Sunday, December 16, 2012

Bear coming in 2013..

Top 10 reasons why Singapore property market is heading to a Super Prime Mortgage Crisis induced price crash in 2013 to 2018.
No.10: Negative REAL interest rates:  bank deposit rate at negative 4% real rate  FORCE Singaporeans into buying properties to hedge for housing inflation.

No.9: No long term fixed mortgage rates: Just like those adjustable interest only loans during Subprime crisis, current low SG local interest rates are trapping the buyers of today into false sense of mortgage affordability. If interest rates go up by just 1%, it represents 100% increase over current first year rate of 1%!!!!

No.8: The genuine demand side for SG properties has no further potential to the upside:  Casinos, Resorts, Influx of FTs, QE 1 -3, Tax haven for the top 1%, all those elements have ALREADY been fully priced into the current market. If just only one element falls away, the domino effect will start.

No.7: Strong oversupply of new properties: particularly new mid range condo units at fringe areas, will be coming online with the next 5 years. All sold at record high prices, record low interests and record speculative demand. When all those TOP periods coming due, there will be not enough tenants to be found.

No.6: Falling nominal rents: In today’s rental market in SG, rents for brand new condo units are highly negotiable. Under the pressure of looming mortgage repayments, all the freshly minted landlord will have very little negotiation power to fill their new investment properties.

This is from a blog I picked up from hardwarezone. .. sounds pretty convincing don't you think? :)
But of course, always read with a pinch of salt and whether vested interest or conflict of interest is present. Form your own conclusion. But i do agree everything in singapore (the stock market , coe and property ) all feel quite toppish.. I have been in the Australia stock market, now looking at Shanghai Stock Index ETF and other  H-shares and also the Australian property market in Syndey and Brisbane.

Wednesday, December 12, 2012

Olam Bonds worth buying?

Got this email from my swiss bank 2 days back. Anyway, this is their takeaway from mgmt meetup. My own gut feel is if I have $250k to spare and taking this type of risk, I would rather go and buy a $500k-$800k condo and wait it out. My risk appetite is not that big on financial instruments that is out of my control. I'd rather risked it on a property.

Our team met the management of OLAM yesterday. Among other things, the following issues were discussed and wish to share with you, hopefully to address some of the concerns  you may have on its recent headlines: 1.    Why did OLAM announce a bond cum right issue, instead of re-considering/cutting capex for  next year
a.    The bond issues was a short term tactical measure designed to rebuild confidence and to end all speculations that OLAM could be running out of funds or liquidity. Even thought this was not the case, the management acknowledged that these things can take its own dynamic and a loss confidence can be very damaging
b.    Board saw an immediate necessity to “bridge the confidence gap”
c.    Temasek has effectively written a ‘put’ on OLAM’s debt
d.    The capex program is under review will be discussed between now and February and changes be done. This is not something which could have been decided over the weekend- nor would such a knee jerk reaction have been either credible or a service to its shareholders and stakeholders. OLAM realizes that as a growing and FCF (free cash flow)-negative company it is vulnerable to these kind of attacks and intends to reduce its vulnerability
 2.    Why this complicated exercise to raise cash?
a.    With these 750 mio, OLAM will have no more funding needs well into 2014
b.    The  main shareholders (Family, Temasek, Verghese) didn’t want to be diluted – OLAM had committed at the last rights issue to shareholders that no new shares would be issued for 4 years. With the new warrant structure, the new shares will only be exercised in 2016 (keeping that commitment)
c.    Still: the board recognizes the need to treat all shareholders equally (as Temasek had signed its willingness to take up the whole issue), hence the rights that give all shareholders the ability but not the obligation to be on the same footing as Temasek.
d.    The cost of the new bond (IRR 8%) is to put the deal on a commercial basis for Temasek. Temasek is NOT giving free money to OLAM. Temasek will also be taking an additional cut in the underwriting fee for the issue.
e.    The new bonds are coming out at a yield of ~8%, around the current levels for Olam papers. In the short run this does provide a new reference rate for Olam papers)
 3.    Leverage
a.    OLAM is having the lowest leverage ratio since listing at the moment
b.    Short term financing is fully collateralized and consists of trade finance for merchandise which is to 80-90% already contracted
c.    OLAM has a 90 days average inventory turn. Per month the company delivers ca. 1.2 Bn SGD of goods, which then settles the lines with banks. In the last few weeks as the crisis has unfolded, lines have been repaid and redrawn with no changes to conditions
d.    No bank has pulled any line or renegotiated the conditions
 4.    Rating
a.    Rating has never been necessary, as OLAM as so far addressed pools of funds of investors which know the company well.
b.    Other companies in the same are not rated either (most prominent: Louis Dreyfus)
c.    Singaporean companies issuing  bonds seldom get a rating as they are well known within its potential investors
 5.    Acquisitions
a.    Sometimes good will is build, but sometimes assets get revalued, namely when company successfully turn around businesses it buys.
b.    MW pictures in the report are misleading and do not depict OLAM assets or operations
c.    Out of 40 acquisitions2 didn’t deliver the expected result and where shut down/written down. This has been clearly documented
 6.    Dealing with MW
a.    OLAM has being dealing with main stakeholders on a daily basis since the “crisis” started
b.    Main shareholder incl. Temasek and Family have fully supported the company and the rights issue
c.    OLAM will desist from reacting to each and every comment from MW, as the intent is clearly to create panic and the 133 report content very little facts
d.    OLAM is suing MW for slander/libel in Singapore High court. It has evidence that MW has been selling the report to hedge funds already in May. At the same time short positions started to increase. This raises the potential for ‘insider’ trading and market manipulation – given the current investigation into hedge fund activity in NY this is likely to run as well.
e.    MW also deliberately misled public by announcing a 80 pages report and then delivering 1 days later a 133 pages one (manipulation)
 All in all, this was a heavy crisis for OLAM according to CEO Sunny Verghese. The company realizes that as a public company, having a growing profile, complex accounting in different countries and a negative free cash flow, you make yourself vulnerable for short seller like MW. The company will work hard to reduce piece by piece this vulnerability. It will eventually also become FCF(free cash flow) positive earlier than planned (2016) and thus start creating shareholder value. The company has always been and is profitable, running an operating cash flow of 500 Mio SGD per year. Some thoughts The explanation on why the debt issue cum warrants makes sense to me. if confidence goes, the company goes (especially a leveraged one). At the same time OLAM understand that the markets started to get some issues with its strong and aggressive growth and it complexity. The commitment to reconsider its huge capex is an important step in the right direction. The fact that Temasek and Kewalram group supports bond and right issue fully significantly reduces risk for bondholders for at least well into 2014. I don’t think the bonds will trade up to the old levels so quickly, as they have to reflect a higher level of risk. The shares are another story and will move in function of how quickly OLAM intends to be profitable. As of this moment too speculative to make a proper assessment  However, I think the 6% 2018 in SGD (offered at 91 for 8% Yield)  could be a good carry for diversified portfolios for the next 12  months, looking for a high yielding bond but for clients who have the risk appetite and believe in the company.  The yield offered compensates for the (headline) risks to come Happy to discuss in greater details with you at your convenience and appreciate your thoughts you may have/share with me.  Below are the list of Olam’s outstanding bonds and price indications for your reference: CCY    Issuer                                                  Cpn     Maturity                       Bid       YTW    Offer   O YTW           SGD    OLAM INTERNATIONAL LTD          4.070   12/2/2013                    99.10   9.50     100.00 4.01SGD    OLAM INTERNATIONAL LTD          3.000   25/2/2013                    99.00   8.01     100.00 2.97SGD    OLAM INTERNATIONAL LTD          2.500   6/9/2013                      95.50   9.01     97.00   6.78SGD    OLAM INTERNATIONAL LTD          6.000   10/8/2018                    89.50   8.36     91.50   7.89SGD    OLAM INTERNATIONAL LTD          5.800   17/7/2019                    85.65   8.70     87.85   8.22SGD    OLAM INTERNATIONAL LTD          6.000   25/10/2022                  83.65   8.48     85.85   8.11SGD    OLAM INTERNATIONAL LTD          7.000   Perp                            79.15   13.68   82.85   12.35USD    OLAM INTERNATIONAL LTD          5.750   20/9/2017                    89.65   8.43     90.95   8.07USD    OLAM INTERNATIONAL LTD          7.500   12/8/2020                    92.00   8.96     93.50   8.68USD    OLAM INTERNATIONAL LTD          6.000   15/10/2016                  85.50   10.70   87.50   10.00 

Tuesday, December 11, 2012

The Automatic Way to a Rich Retirement.

For anyone short of time, a good summary of the book "Automatic Millionaire" By David Bach. I guess the contents will be more on illustrations on the concepts and might be repetitive like all "Retire Rich" books. But it does not take away the key concepts that is encapsulated in the pdf file.

 David Bach outlines the philosophies on becoming The Automatic Millionaire:
! You don't have to make a lot of money to be rich.
! You don't need discipline.
! You don't need to be "your own boss".
! By using The Latte Factor, you can build a fortune on a few  dollars a day.
! The rich get rich because they pay themselves first.
! Homeowners get rich; renters get poor.
! Above all, you need an "automatic system" so you can’t quit.

Take a look. Of importance to me is Homeownership. Your home is not an investment, but you will be surprised how you managed to keep up with inflation and have options open to you should you be owning a 4/5 room HDB 10yrs down the road.

Monday, December 3, 2012

Would I buy the CityLife EC?

EC's are the rage of the year and especially the bigger units penthouses which I find a big value for money. You can never find sizes of penthouses in private condo going for that type of pricing. We've heard the tired old argument ECs are not Private Condos. Well, a recent report states the price differential between a resale ECs and a private condo is very minimal. This is what matters, we sell in a bull market.

The most anticipated launch next month will be the CityLife EC. The CityLife plot next to Tampines Trilliant EC was acquired by SingXpress on early May 2012 for $233mil. This works out to about $373 psf ppr. Add in the marketing and construction costs, you might be looking at a similar breakeven price of $600psf per unit in the new development (quite similar to Trilliant's breakeven psf). Add in the developer's profit margin, you might have new units selling for $700 - 800psf.

Can you see why EC penthouses are a steal (always the first to be fully sold out) with their asking prices of $550-600psf (the developer's  breakeven psf pricing). I've explained why you need to pay for the roof in the Tampines Trilliant article and that's why the psf is as such. So , do not worry too much about buyer's unwillingness to buy a penthouse. They are the prized assets of any condos and people will usually be willing to pay a little more for the space especially those who like condo facillities but yearn for "landed spaces" in the sky.

When I looked at CityLife, I found the much hoo-haa 4300sqft penthouses not really a value buy as it has simply too much roof space to be acceptable for me. However, the 2300-3300ish-sqft 5bedrooms (not sure whether it is a penthouse but it is type G4-Gx) are EXCELLENT! To me the layout is very much like a landed in the sky. It is a SINGLE LEVEL OF AWESOME GOODNESS (not a duplex). If you can get those facing the park or unblocked, i'm sure you will sell much easier and faster and more expensive than the inner facing ones.

For selling, the prices that exceeds $2mil will have a harder time selling. Can you imagine a 4300sqft penthouse bought for $2.4mil and trying to sell for $2.8-3mil? Most singaporeans would go for a landed at this kind of pricing. As you might have read, after the CMs, a lot of units that are moving are those <$1.5mil. So, be careful of buying something that is out of the norm too much ($1.6-1.8mil is still alright I feel). Your buyer base will shrink dramatically especially since you can only sell to foreigners after year 10 and locals from year 5 onwards. Local buyers have a choice between your unit and a landed.

The layout is very suitable for multi-generation living with the parents taking one ensuite, the couple taking one ensuite and leaving 3 more rooms for children and study. The living and dining room is situated at a corner with a big roof terrace surrounding the two frontages. You can imagine the wholesome goodness of the roof terrace if you can spend some money to do up the landscaping. It will be something similar to this... a landed in the sky. Just imagine it wraps two corners. Oh.. ignore the phone number, it is not mine.

Just imaging replacing the swimming pool(Citylife is just PES) with landscaping as below. And I can imagine my kids and family enjoying the outdoor space right in the comfort of our home.

It will be shiok! If this came online in February 2012, I would definitely have bought this as I much prefer this to the current Trilliant Penthouses layout. Again, if you are doubtful of your purchase, just look at the condos/ECs around Tampines and Bedok Reservoir. Then see how it stacked up against an EC with 3 shopping malls and 2 MRT lines straight to town. Of course, the arrival of QBAY next year by FEO, Sekisui House and Frasers near Temasek Poly will bring some excitement. They bought the piece of land at $417psf ppr and expected selling price should be around $900-$1000psf guesstimate.