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.

I have compiled the DPU trend of Reits here on this page. 

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

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.

Assumption

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

https://www.moneyowl.com.sg/articles/premium-financing-leveraging-insurance-policies/

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

https://www.moneyowl.com.sg/articles/premium-financing-leveraging-insurance-policies/

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!

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An ETF giving 40% pa CAGR. You dare?

 It was the class gathering that only the most successful was most keen to go. 

First the sound of a Maserati. 

Next, she walked in with a swagger, armed with a Himalaya Birkin. 

The girl who consistently did the worst in class. That girl who got the lowest paying first job and now no job. That invisible girl. 

She sat quietly at the corner (as usual), unbeknownst to everyone except me. The Alphas were having a field day, with their identities tied to their jobs, they unleashed a torrent of stories about their work life and which enrichment classes they have been sending their kids to.

The last class gathering was in 2010. The now class gathering is in 2021.

I sat beside her and humbly asked her. 

"Can share?"

"I had nothing to lose. I whacked the UPRO ETF. I was lucky."

The UPRO ETF incepted in 2009. 

It had a price of around USD$2.50 then. Now, it's price is USD$147. 

A staggering compounded annual growth rate ( CAGR) of 40% pa.

The UPRO ETF is a leveraged fund and it seeks to 3x the return of its underlying benchmark (target) for a single day. The underlying benchmark is the S&P500.

Comparing SPY ( another etf which mirrors the S&P500 without any leverage) to UPRO ETF, SPY sucks!

After reading up on UPRO ETF, i realized this girl has balls of steel, having experienced through one of the most volatile investing instrument.

You see, what happened between 2009 and 2011, masked by the beautiful CAGR was terrifying. 

Volatility Decay

Assuming the underlying benchmark starts with 100. It falls to 80. That is a 20% drop. 

For it to rise back to 100, it has to increase by 25% now. 

Let's compare the effect of volatility decay between the benchmark fund and the corresponding 3X leveraged fund.

Both start at 100.

At Day 7, the benchmark is back at 100. Since the 3X leveraged fund seeks to "return" 3X the benchmark return for a single day, on Day 7, it has become 34.3.

That is volatility decay in action. 

This girl is pretty lucky and she knew it. 

She would have lost money if in the long run :

1) The market is flat and is volatile

2) The market goes down and is volatile

3) The market goes up slowly and is volatile

It seems the S&P 500 has been going up very steadily and not very volatile for her.

I am indeed happy for her and shared my observations.

" Oh i didn't think about that, thanks, i have made enough, will be transferring to SPY. "

And handed me a hulk. "You want? No box and cert. Free"

How does your asset allocation compare with others in Singapore

The household networth in Singapore has grown at a rate of about 6.5% pa from 1995 to 2021. Compared with the general inflation of about 2-3% pa, we are not too shabby. No wonder property prices keep rising!

How has the asset allocation change over the years as the country becomes even more developed and the population get more aged? 

What are some trends we can observe?

Over the years, the allocation to property has been reducing.

Allocation to life insurance has been increasing.

Allocation to CPF has been increasing.

Allocation to currency and deposits has been increasing.

How does your asset allocation compare?

2021

2010

1995

Source: Data.gov.sg

There looks like much money on the sidelines ( CPF and currency  & deposits). 

Figure 4

On a whole, is there much distress in the property market?

The amount of mortgage loans to household networth seems to be pretty healthy and having a downward trend.

I use the following for my SRS investments.

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I use the following for my cash investments:

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Use my Tiger referral code to get free apple shares.

Use my Moomoo referral code to get SGD200 Stock Cash Coupon

[I am not a financial advisor]

Loss of 99.3% investment in Landbanking

Overseas landbanking as an investing trend was popular in the late 2000s in Singapore and may now be forgotten by many. 

One can read more about it here. 

My parents are one of the unfortunate investors. Being like most Singaporeans, a free lunch buffet at a nice hotel is attractive, thinking that one has the will power to resist the hard sell tactics. 

I wouldn't go as far as to say this is a scam even though this company is on the MAS investor list but as a general rule of thumb, if something is too good to be true and have to be sold very hard with nice accompaniments, run far far away from it.

Long story short, the land they bought was a Greenbelt land ( basically land designated by policy to be undeveloped and generally used as agricultural land to control urban growth.) 

Investors will make a windfall  if this land is rezoned into productive land use like for residential or commercial purposes. 

There has been cases when such conversion has occured but the problem was, the probability of this happening is extremely, extremely low and it was basically a high risk investment premised on hope. 

Long story short, after 11 years of holding onto this plot of land which they bought at a price of $27,000 from Jardine Smith Singapore, the UK government decided one fine day to compulsorily acquire this land to build a high speed railway line . This project is called HS2. This is a planned high-speed rail network initially set to link London and the West Midlands, with a further phase extending to Manchester and the East Midlands.

Guess what? 

The compensation was a measly $171. From $27,000 to $171. A 99.3% loss of capital. And mind you, this was after 11 years of holding and one would think land would have appreciated.

Lessons to be learnt.

If an investment needs to be hard-sold, the commission or profit margin should be sky high.  If this plot of land is $171 ( actually $342, more of this later) now, it was purchased at $27000 11 years earlier, one can see that the "free" buffet is actually an expensive one.

Sub-divided small plots do not add up in value to large plots. The UK government stated that the valuation of the land is actually further halved compared to if it was valued as a larger piece due to the administrative cost of having to deal with many small land owners. Hence, the original valuation by the UK government was $342 but reduced to $171 due to it being a small parcel of land.

Negotiation is basically futile as the UK government would want the plot owners to engage property agents to negotiate and cost is to be borne by the plot owners. Who in the right mind would do that for $171.

I guess the only upside to this is that the UK government has said they would pay for any necessary , reasonable cost to engage a lawyer to effect the transaction of the compensation but this is still up in the air as they have not replied what reasonable cost means. Imagine trying to get a reimbursement on such fees and they then deem it as unreasonable and one would be effectively out of pocket and wasted time.

One other possibility is to gather all the plot owners together to probably explain to the UK government that the administrative fees are now reduced for them as they are now dealing with a larger land area instead of smaller land parcels but it is nearly impossible due to PDPA issues and the gain is at best another $171.

The Perils of Investing through a very hard selling agent!