Monday, January 31, 2022

Can we use how Reit Manager Fees are structured to determine the Reit Perfomance?

Some investors look at how the Reit managers are compensated to determine whether there is an alignment of interest. 

The logic is, if the interest is aligned, then the long run performance of the Reit should be better than if it wasn't. 

This makes sense.

If investors feel the pain when their Reit's lose money, at the very least, the Reit managers should, rightly, also share in the misery. 

The opposite is also true, if investors make money, Reit manager should be rewarded. 

The management fees of Reit managers come in two components:
  • Base fee
  • Performance fee
Acquisition and disposal fees are largely similar across the Reits, 1%  of acquired property value and 0.5% of disposed property value.

Base Fee

Performance Fee

In my previous article, i found that the growth of DPU over time is the single most important metric to judge a Reit's performance as a growing DPU would naturally result in a growing Reit price too.

This makes sense as people buy Reits for their distributions. 

All the financial chicanery will over time be laid bare in the DPU.

Do you think the structure of the Reit Manager fees affect the DPU over time?

3 Reits stood out for me.
  • Lippo Mall Trust
  • Keppel Reit
  • Ara Logistic Trust
If you look at their DPU trend over time, they have been trending down. 

Yet, they have been paid for performance by way of performance fees.

Lippo Mall Trust

Lippo Mall Trust

And to put things in perspective, its performance fee is nearly as much as it's base fee for Lippo in cash.

Keppel Reit

Ara Logistic Trust

Monday, January 24, 2022

Agent Likens Premium Financing to Property Investing

" Property very high now man, just when i saved up $300 k to buy my $1 million property, it shoot up again!"

" Why you want to buy property?"

"For retirement loh...Cash flow incoming in retirement years"

That's when it started.

The sales pitch.

If one were to google premium financing, one would notice that the examples shown are normally portraying people in their 40s. The ripe age of wanting to buy an investment property and yet may not be able to due to property prices rising too much.

In a nutshell, premium financing insurance product is borrowing money from a bank to buy an insurance product. The series of monthly cashflow from the insurance returns is used to net off the monthly loan paid to the bank. 

This is akin to buying an investment property and borrowing money from a bank to buy it. The series of monthly cashflow from rental is used to net off the monthly mortgage payment to the bank.

Both require a downpayment and both are custodised with the bank.

Actually, on the surface both looks the same but actually its more similar to property investing more than 15 years ago when they allow payment of interest only and not the principal. 

Now a days, property investing requires payment of both interest and principal in the monthly mortgage payments. In premium financing, one only pays the interest and not the principal. The loan amount stays the same.

Hence, using the simple formula of (annual net inflow/down payment) multiplied by 100%, rates touted by financial advisors for the premium financing insurance product can be mouth wateringly 8% - 18%pa! And comparison with property investing now can be very misleading because in property financing, the net inflow is surely smaller as the mortgage payments include paying off the principal loan!

It is also when interest rates are low that such aggressive selling of such products are pervasive. 

Truly financial engineering at work!

I have summarised some information from a case study from MoneyOwl.


  • loan rate : 1.267%pa 
  • Insurance return: 3.648% pa (1.248% pa guaranteed + 2.4%pa non guaranteed)

If loan rate rises to become 2.91%pa and insurance returns stays the same.

How did 8%pa - 18%pa advertised returns become such low returns as shown on the tables?

And the funny part is, the low returns shown on the table are based on insurance returns where 2/3 of it are non-guaranteed insurance returns!