITs and stronger interest coverage ratio expenses. The REIT owns Jurong Point and AMK hub in Singapore.

<Author is invested in LINK REIT>

Sing Dollar is Weakening. Time to Buy Other Currencies to Protect Our Wealth?

Due to the "good news" by Fed, it seems global inflation is in control.

Singapore utilises its exchange rate to limit the pressures of inflation (commonly known as imported inflation). In recent years, due to the bout of strong inflationary pressure, the Sing Dollar has appreciated considerably, with MAS controlling it in an appreciation currency band.

With news that US and other countries have started to face less inflationary pressures, the SGD dollar has started to weaken considerably. At the start of this week, the Malaysian Ringgit has strengthened considerably just 0.5% in a day (that is a significant movement in FOREX), the Japanese Yen too (pherhaps the most popular tourist destination for Singaporeans) has strengthened by 0.8%.

Will It Continue?

Pherhaps yes or pherhaps no, if everyone could predict things perfectly then it will not be called a forecast.

However, in my view, moving forth, there will be a significant downward pressure. Here are my thoughts:

(i) Singapore REITs borrowing in JPY might convert SGD to Yen to pay down loans

A few REITs such as the Mapletree family have been taking on large amount of Japanese Yen loans to finance its global portfolio. With Japanese Yen now appreciating due to the normalisation of interest rates, there could be a chance the Japanese Yen Loan held by the mapletree REIT entities will become more expensive. Mapletree may decide to reduce its japanese yen debt by selling Sing Dollar to buy Yen to repay. That will have considerable pressure on the Sing Dollar.

Mapletree Industrial REIT, one of the largest in Singapore, has 4.9% assets in Japan but assumes a 13.2% of its debt in Japanese Yen; this is to take advantage of the low interest rates in Japanese Yen. However, with the yen starting to appreciate and interest rates starting to hike, MIT Yen loan will become very expensive to the REIT and push its leverge ratio high. It might be inevitable that our Singapore REITs will try to sell off their Sing Dollar currency to pay off Japanese Yen debts.

(ii) Continous Downward Ringgit- SGD Currency Pair on Malaysian Workers

Singapore has a large number of foreign workers of Malaysian nationality. Should the ringgit appreciation start, droves of Malaysian workers will change their Sing dollar savings into Ringgit to take advantage of the trend. Not sure if it will happen but this is possible.

All in all, I do expect to see significant downward pressure on the Sing dollar. Aided by the fact that inflation is now under control, MAS will not be continuing its appreciating currency stance to combat inflation. For those dablling in Sing dollar currency pair, it might be good to be aware of these factors. Personally, I think Sing dollar will start to depreciate to a certain degree with the changing macroeconomy conditions. Maybe for those who love to travel to Japan and Malaysia, it will be good to stockpile your foreign currency to spend to enjoy the still good rates our Sing dollar has.

Top 5 Dividend Stocks on SGX

On SGX, a stock screener function is avaliable and dividend stocks can be filtered. I will be weighing my thoughts on the 5 highest SGX dividend stocks and if it is sustainable. I have excluded PRIME US and KORE REIT which SGX listed as No 2 and No 3 because their dividends have been cut.

1) World Precision Machinery (Yield 19%), WPM

A china precision stock which focuses on metal stamping products. The company distributes a payout ratio of 30% of earnings as dividends. However, first quarter the company reported a loss and this has spooked the market. Looking to this year's results, it is likely dividends will be cut if company follows its 30% payout ratio policy.

WPM is a proxy to the Chinese Manufacturing health. China's manufacturing is declining.

However, if investors want to bet that Chinese manufacturing will recover, WPM is a good bet. The company's balance sheet is relatively healthy and I believe should China recover, WPM will resume dividends at 10+% at current cost price

2) Pacific Century Developments (Yield 14%), PCRD

A large shareholder of HK largest teleco, PCCW/HKT, part owner of FWD insurance and Viu (OTT). PCRD generates dividends from the dividends decalred by its asosciate companies. In 2024, iPCCW/HKT generated a bumper dividend and PCRD then shared the earnings as dividend to shareholders. PCRD is a holding company which just holds investments with no main business on its own, similar to Taiwan's Hotung Holding.

How much PCRD distributes as dividend annually depends on the performance of PCCW in HK and Viu. The current strucutre of PCRD is that it is largely held by Pacific Century Group with Richard Li at the helm. PCRD is structured to be milked as a cash cow providing the cash to its parent, Pacific Century, to finance its operations.

Hence as long as the structure remains, it will definitely be a top dividend stock for shareholders.

3) Asian Pay TV Trust (Yield 13.2%), APTT

APTT is in the TV/Broadband business in North/Central Taiwan. Its annual dividend is 1.05 cents. 

With dividend forming only 15% of its free cashflow with the remaining used to pay down its large debts. The trust is highly geared but i believe it will not affect its dividend. I foresee a continous issuance of 1.05 cents dividend. Its TV business is declining but the remaining cashflow generated from its broadband business is able to support current dividend. 

4) HPH Trust USD (Yield 13%), HPHT

The trust pays a high and fixed payout ratio. It is in the business of Hong Kong Terminal Port operations. The port operations is currently in an upcycle with supply outstripping demand. This is why HPHT is earning good profits and in turn distributing it out as dividends. 

It is in a cyclical industry. Hence I do not view the current dividend as sustainble. It depends on the dynamics of Hong Kong's port supply/demand. 

5) ARA US Hospitality Trust (Yield 11.8%), ARAHT

The trust is in the 3 and 4 stars hotel business in USA, catering to the mid end business and tourists. While it sports brand names such as Marriott, Hilton and Hyatt, the tier of the brands ARAHT has is for consumers of the middle income level. Its hotel occupancy has been low, but churns out good profits because unlike office/malls, hotels occupancy do not need to be sky high to maintain profits.

To delever itself, the trust has been selling a few properites such as Hyatt House. The trust has a sightly high leverage and is facing an increasing cost of debt due to US Fed interest rate upcycle (now in the region of 5.7%). However, I feel the dividend is sustainable. The reason why its dividends places it in top 5 is because Mr Market is worried about its declining profits/earnings due to high interest expense and valuation decline due to the need to set higher discount rates. However, once the cost of debt falls due to the reduction in US Fed interest, its dividend can still be maintained.

Investors should expect a drop in annual dividends this year. This is because the trust has to conserve some cash. Secondly, there is a change in ownership from ARA to the Tang family of Chip Eng Seng. It is likely some cash will be saved so that when the upcycle in US hotels happens, the Tang Family will inject Chip Eng Seng US hotels into ARA portfolio to monetise it. The injection may mean ARAHT has to pay out via cash/borrowings/share placement

Summary

To me, no 2 and 3 will likely continue to dish out good dividends. No 5 is a mixed bag because there could be an undertone that ARAHT could be conserving cash and then using it to monetise the new owner's US hotel assets via an injection into the stapled trust.

No 1 and 4 are dependent on the industries they are in, so earnings/dividend are cyclical.

Mid July Update: Locked Profit on PRIME US Trade, LINK REIT Purchase

Following up from my previous update, I mentioned my latest PRIME US purchase was a short term punt on the news of debt renewal. It happened and the share price went up 30%.

Refinancing for PRIME (almost done)

PRIME US REIT's refinancing is almost done and I believe it can be successfully completed. Both PRIME and KORE REITs are financially stable for now. Unlike one financial blogger who terms this US REITs as "Sampan REITs", I do not think this is entirely true.

What has negatively affected these 2 US commercial REITs is the overall industry. Cashflow wise, they have been able to promptly pay their debt facilities' instalments. Therefore, I do not think they are as distressed as it seems. As a few of their properties are in US cities with stronger vacancy and Grade A status, they should be able to benefit much as US office vacancy stabilises.

Overall, I am still optimistic that these REITs can double in share price from here as they shift closer to their net asset value.

Li Auto was sold as well given the run up in prices.

Bought LINK REIT

Using the sale proceeds, I bought LINK REIT. The reasons are: largest REIT in Asia, one of the lowest leverage ratio, properties are diversified across East Asia/Australia, an internal REIT manager eliminating conflict of interest and 8% dividend yield. It surpasses all Singapore REITs and is definitely better than any Capitaland or Mapletree REIT. I would focus only on LINK REIT for Asia exposure.

With LINK REITs purchase, it does look like my portfolio is becoming a dividend portfolio; but that is because globally, the high risk free rate makes dividend stocks appealing while in Singapore our risk free rate is artifically suppressed.

Why this Stock Could Double and Pay you 10+% Dividend While You Wait

Asia Pay TV trust (APTT) is a trust which offers TV and broadband services in the Northern and Central regions of Taiwan. It was a spin off from the MIIF fund of Australia.

Beaten Down Stock

One reason the trust spots a high dividend yield is because its share prices have fallen 90% from its all time highs and market are fearful of further dividend declines; over the past 10 years, APTT's dividend has been slashed from 8 cents annually to now 1.05 cents. 

Time Have Changed

In the early years of its IPO, APTT had been funding its dividend by taking on more debts. This caused the APTT of today to be over leveraged, burdening the trust with a high interest expense. 

However, in the past 4 years, the new management has dramatically slashed dividends to its current 1.05 cents DPU and used the remaining cash to pay down its debts gradually. 

The current 1.05 cents DPU of $19.9 million cashflow is only 13% of its operating cashflow generation ability of $152 million. With CAPEX guided for $35-38 million, this highlights APTT's reduced dividend of 1.05 cents is sustainable for a long time.

Financing Expenses

Due to the legacy trust manager incurring a huge amount of debt, APTT now has $1.2 billion in debts. Fortunately the financing expense amounts to $44 million a year and when its hedge expires, should rise to $46 million per year based on current interest rate environment.

1.05 cents dividend per unit is Sustainable

Looking at its current cashflow ability of $145-$152 million ($38 million as of latest quarter), its definite APTT can continue paying 1.05 cents DPU which translates to a cash outlay of $19.9 million. 

This is why I am confident despite the declining business in 1 segment, APTT will maintain a DPU of 1.05 cents. Until market appreciates the stability of its current dividend and erases the fear of further dividend cuts, investors are now owning a 13% dividend yielder. 

With SORA now at 3.6%, I view APTT can be equivalent to the higher dividend yielder SG Reits which commands a 7% dividend yield. With that, I will be owning this stock until it reachs the 15 cents range. This means a doubling in returns for owning APTT now.

<Vested in APTT>

July 2024 Portfolio Update: Sale of YZJ Finance and Alibaba to buy REITs

I have given up on YZJ Finance as it moves back to its maritime fund. The company does not seem to be able to move beyond its core. Its foray into the property shadow lending has led to mis adventures and till now, the company is taking time to redeem it. The cost of capital stuck in China's property segment is poor. I still own YZJ Finance in my CPF OA account.

A portion of Alibaba and Hang Lung were sold, with rotation to safer China/HK property of Link REIT and buying more of Utdhampshire REIT. A new addition is seen in Li Auto that has seen a growth in EV car delivery. It is a top 10 EV producer in the world.

Lastly, I bought more PRIME US Reit, this is a short term bet because the outcome of its debt renewal is due between 15-19 July. If it is successful, it is a good short term purchase. With more REITs being purchased, this is now a 20k dividend portfolio with a good mix of growth stocks