Since this has been a relatively successful investment, it would be good to understand what are the factors that make it an attractive investment? Let me share the rationale on why I invested it in the first place and what we can learn from this.
1. Macroeconomic Factors in Japan
The first reason why I decided to invest in Saizen REIT was due to the macroeconomic factors in Japan at that time. 3 years back while I was taking my part time degree in Economics, I heard about the QE that Japan was going to embark on. I understand that the QE in US and Europe were roads to easy money which actually brought US out of a recession from the 2007 sub prime mortgage crisis and the EU also averted a major sovereign debt crisis.
In 2013, I wrote this in a blog post:
Japan's real estate prices were rising tremendously from 1986 to 1991. This formed an asset price bubble and the bubble burst in 1991 sending real estate prices down into negative territory. Japanese Yen was appreciating a lot due to the Plaza Accord. This was an agreement to depreciate the US dollar in relation to Japanese Yen and German Deutsche Mark. Both these 2 events lead to the Japanese economy suffering and ended up in deflation. I will leave out the finer details of what happened exactly but i hope you got a rough idea.
Japan's government has set an inflation target of 2% to reach by 2015. Prior to that, Japan has been in a deflation state for many years. As prices keep dropping, Japanese people defer their buying in the hopes that they can buy it at a cheaper price later. This is completely opposite from our current state in Singapore where people rush to buy properties because they are afraid that prices will keep going up. It's the thought that if i don't buy it now, it's going to get more expensive.
With this inflation target, asset prices in Japan are sure going to go up. With QE, money flow in Japan's economy will be expanded. Interest rates go down, asset prices goes up. This was definitely going to be beneficial for Saizen Reit which owns properties in Japan.
2. Saizen REIT has stable income from residential properties
Saizen Reit has a portfolio of income producing real estate. These properties are mostly residential properties. As home ownership is low at about 60% in Japan, rental properties are still in strong demand there. Rental prices are set to rise as the Japan's economy recover. mid market rents in the 23 ward area of Tokyo showed an increase of 1.1% from the year 2013. This was very attractive to me as Saizen REIT offers about 6%+ in dividend yield at the price which I bought.
3. Attractive valuation
Saizen REIT stock price has been low for quite some time. In fact, it didn't really move even though it was trading at a discount to NAV of 23.7%. Gearing level was around 34% which I thought was quite ok. Of course, we can't just look at NAV alone to determine if the stock is attractively valued. Some REITs overvalue their properties which make their NAV seem higher. However, for Saizen REIT, I do know that they value their properties conservatively as there were a few times they manage to sell their properties at above valuation.
With rising property prices, rental prices and stock trading at a discount to NAV, I believed this was a good investment.
4. Good risk management
Interest rates are sensitive for REITs. 88% of its debt are on fixed interest and all its debt is long term in nature. The nearest loan maturity it has is in March 2020. Although Saizen REIT could have benefited if they are on floating interest rates instead as interest rates in Japan were low but that's any issue for now.
The Japanese Yen was also declining against the SGD which means it could affect the dividend distribution to shareholders in Singapore. I liked they have hedged their currency risks in view of the falling JPY which means dividend yield will be more or less stable moving forward.
Its time to bid farewell to Saizen REIT from now onwards. Now, I'll have to find another stock which can replace the income I get from Saizen. I have identified another stock which is quite similar to Saizen REIT and am still looking at it. Will blog more about it later on.
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