Monday, July 6, 2020

Forget About Investments - Look At The Looming Economic Crisis

2020 has became the toughest year to live in human history. Virtually everything has changed from the way we work, to the way we shop and the way we could travel. Investing will become the toughest as we brace for a longer depression happening in the economy which means stock prices could take very long to recover. 

I was looking at Singapore's GDP forecast by MTI and things don't look rosy at all. Many of you may have lost your job or have your pay cut and bonuses cut too. Those working in hospitality related sectors such as hotels, attractions and those doing events or in the entertainment industry will be affected the most. Singapore's unemployment numbers have not moved up much due to the many temporarily jobs created by the government. This has enabled people to continue earning some money even though their salary may not be as high as what they would have got before they were retrenched. 

In times like this, if you're working in an industry which is at risk of retrenchment now, its better to prepare your emergency fund for the possibility of a retrenchment later. This will definitely help you to tide thorough when it really happens. We do not want to make the mistake of investing all our savings in the stock market and end up having to sell at a loss when we lose our jobs. I believe the worse is yet to come and companies have not felt the full impact of the crisis yet due to government supporting wages through the jobs support scheme. This is unsustainable and it will be unwise for the government to keep using taxpayers money to fund wages for the long term. We have already drawn $52 Billion from our past reserves and used a total of $92.9 Billion for all the 4 budgets combined. This is at about 20% of our GDP in 2019. 

Breakdown of Singapore's GDP

If we breakdown Singapore's GDP, we will know which are the areas affected and why MTI forecasted a contraction of -7% to -4% for 2020. 

A contraction in GDP means the aggregate value of the goods and services produced within the economic territory of Singapore is decreasing. This means lesser revenue for the businesses which may lead to retrenchments as companies tighten their belts to protect their bottom line. 

Statistics of Singapore has a very good info-graphics as shown below showing the breakdown of GDP. 70% of Singapore's GDP comes from services producing industries such as wholesale & retail trade, finance & insurance and business services etc. 

Adapted from: https://www.singstat.gov.sg/modules/infographics/-/media/Files/visualising_data/infographics/Economy/singapore-economy25062020.pdf

According to MTI report here, the worst contraction in 1Q 2020 came from the accomodation & food services sector with a 23.8% year on year and 69.9% quarter on quarter contraction. Luckily, this sector only makes up 2.1% of our GDP. This sector includes hotels and also food services providers such as caterers and restaurants. 

The next sector which contracted the most is the transportation and storage sector. It contracted 8.1% year on year and 29.9% quarter on quarter. This sector includes air, land and sea transportation. Air travel shrunk drastically due to the closed borders and restrictions on international visitors. Sea and land transport also contracted due to lesser demand for sea cargo handled and reduced domestic demand for public transportation. 

Wholesale and retail trade also contracted by 5.8% year on year and 18.1% quarter on quarter. This sector includes motor vehicle sales, watches and jewelry and also apparel and footwear etc. Amidst all the contraction, we still see some expansion in some sectors such as manufacturing, finance & insurance and information & communication. 

Which sector will have more retrenchments?

By looking at the breakdown of the GDP above, we might be able to get some hints on which sector will have more retrenchments moving forward. The accommodation and food services sector made up only 2.1% of GDP while tourism contributes about 4.2% of Singapore's GDP. If borders continue to be closed to tourists, Singapore's economy will still survive. Thus, this sector may see more retrenchments if tourists are still not allowed to come to Singapore. It is difficult for the hotels to survive if they continue to keep their staff with them. 

Wholesale and retail trade may also continue to face some headwinds due to reduced domestic demand as most people work from home during the weekdays and also reduced tourism spending in areas such as Orchard road. Businesses in the CBD area will definitely be more affected as compared to shops in the heartlands. 

We have not touched on the "other services industries" which also is the most affected in this COVID-19 crisis. This includes the arts, entertainment & recreation segment such as concerts, events etc. Events are still not allowed in Singapore but good news is entertainment is slowly allowed to reopen such as cinemas and attractions. For corporate events, it will definitely take some time before it is allowed again so those businesses which provide event services to corporations will surely retrench many of its staff.     
It is election week for the whole of next week and we await to see the election results if Singaporeans will lean more to the government side or the opposition side. Nevertheless, life still goes on and we should always be prepared for such a crisis like this by having an emergency fund for rainy days. This is what I have always been advocating for and maybe through this crisis, the importance of financial planning will emerge out at the top again. 

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Monday, June 8, 2020

Lendlease Global Commercial REIT - An undervalued Retail & Commercial REIT investment

In just 3 months since the great sell down of the stock market, stocks have started to rally with most REITs going up more than 20% from their lows. The big names like Capitaland Mall Trust, Capitaland Commercial Trust, Suntec REIT and Frasers Centrepoint Trust have all went up. My returns from these REITs now ranges from 10% to close to 40%. Yes, I bought quite a few REITs when Singapore was still in lockdown and all the malls were closed. It wasn't an easy decision to make since the economic situation is still quite bad out there but with such attractive valuations, I couldn't resist to put my money to work. 

With all the rally, I believe there are still opportunities to invest as the situation out there is still dynamic and STI index has not covered back to Pre-COVID-19 days. In this post, I will focus on Lendlease Global Commercial REIT. This is a new REIT which just IPO last year Oct at $0.88 and they only have 2 properties in their portfolio, one in Singapore and one in Italy. I applied for the IPO back then but did not get it. On hindsight, I was lucky not to have got it last year as I can invest in it at much lower price now. Let's start the bargain hunting. 

Lendlease REIT has 1 property in Singapore focusing on retail. This is non other than the popular 313@somerset which we are familiar with. 313@somerset contributes 2/3 of the NPI to Lendlease REIT. In Italy, they have a commercial property called Sky Complex, Milan. Let's take a look at the stock chart to see where the stock is at now.


As you can see, Lendlease IPO at about $0.88 and traded at about $0.90 consistently for the next few months. When the COVID-19 situation got worse, it went down in a straight line just as what happened to the other stocks as well. The price of the stock went down as much as 50% at the lows which was extremely attractive. It was trading at a discount to NAV of more than 50% at that point in time. 

Many investors seem to realise this and started to scoop up shares of Lendlease REIT at the low. This is like buying a property at prime land at Orchard road just above Somerset MRT at 50% of the price. The normalised dividend yield would have also been more than 10% at the low. 

The question is, will Lendlease REIT survive this crisis? Let us look into the REIT in detail.

Tenants at its properties

Majority of the leases for its tenants at 313@somerset have been renewed for FY2020 except for 5% due for renewal in FY2021. For Sky complex, Milan, its on long term leases till 2032. All in all, this will prevent a scenario where tenants demand lower rental due to COVID-19 when their renewal is up. Based on its 3Q financial results update on 5th May 2020, Lendlease still has a occupancy of 99.8% at its properties. 

Most of the leases will expire only in 9.9 years time which is a long time before the next renewal. This is because for Sky Complex, Milan, the leases are very long at average 12 years. For 313 @somerset, the WALE is 1.8-1.9 years. 

Healthy Balance Sheet

A healthy balance sheet is the most important when investing in times like this. Their gearing ratio is at 35.9% as at 31 March 2020. They still have ample room to increase their debt if needed. One thing that strikes out is their low borrowing cost at 0.86% which is much lower than any local REITs listed on SGX. This gives them an interest cover ratio of 11.2x which is a clear winner comparing to other retail REITs!

If we look deeper into their debt profile, we can see why they can get such low interest on their borrowing cost. Most of their loans are on Euro term loan at 0.58% p.a. Their average weighted debt maturity is at 3.3 years so there is no refinancing till FY2023. This would alleviate any concerns of them not being able to refinance their loans in times of the COVID-19 crisis now.

Valuation

Lendlease REIT has an NAV of $0.82. At current price of $0.715, it is still trading at a slight discount to its NAV. Normalising the DPU of 1.28 cents per quarter, we will get a DPU of 5.12 cents. This gives us a decent dividend yield of about 7%. 

On capitalization rate, 313@somerset has a cap rate of 4.5% which is comparable to properties such as Plaza Singapura in retail REITs like CMT. For Sky Complex, Milan, the cap rate is 5.75% which is normal for overseas office properties. The cap rate is the rate of return that an investment property will generate based on its current market value. It is calculated by taking the Net Property Income (NPI) dividend by the current market value of the property. 

Conclusion

With all the factors above, I believe Lendlease REIT will survive this crisis. The retail space should be the first to recover after phase 2 of the circuit breaker where we are allowed to dine in again at restaurants and more retail shops to be allowed to open. 

However, we must always understand that in times like this, stock prices can always go lower and we should only invest money which we can afford to lose and not use it for at least the next 1 year. Who knows a second wave of infection may come and Singapore goes into a lock down again. This should send stock prices diving down again. 

Nevertheless, I have invested into Lendlease REIT at lower prices than the current price and would accumulate if there are opportunities to buy on dips. With all the rally going on, a pull back should happen soon and that would be the time to accumulate. 

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Monday, May 25, 2020

Video Sharing - Panic: The Untold Story of the 2008 Financial Crisis

Due to COVID-19, a financial crisis seem to be looming and it got me interested to look back at past financial crisis again. Recently watched a documentary on the 2008 financial crisis which described what really happened back then. Financial crisis is scary indeed. Now I know why those who had invested back then said it was a scary experience. But on hindsight, the world recovered from the crisis nevertheless and made more people rich for those who had invested in the right companies.

Here's the video for sharing: