Kyith Ng is the founder of Investment Moats, which mentors you on wealth management towards Financial Independence. Investment Moats shows how you can build wealth through stock market investing, dividend income investing through a value based approach.
At the end of April, City REIT Management, a subsidiary of City Development Ltd (CDL) purchase 50% of IREIT’s manager. City Strategic, also a subsidiary of CDL, purchase a substantial stake in IREIT itself.
In November 2016, Tikehau Capital purchased a 80% stake in IReit’s manager. The rest of the stake is held by Chinese Tycoon Tong Jinquan and Soilbuild founder Lim Chap Huat.
Tong Jinquan owns 297 mil units (47%), Chap Huat owns 33 mil units (5.2%), Tikehau Capital owns 52.6 mil (8.3%).
In this deal, Tikehau Investment Asia Pacific bought back Tong’s stake in the manager. They then sold half the stake in the manager to City Reit Management, which is CDL’s arm in doing reit management.
Now, Tikehau and City Reit owns roughly 50% each in the manager.
Then, Tikahau increased the shares they held in IREIT. They bought 50 mil shares or 8% of IReit from Tong. They now own 16.4% of IREIT.
City Reit bought 75.6 mil shares from Tong and 3 mil shares from Lim Chap Huat. They now own 12.4% of IREIT shares as well.
Tong owns 35% stake in IREIT still.
The minority shareholders own 36% of the rest of IREIT Global.
What are Each Stakeholder’s Motivations
If you ask me whether it is CDL that is more interested in purchasing IREIT as a platform, or whether Lim and Tong are more interested in selling IREIT away to someone else, I would think it’s the latter.
Ho Toon Bah, a director in Soilbuild, stepped down as a director and in his place Frank Khoo of CDL became a director. Frank Khoo is CDL’s Group chief investment officer.
Subsequent to the announced deal, Tong is still pairing down his stake in IREIT little by little.
It sounds to me that Tong and Lim would like to reduce their stake in the Reit.
So Tikehau shopped around.
And CDL is rather interested in having a Reit platform that is non hospitality based. CDL already have CDL Hospitality Trust but other than that, they do not have a platform for retail and office.
Frank said this of the acquisition:
“As part of CDL’s transformation, we are developing our fund management business through organic growth coupled with the acquisition of assets and platforms,” Mr Khoo said.
“This investment in a Reit is in line with our aim to achieve assets under management of U$5 billion by 2023.
“Besides being earnings accretive with immediate contribution to our recurring income through management fees and attractive yield, the investment in IReit Global complements our existing CDL Hospitality Trusts and will strengthen our Reit management expertise.”
In recent years, you are seeing the developers following the footsteps of Fraser’s Property, to strengthen their recurring income stream as a larger percentage of their income stream.
It is as if telling us that development in the future is going to be extremely challenging.
Capitaland and Keppel are notable ones talking about this shift in mandate.
And I think Tikehau will find CDL to be the perfect partner for them to work with.
So much so that they are willing to increase their holding (or perhaps Tong is desperate to pare down)
Is this good news for IREIT’s shareholders?
This news might be good news for existing IREIT’s shareholders.
IREIT is getting close to being a 5 year old REIT. If you are an existing shareholder, you might be wondering about where the REIT is going. How Tikehau is going to grow the REIT.
When Tikehau took over from the previous manager, they provided a slide of potential acquisition target. They also sought to expand their investment mandate.
Since then, there were no acquisition made.
By working with CDL, Tikehau may have a partner that, in the eyes of local investors, are known to be rather astute property investors.
The main advantage for the shareholders is that with CDL, is that while they parent may not have so much offices, equity and debt capital raising might become easier now.
If both CDL and Tikehau has an economic incentive to grow their AUM, so that they can earn fees from it, they are likely not contented to just inject assets that would impede future assets from being injected into the REIT.
How would growth take place?
CDL is not known for most things other than luxury private homes and hospitality.
And if we are looking for a large pipeline of quality injections, we might not see that take place.
In recent years, CDL have acquired 2 office buildings in the United Kingdom:
2016: Development House
2018: Aldgate House for 183 mil pounds. Aldgate is grade A office and retail, 88% occupied with a 5% passing rent yield.
With CDL, Tikehau might still be looking at acquiring third party assets instead of these from CDL.
IREIT currently pays about EUR 3.56 cents.
With the weaker Euro, a conservative local DPU is 5.47 cents.
At a share price of SG$0.74, this works out to be a dividend yield of 7.4%. The current debt to asset is 37.7%.
IREIT’s cost of equity is still very high.
Suppose if we wish to make the CDL’s UK prime purchase to work out, and imagine that they inject this to the portfolio.
Based on the passing rent of 5% and UK cost of debt to be 2%, IREIT would probably need equity raising of 55% and taking on 45% debt to achieve an accretive acquisition. By doing this, it allows IREIT to be injected with good quality office asset that has good appreciation value.
But this is rather tight.
The hope is that with CDL, IREIT could do a non-renounceable rights issue that is 10-15% discount (a not very tight range) with CDL choosing to take a big chunk of it.
The likely long term acquisition horizon could be possibly in the areas that Tikehau highlighted in their slides long time ago.
The acquisition profile can be something like the above. The net property income yield would be higher than UK, and the cost of debt to be cheaper in Euro. Even by putting down more equities, it should still be rather accretive.
Fundamentals of IREIT Global
There are always some things that you like about a REIT and some less desirable things.
Let me go through some characteristics.
The trading volume is on the low side. I have list out the average trading volume below:
Average Trading Volume:
ESR REIT: 4 mil
Manulife US REIT: 1.1 mil
IREIT Global: 0.4 mil
Mapletree Commercial: 8.3 mil
Capitaland Commercial Trust: 13 mil
The trading volume is important to provide liquidity. Without the liquidity, institutional investors, who have larger pool of money find it hard to get in or get out.
With difficulty, they might not want to get invested
Minority Shareholders hold a small proportion of shares. Not sure whether this is a good thing or not. On a day to day basis, there are currently not much surprises to the operation of the REIT.
And so since a large proportion of shares are tightly held my Lim, Tong and Tikehau, this REIT resembles more of those godfather property play where it is not so much traded.
Some of my friends like this kind of companies. Some do not like due to the lack of growth catalyst.
Dividend Per Unit not Growing. I have tabulated IREIT Global’s available distributable income over the years. This includes the amount that they retain, since IREIT only pays out 90% of their available distributable income.
I have listed out the amount both in Euro and Singapore dollars. Red denotes a decrease from last quarter and green denotes an increase.
If we look at the profile on its own, in terms of Euro, the distributable income have not been increasing.
This is despite a build in CPI escalation for most buildings. Since inflation is very very low in the region, recent decrease in distributable income per unit can be attributed to more expenses.
In Singapore dollars there are more decreases due to the strength of the Singapore dollar versus the Euro.
If we observe the 5 year chart of EUR versus SGD, we can see the currency fluctuates in a 1.50 to 1.60 band.
This is a 6% range and depending on how you look at it, your dividends may be
7.4% + 3%
7.4% – 3%
IREIT does hedge the dividends on a quarter to quarter basis 1 year in advance so as to smoothed out the volatility.
But if you look at where the currency is at, and if you are speculative, perhaps now we are at the lower side of the band?
IREIT not growing its DPU over time. This is due to a lack of organic growth through AEI, rental escalation, renewals. This is also due to the currency difference making the DPU volatile.
And that would be a problem for investors to participate in since, if DPU is not growing, the demand is not there, the share price would not grow.
Their yield on their AFFO/free cash flow/distributable income is likely close to 8.2%. It would take a quality REIT like Capitaland Commercial a lot a lot alot of DPU growth to reach this.
But investors prefer the quality REIT because despite the low yield, they know that, factoring currency fluctuations, vacancies, rental escalations, acquisitions, AEI, the dividend yield is protected (since each quarter is usually higher)
With a REIT with high dividend, there is this susceptibility that you have 8.2% this year but in the next few years, if the currency trended down, the dividend yield net of currency fluctuation is closer to 5%. There is a lot of uncertainty there, and investors do not like uncertainty, would choose not to get invested.
The inefficiency is when things are different. Currency is on a secular change in trend due to a change in trend in the region. The properties are more diversified. If the REIT is well managed, more diversified and gives you 7.5% for 4 years, perhaps some form of re-rating by the market will occur.
Debt Risk drastically reduced. The appeal of investing in Europe that counter balanced the lack of growth is that the cost of debt is low.
IREIT managed to refinance ALL their debt to 5 years later, at an average interest rate of 1.5% versus 2.0%.
This removed any debt refinance uncertainty.
Asset Value is Slowly Appreciating. In land scarce Singapore and Hong Kong, we have seen much price appreciation in asset value. The advantage for a property investor is that it increases the amount of leverage that you can take.
When a new REIT comes onto market, we are not sure if they are dumping poor assets that would not grow.
If the assets are poor, their value goes down, it puts more pressure on the amount of debt you can take.
I have tallied the price appreciation/depreciation versus the debt to asset over the past 4 years.
IREIT global could possibly be the rare portfolio where there were no injections so we can see the effect of the appreciation over time.
The growth have been rather low. Well if you factor in non existent inflation then this 2% real growth is not too bad!
For some reason the latest property revaluation values the portfolio almost 9% higher.
And you can see the effect on the debt to asset.
What was not so safe, suddenly look pretty OK. Perhaps due to Brexit, and the relative strength of the German economy versus the rest of Europe have increased the demand for German property.
I think one thing I highlighted in my last post of IREIT 1 year ago was that there was 14.5% of the gross income has break clause and 8.4% have lease expiry in 2019.
Of the 8.4% expiring in 2019, 3.6% gets pushed to 3 years later, and 4.6% gets pushed to 5 yeas later. Perhaps not all tenants would want to lease for a long time. But at least it shows that there are demand for the spaces and that the manager is able to lease out the spaces.
Sometimes it does irritate me that I have to reverse engineer to find out some of these things. Perhaps they were revealed a few quarters ago and I have missed it.
In any case, with CDL’s involvement, I think IREIT will evolve.
How would it evolve, I am not much clearer than you. I do certainly think this is a good development.
I write more about REITs in my Learning to Invest section below. It is free.
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And the main highlight of the survey focus on how much Americans were influenced by what their friends shared on social media.
Respondents blame social media platforms, NOT the people as the bad influence when it comes to how they manage their money, while they put friends and family among their good influences.
Personally, I like the first one where they wonder how their friends can afford expensive experiences posted on social media. The survey zoomed in on the Millennials and Gen Z and you would think that the Gen X like ourselves would care less about our friends.
I do not think so!
I think we will wonder about very different things. We wonder how come our secondary friend who was useless in school is able to have that wonderful life now.
I think we are just curious by nature.
Which is why a lot of what we posted as title is geared to stir up your curiosity.
But I must say some ads were done to great effect and rather unfortunate that people fell for them.
Some of the most curious ones are how you can own 34 properties at a very young age and how you can sell your HDB flat and buy two condominiums. We become curious due to how hard it is to own private properties in Singapore.
According to the survey, we also pay too much attention to how much our friends spend then how much we save.
I wonder what would happen if one of your friends starts using their Instagram or Facebook to post a micro-blog on their debt pay off. They will put out an image of how much debt they have left and how much they cleared this month.
Their friends would get curious and start telling them they should not pay off their mortgage because it is a cheap loan.
Their friends might get curious how much they earn to afford them to funnel so much to mortgage payoff.
Their friends would be trying to find where the couple currently work, how long they been there and how much the folks that work at these places are paid. They would start seeing how unbelievable it is, for them to use that amount from their take home pay to pay off the loan.
And then they will start looking at their own situation and see whether that is possible for themselves. What is the math behind this.
How they can also post something similar at each debt payoff milestone.
That might be weird, but it is how we can use social media to start a different kind of movement.
In reality, this is not going to happen because, money is personal to most of us. And if you have a massive credit card debt, you do not want to embarrass yourself as someone will ask how did you get yourself into this predicament in the first place.
So a permanent portfolio, which is the concept of Harry Browne in the 1980, is to create a portfolio made up of
Cash or very short term safe instruments
These 4 tend to be asset classes which are rather less correlated with each other.
The idea is that if you have 25% allocation in each of these, you can create a portfolio that would counter balance each other in different economic regimes. Browne highlighted 4 of these regimes which ranges from mild inflationary growth, stagflation, deflation, high inflationary period.
There should always be 2 asset classes that does well in each of these periods, so they counter balance those that do not do so well.
The table above shows the returns of various famous portfolio. Notice the permanent portfolio denoted by the column PERM.
What you will notice is that while the CAGR is pretty good, the max drawdown (MaxDD) is the lowest at -12%. The standard deviation is low at 4.35% as well.
In Demonetized, he thinks that the problem with the permanent portfolio is a lack of equities, and too much cash. So his portfolio is tilted towards:
Why Add REITs?
A reader thinks that the portfolio is too heavy towards gold.
And there might be a justification for it because:
Gold does not provide a income or yield per say
There are costs to storing gold
The author seem to agree that there are some characteristics of real estate that would make it work like gold in certain regimes:
Real estate value tends to go up in inflationary scenario
However, I do think that interest rates, which is a cost of securitized real estate borrowing will go up as well, counter balancing the advantage in #1
If there is one period that we should fear it is the stagflationary period in the 1970s.
From my research on retirement and financial independence, there is a few 30 year periods that resulted in the safe withdrawal rate to be 4% or less. And that is those 30 year periods that starts in 1966 to 1969.
Without these periods, I think the safe withdrawal rate can be much higher.
Real estate, was able to do pretty well during that 1970s period. But I would caution for us to conclude that just because gold and real estate did well during those period, that in a seemingly similar period next time, they would perform as well.
There are evidence that gold was able to do well then, because their valuation due to the purpose they performed, is cheap. Given another period with different permutations, and their results might be different.
This is to say there are periods in the past where inflation was high, but gold didn’t do as well.
The author decide to do 2 portfolios by adding the US REITs index.
The first portfolio halve the gold and puts it in REITs:
The second portfolio halve the US Stock Market and puts it in REITs:
The third portfolio is a pure 100% US Stock Market.
Here are the results:
You would notice that the compounded average growth (CAGR) is slightly weaker than a pure US Stock Market portfolio 3. But it should be good enough for most people.
By reducing gold, the max draw down is higher (portfolio 1 vs portfolio 2).
Replacing gold with REITs improves the return per unit risk (Sharpe ratio) and the volatility profile (Stdev).
So it seems:
Your portfolio is less volatile
But if there is a draw down, it might be much worse
The long term compounded growth is not too shabby
The table below shows the level of drawdowns for the three portfolios in some of the tough periods:
In most periods, the draw downs of the permanent portfolio, be it portfolio 1 or 2, was able to reduce the draw down to a manageable level.
We notice that the draw down for portfolio 1 is usually greater than portfolio 2.
Subprime crisis, is also a crisis of the equity market, real estate market, and the credit market.
Portfolio 1 has less gold than portfolio 2, and we can see that the draw down is larger without gold.
Why are Volatility and Drawdowns an Issue?
Because they affect human beings. We do not like it when we lose money. We fear losing our hard earn money.
Imagine painstakingly building up $500,000 over 20 years and seeing that cut by $250,000 (see portfolio 3 in subprime and dotcom)
When we see our position in a money losing situation in the absolute sense (compared to in percentage, like losing 10 years of hard earned savings), it makes us do stupid things like pulling out the money at the absolute wrong time.
Whether it is portfolio 1 or 2, you realize that for a lot of those crisis, the draw down might be much more manageable in the behavioral sense.
If the volatility is small, but the returns are slightly lesser, you keep your mind, and your mind will tell you that this is the opportune time to add more to cheaper positions.
It is easy to brush off that you can endure a 30-50% draw down on a portfolio that is 10 times your annual savings rate, until you do it. I for one admit that I hate seeing my portfolio in a draw down state. (if you wish to see my thoughts on portfolio management, position sizing and risk management, there are a few articles on this in my active investing section)
Many investors take it that REITs is an asset class. Various research have shown that if you add REITs to the portfolio, it does not improve the returns of the portfolio, it does not improve the volatility profile of the portfolio.
It is not an asset class. An asset class has a few characteristics that would classify them as such.
REITs is a sector and should be evaluated as such.
This back testing by the author is by no means super comprehensive but it does show that there are certain periods where REITs is less correlated than equities.
But the draw downs are more fierce.
Some of the reasons is this:
when there is a major equity drawdown, the credit market tends to switch from very lax to very cautious. Lenders become more stringent
REITs or real estate tend to be leveraged in some ways, so if you have trouble getting refinanced, you are in trouble. You might need to sell off assets at fire-sale prices
REITs despite people thinking it is a separate asset class, is still equities and would behave in a similar matter when investors lose general confidence and decide to sell rather than buy
Of course the credit market might not always be in a euphoric situation.
We can see less correlation in the Singapore markets recently.
Due to the increase in trade tension between USA and China, the markets have been in a wobble. However, the local REITs prices have largely been stabled.
The worse sin would possibly be to treat REITs like a bond, thinking that they are so low correlated that in an equity drawdown, the REITs would stay stagnant or counter balance. Sometimes it would, but most often if you think that way you might be in for a shock.
I write about more REIT stuff in my learning about REITs below. Do check it out.
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Few days ago, I sat in a product presentation on a software-as-a-service (SAAS) that helps financial planners.
This SAAS seeks to help the planners and their clients visualize how adding different life goals to their lives affects their wealth accumulation outcomes.
It seeks more for the planners to be able to communicate how complex our lives can be.
And when we tie our money to it, it makes it important that you should divert adequate resources to these goals.
If not you will not be able to reach them. (If you read my wealthy formula, you would know that the 2 things that has the greatest impact to your wealth, is also within your control. They are to build wealth early, and contribute more from your human capital)
The SAAS product is damn good.
As a person trained in school to write software long time ago, if I were to code something, this one would be very close to the final product how I want it to be.
But there is something very subtle that I couldn’t spot.
Only more experience planners would be able to articulate it to me. And then I realize the issue.
The SAAS starts the planning by defining the client’s age, and family dependents.
Then there was this portion where they will ask the clients:
How much out of their disposable income, would they want to use in their planning?
This is seriously odd to me.
They have a few ways to specify this:
Opportunistic amount. This means above your expenses, you would use this amount to be part of planning
The odd thing is this.
If you read enough of my stuff, you would realize that we are always working with 100% of what we earned today.
If I bring home $65,000/yr in disposable income, I want to find a way to deploy this amount so that I:
Live a modest, yet good life now
So that I can plan for a modest, yet good life in the future
Every dollar that I earn, should be deployed either to bring value to my life today , or tomorrow.
However, in this case, as part of the work flow, the SAAS asked the client, out of $65,000, how much would you consider to do planning.
The only reason why the software is designed this way, is because of real customer requirement.
The customer here is the financial planning firms.
And this is part of how they do their prospecting.
This means that…. Clients usually do not disclose how much they want the money to be manipulated by the adviser.
Essentially, the financial planning firms giving their feedback have let the requirements gatherer in the SAAS know that clients usually don’t tell them all their financial stuff.
You might encounter yourself doing that.
I do it myself in the past.
Whenever you meet an adviser, the adviser usually is commission based. You have no idea the integrity of the adviser. You have no idea the level of sophistication of the adviser.
So you would only tell them the amount of cash flow that you are willing to be manipulated by them.
This is a big problem for you but there is nothing much you can do about it
I have readers email me their financial life in the past. Their net worth, their income, their expenses. Rough figures.
And I could give people a few trajectories how they could tweak their financial situation, and lives so that they can have a life that they prefer.
If you are sophisticated, you can do a pretty good job and likely you will take a holistic look at your financial life and plan with your entire $65,000:
Try your best to bring down that $40,000/yr expense to $35,000/yr
Better deploy the $30,000 in the best risk adjusted way so that you have a good buffer 15 years down the road
You would only disclose a portion of your cash flow, or willing to purchase a product using a portion because you have no trust in the adviser.
If I have absolute trust in my adviser, if I have $30,000, I will funnel all the $30,000 to him.
Next year if my income rises and I have $34,000, I will funnel the excess $4,000 to him.
He would do the best job to give me a good life in the future.
So if you cannot trust your adviser you cannot have a well calibrated financial life.
And one of the main reasons is incentives. And planning competency.
Almost all in Singapore are commission based planners. If they do not sell, they do not eat. There is a strong economic incentives to sell, even if that is not the right product.
How many planners out there have the competency to plan well for you?
There is a good reason you do not trust them.
And this is the problem that we have to live with. The planners would probably win if they sell well.
For you, unless you get competent yourself, you always loses.
It gets crazy that they are designing this inappropriate way of planning into the software
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On May 9th 2019, the government announced some changes to how we can use CPF to finance our public and private housing, and how this affects how much we can withdraw from our CPF at age 55.
This will affect you, if you do not own a home, or currently own a home, but would in the future sell and buy again (which is likely going to be a lot of people!)
I think there are a lot of media coverage on these stuff from the traditional pro-Government mouth pieces so I will not explain too much.
I will however present this table:
This is how I look at it:
It affects the maximum amount you can use from your CPF to finance your home. Be it HDB, private or EC
It affects the maximum amount of HDB loan you can get
Just so you know banks also take reference from CPF restrictions when assessing how much loan to lend
It affects whether you can get money out of your CPF above the CPF Basic Retirement Sum, if you have pledge your property
The updated rules will apply to:
HDB flats: Flat applications received on or after 10 May 2019
Private properties and Executive Condominium units: Option to Purchase or Sales & Purchase Agreement signed on or after 10 May 2019
CPF withdrawals: Applications received on or after 10 May 2019
The Heuristics to Remember
The easiest way to understand these stuff is to frame your mind to what the government is trying to do.
Try to reason this way, and see if what they implemented is other wise.
Some of the main things to remember:
The government is here to watch out for all our welfare
The government wants to manage the price appreciation and price draw downs through these rule changes
These rule changes would change broad demand and supply, or demand and supply in certain segments
The government have to take care of the social situation
The government have to take care of sentiments since this may be the election year
If you think from this angle, than you will realize the world is a very beautiful place with the PAP around.
You can Use More CPF to Finance Older Home
The main difference is that the rules that determine the maximum CPF usage to finance the home.
Before 10th May 2019, to use 100% of your property’s valuation with CPF to finance your home:
Your remaining lease on the property must be greater than [60 years]
Your remaining lease on the property cannot be less than [30 years]
Anything in between, you can only use a portion of your property’s valuation (or Valuation Limit) to finance with CPF
Your remaining lease on the property must be greater than [95 years – Youngest owner age]
Your remaining lease on the property cannot be less than [20 years]
Anything in between, you can only use a portion of your property’s valuation (or Valuation Limit) to finance with CPF
So the main idea is the change to [95 years – Youngest owner age].
They actually want to link your ability to use CPF to finance the home, to how long you can live in the home.
The rational is this:
CPF is a government scheme with a certain social objective
If you use it, you must use it in a way that takes care of your long term needs
They do not want a situation where you outlive your home. If that happens, it is a social problem. They have to take care of you!
Since they know that you like to use your CPF to finance your home, instead of cash, they link this social objective (have a home that you won’t outlive) with your favorite capital to finance your home
Likely, based on their data, they do see this latest young cohort having a life expectancy to 95 years old.
This would likely mean, these stuff might change in the future.
I think putting this way explains things much better. If not, the previous way of explaining is a bit strange:
Why greater than 60 years remaining lease?
Why if your remaining lease is between 30 and 60 years, you must also satisfy that the remaining lease be more than [80 – Youngest owner age]?
So this way simplifies things.
If you choose to purchase a home that does not last till you are 95 years old, that is fine.
But you cannot use all your CPF to finance it.
I think that is fair.
Lastly, it used to be that if the remaining lease is less than 30 years, you cannot use your CPF to finance the property. Now it is reduced to 20 years.
The 4 Year Max CPF Usage Rule
Someone in one of the chat that I am in came up with this mathematical number to let me easily remember easily whether you can use maximum CPF to finance 100% of your property valuation.
The idea is that if you purchase a home that is 4 years or more older than you, you cannot use 100%.
So if Kyith is 39 years old than if he would like to use the maximum amount in his CPF to finance 100% of the valuation limit, he cannot buy a property that is older than 43 years old.
It is also an elegant way to look at things in that, just purchase a home that you will not outlive.
I think it is easy to gauge because the maximum age of leasehold (99 years) is around this 95 years range.
If the home is 4 years older than you, then you can only use a pro-rated amount to finance the home.
You can Finance Older Flats with MAX CPF Funding
Due to this move, older folks an purchase older home with MAX CPF Funding.
This will allow them to not use so much cash to finance it.
Jane is the youngest owner at age 45. They wanted to purchase a home with 50 years of remaining lease.
In the past, they would not be able to use 100% of their CPF to finance, since 50 is less than 60. However, with this change, the remaining lease is equal to [95-45=50].
So they can use 100% of the Valuation Limit with CPF to finance.
The Pro-Rated Case Study
Those that wanted to purchase a home that is 4 years older than them, they can only finance partially with CPF.
The above example shows Nick and Cheryl, who with the previous rules will be eligible to fully finance their home with CPF but now they will have to fund partially with cash.
The remaining lease is 65 years which is greater than 60 years, and both of them satisfy [80-25=55] < 65.
However under the new rules, [95-25=70] > 65.
Nick and Cheryl will outlive their home.
So their MAX CPF Usage will have to be pro-rated.
This pro-ration is the most confusing because they do not reveal the formula how they derive this.
I can only find this Straits Times look up table:
Some May not be Able to Pledge their Property to Withdraw More from CPF at Age 55
I think one of the bigger downsides would be certain group of people might
previously able to pledge their property so that they can get money above CPF Basic Retirement Sum at age 55
now unable to pledge due to the changes
If we review the table again:
The rule previously is rather simple. Pledge a home with greater than 30 years remaining at 55 years old, and you can take out the sum equivalent to the amount above the CPF Basic Retirement sum.
Now, your property must last you to age 95, which means the hone must have 40 years remaining at 55 years old.
This means that if you did not buy a property that is 4 years older than you, you have to satisfy the Full Retirement Sum (double that of Basic Retirement Sum) at age 55 in order to take out the excess money (except for the first $5,000 from the age of 55, and 20% of their RA savings from their payout eligibility age)
To put it in another way, if you choose to finance the home with more cash, you cannot take out more CPF at age 55.
No Grandfathering it seems
These rules affect the CPF Applications received on or after 10 May 2019.
This change is not expected to affect most CPF members, as all HDB flats and the vast majority of private properties have leases that can last a 55 year old till age 95.
CPF thinks that the majority of those turning 55 will not have a problem as their remaining leases are mostly longer than their age.
Nick and Cheryl, who have previously purchase home that is > 60 year remaining lease and now failed the [95- Age] Rule, you are caught in a worse off situation.
However there would probably be some folks like Nick and Cheryl that are affected:
Trying to buy a place that have 60 to 70 years remaining lease at age 25
These flats are built in 1980s to 1990s. 1980s is where majority of the HDB flats were built
They wanted a place near their parents, or that it is close to town where they work
So these people will be caught in this special situation.
Government Trying to Balance the Demand for Older Flats
I find that these changes are mainly to address the demand situation for older flats.
In August 2018, government announces the Voluntary Early Redevelopment Scheme (VERS), a scheme for those flats that reached 70 years old to be sold back to the government. There is also the Home Improvement Programme (HIP), which will update the flats a second time around the age of 60-70 years old. You can read more about my thoughts here.
Together with a few releases from ministers, it jolts people back to the reality that the lease of the HDB flats will run down to zero, and will be return to the government at $0.
Sine then, the demand for older flats like those in Toa Payoh have been reality checked.
The problem in Singapore is that:
most of our wealth, that we use to fund property purchases are in CPF
with the old rules, if the leases are less than 60 years, you can use less and less of your CPF to fund it
the demand pool of prospective buyers are greatly reduced
this becomes a buyer market
So with these changes, the government hope to
unlock that 10 to 15 years older flats to allow more people to use 100% of their MAX CPF valuation limit to purchase the home
reduce the rapid depreciation of those older flats
Bala Curve: The depreciation of land lease from right to left
The chart above is the Bala curve and as the property age from right to left, the depreciation of the lease accelerates.
Usually, if there is demand for the property, as in people find that there is a use for it, that will slow down the depreciation.
A leasehold property (red line) theoretical growth due to both depreciation and growth counteracting each other (Left to Right this time)
The government is thinking that, if there is not much demand, that appreciation from 40 years old of the property to 70 years old would not even happen.
The good thing for the government would be for VERS they get to buy back cheaper (but think a lot of us would not be too happy about that)
So this move is to improve our access to wealth so that the depreciation of leases is slower.
However, it seems that those who are trying to sell their older flats, don’t think that is the problem.
In an article in Today, Mr Calvin Low, 39, who is a sales manager and trying to sell his 3 room flat in Commonwealth Close, which have 47 years of remaining lease, felt it does not help much:
those that come to view his flat are older couples
they are downgrading to a smaller apartment. They are empty nesters
they already have enough cash flows so purchase is not an issue
Viewing the HDB Flat for its Functional Utility
In a certain sense, when there is a lack of demand in this segment of property, and the lease will eventually run out, people will see the property as what it is: the functional use of it.
I think that is how the HDB should be viewed in the first place:
A shelter where your family can be protected from harsh weather conditions
A place which is closer to where your family or extended family operates
I can see demand for shorter lease flats for the following reasons:
Staying closer to a place closer to your work place. Had the lease be longer, due to the proximity the properties could be more expensive
Moving closer to where your children goes to school
Instead of opting for a new 30 year lease 2 room flat, older couples can have a bigger place, closer to their children, at a more affordable price
Living in some place you always wanted to live, but cannot afford due to the high price
For 1 to 4, they opt not to rent due to the uncertainty and volatility of renting
Whether 1 to 4 will work out really depends on the demand and depreciation dynamics.
For example, there are some who find Telok Blangah to be very close town, and especially for me, close to my work place.
So you can see if some of my colleagues who have been working in Bukit Merah for a long time, and see them working longer there, to find a place so that they reduce the commuting stress.
For the same 4 room flat along the same street, some are 44 years old, some are 17 years old.The older flats are smaller but they are also much cheaper.
Someone who is 41 years old or older (I just narrowly missed out!), can purchase this flat, fund it with all their CPF and still be able to pledge the property so that they can take out the CPF money above BRS at age 55.
Singaporeans attention might be on Private Properties then Depreciating HDB flats
I would think that what is on most 30 something and 40 something’s mind is more than finding this very desirable place to live.
I think that the thought that their prized HDB flat:
May not always grow as it should as in the past
Cannot be passed down as a heirloom to descendants
Would make those who have the means (or struggling to find the means) to focus on building their wealth through private property.
This could be upgrading to a private property, or buying a private property on top of their HDB.
And they would be spending the next 10 to 15 years, before their retirement servicing the loans for this.
Psychologically, it is damn tough to ask people to buy a property that have a short lease left, limited price appreciation.
It is the Asian mentality.
Until there is a cultural shift there, Singaporeans, I am afraid are so spooked that their attention has turned to private property, preferably freehold property.
They know no other way to build wealth in a low volatility manner.
Personally, I think due to the last point highlighted, these changes won’t do much.
However, I do feel that if you are able to accumulate your wealth in different ways, these move might be better for you.
It allows you to be able to fund a greater amount of your home financing through CPF.
This move is better for me as well. Likely, I won’t outlive my current place.
But suppose I been chased out of my home due to sibling rivalry, I have more options.
I would be able to find a place in those 1976 to 1990 built places, don’t spend so much, fully fund it with my CPF money.
I think the government have ran their numbers and suspect that majority of those 25 to my age (around 40) are not so into purchasing old property, so things should be rather OK.
Let me know your thoughts.
If you are affected, do share your experiences if its not too private.
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The DBS Multiplier account was pretty refreshing when it was launched because it caters to a particular group of savers that other banks were not catering to.
On 1st of May this year, DBS decided to enhance their DBS Multiplier so that you may be able to benefit from higher interest rate and have this interest rate applied to a larger savings amount.
I took a look at the offering, and I think I will stick to the DBS Multiplier.
So let me explain to you the changes, why I decide to stick with my decision, and some of the ways that I can make use of it to help me build wealth better.
The Current DBS Multiplier
Before I carry on the explanation, you might be interested to hear my perspective of the Multiplier account 19 months ago. You can read the link above.
I think before I explain the changes it is better to refresh our memory how the Multiplier is like currently.
If we recall, the table above shows the interest that you can earned if you made different levels of transactions. If you have satisfied that particular band of transactions, and have fulfilled 1 or 2 categories of different transactions, you earn that amount of interest within that band on the first $50,000 in your DBS Multiplier Account.
The mandatory criterion is that you must credit your salary into a DBS/POSB savings account. This does not have to be the DBS Multiplier account, it can be your savings account, multi-currency account, joint savings account with your spouse. DBS have a way to track the salary being credit to any account under your name.
There are 2 different tiers of interest rates that you could earn, and it depends on how many categories of transactions you can satisfy:
Credit Card Spend with DBS/POSB
Home Loan Instalments with DBS/POSB. Both contributions from CPF and cash payments for home loan instalment qualify
Insurance with DBS/POSB. Selected new regular premium insurance policies purchased through DBS/POSB
Investments with DBS/POSB. This includes dividends from CDP credited into your personal or joint DBS/POSB deposit accounts. New lump sum or regular savings plan (unit trust or ETFs) bought through DBS/POSB. Buy transactions made via DBS Vickers Online Trading, mTrading, DBS digibank, iWealth
This looks like any of the hurdle savings account out there in the market such as the OCBC 360, Maybank Saveup, UOB One, BOC Smartsaver, Standard Charted Bonussaver.
Except that instead of high minimum for each category, to qualify, the Multiplier allows you to aggregate ALL your transactions to see which transaction band you hit and what is the interest you can earn.
The minimum is to have $2,000 in transactions.
This sounds complicated but it is not let me go through some examples.
For example, suppose that I earned a take home pay of $1,500 and
I spend $300 on a DBS/POSB credit card
I bought a regular Manulife Term Insurance and paid $200 in premiums
So I satisfy
The salary credit
2 categories of transactions
The total transactions add up to $2,000, which satisfy the minimum $2,000 in transactions
According to the table, I will earn 1.80% per year in interest.
This is pretty sweet for you if you are starting out and do not earn so much. You would have failed other savings account qualifications.
If instead you spend $500 on your credit card (as an example, it is a bit irresponsible to earn $1,500 and spend $500 in credit card transactions!) and no insurance, investments or home loans, you satisfy 1 category instead of 2.
You still earn 1.55% per year in interest.
Here is an example for the graduates.
Suppose your take home pay is $4,000/mth and you spend $1 on a credit card transaction and $20 per month on an insurance product:
You satisfy 2 transaction categories minimally
You credit a salary
Your total transactions of $4,021 qualifies you for 2% in interest rate.
Notice that without a minimum amount for each category, unlike its competitors, you are able to qualify for the DBS Multiplier bonus interest rates. I will probably explain the advantages to me below.
Boosting the DBS Multiplier
DBS will be providing a boost to the interest you can earn on the money in your DBS Multiplier account.
Potentially, you can earn higher interest on $100,000 instead of $50,000 currently.
However, it is not so straight forward.
Let me explain.
So what I have explained in the previous section is still valid.
There are no changes there for the 2 tiers of interest rates, and transaction bands that I talked about.
DBS introduce a third tier of interest.
To satisfy this tier of interest you have to qualify one more category of transactions.
And if you manage to satisfy one more category of transactions, you earn a higher interest on another $50,000 of savings in the DBS Multiplier.
Let us go through an example.
Have $100,000 in your DBS Multiplier
Have $4000 salary credited to another POSB savings account
Have a $1400 DBS home loan mortgage paid via your CPF
Purchase $5000 worth of stocks through DBS Vickers for the month
You have hit at least $2000 worth of transactions, 3 categories, and amassed $10,400 in total transactions for the month.
For this month your interest will be
2.2%/12 on your first $50,000 for this month
2.4%/12 on your next $50,000 for this month
If instead of three categories, you can only hit two categories, and amass $9000 in eligible transactions for the month, your interest for the month will be:
2.2%/12 on your first $50,000 for this month
So there is no penalty, you will still earn like your original multiplier.
Why I am Sticking with the DBS Multiplier
As a wealth builder, I have to balance my life and how hard my money works for me. So we are always evaluating which savings account we should use in our daily lives.
I will stick with the DBS Multiplier (unless a competitive bank comes up with a 5% yielding, low hurdle savings account!).
Let me share with you some of the reasons and my perspectives about the account.
1 Throwing down the Gauntlet if You have the Spending Ability
The original Multiplier did something really great.
And that is that it caters to those who have a lot of trouble hitting the high minimums of the various transaction categories in other banks. Due to that, if your earning and spending is low, you are left to earn a low interest of 0.05%. They changed that by enabling those who could hit $2,000/mth in transactions to earn 1.55%.
They took care of the lower bound. And they have kept that lower bound.
With these changes they are challenging those who can bank with DBS more :
If you have the ability to fulfil one more category in transactions, we are going to reward you with more! Higher interest on another $50,000.
But if you failed this challenge, they are not going to penalize you.
2 A Challenge with a Worthwhile Reward
And for me if you fulfil the additional category it is worth it.
By satisfying just one more category, and with no minimum category transactions, you get potentially $1000 to $1900/yr more in interest.
For those who have quite a bit of cash lying around, you may be struggling to fulfil 2 different hurdle savings accounts like the DBS Multiplier. Most would need to have salary credit and credit card transactions.
How does one have so much salary and spend so much money?
If you have a need for home loan, unit trust or insurance needs, it is a worthwhile hurdle to create another high yield savings account.
3 The Only Savings Account that Blends with Your Stock and Bond Investing
As an investor, there are no other savings account that have stock investing as a transaction category that leads to higher interest rate.
Except the DBS Multiplier.
And this suits me a lot.
When I purchase local or foreign stocks using DBS Vickers as my broker, this counts as an eligible transaction (sell, contra and electronic payment of shares do not count)
When dividends are paid by the stock and credited into my DBS savings account via CDP, this counts as an eligible transaction
As a stock investor who has dividends coming in, together with a minimum credit card transaction, I can satisfy 2 categories to earn the Tier 2 interest.
Now we know that dividends are not paid out in all months, so you might be wondering how do we consistently fulfil the investment transaction category.
For those months where there are no dividends, you buy a stock. This might be a bit tough and not really advisable for everyone as the potential losses might be heavier than the interest gain
Implement the Singapore Savings Bond ladder. More on this later
Buy a bunch of dividend stocks that provide dividends every month. More on this later
#3 is doable but I would advise against forcing yourself just for the sake of higher interest. One dividend investor, Paul Low, managed to invest in such a way, he has dividends payable to him every month.
For most of you, #2 looks to be the most applicable.
The way its packaged, if you sell it any time, you will get back your principal, and any accrual interest that have not been paid out. So you do not make loses on your principal
Pays out interest every 6 months. The pay-out counts as dividends from your CDP into your DBS savings account
The minimum amount you can apply is $500. Note that for each buy and sell of the Singapore Savings Bond, there is a $2 admin charge
With $3000, you can form a Singapore Savings Bond ladder that pays you every month. You can look at the admin charge as the cost to get this higher yield interest.
An example of the Singapore Savings Bond Bond Ladder
The table above illustrate how this can be done. For 6 months, you will accumulate different series of Singapore Savings Bonds.
For the next 10 years, you will have 12 interest payment that comes in at all the different months that qualifies you for the investment tier.
Another advantage of the investments category is that, while my income is not more than $30,000, there are some months where I would purchase stocks worth $25,000 to $30,000 which allows me to hit the highest rate of 3.5%. With the enhancement to the Multiplier, I may be able to earn 3.8% on another $50,000.
It is likely I cannot be buying stocks every month at that frequency, I can offset my brokerage fee with this Multiplier interest.
The brokerage fee on a $30,000 transaction is about $60, and the extra interest on the Multiplier at 3.5% to 3.8% can reached $125/mth more. This more than offset my brokerage costs.
4 You may happen to have Insurance Protection Needs
And this would allow you to fulfil that all important third category. However, you have to note that the insurance premiums paid would only qualify you as an eligible Bonus Interest transaction for 12 months. After which, DBS will not count this purchase as a category anymore.
DBS have a 15 year working relationship with Manulife Insurance so there are an assortment of regular insurance plans that qualify for this.
Investment linked plans (Kyith do not advise you to get this)
Income stream plans
Decreasing Term Mortgage Insurance
Term Life Insurance
For most of my readers, I do recommend that you organize your financial objectives well. Do not mix protection and wealth building needs.
With the thought of satisfying this transaction category I can see you purchasing a term life insurance to augment your current insurance coverage.
The illustration above shows the description of ManuProtect Term, which is a term life insurance that should qualify you as an eligible transaction in this category.
More so, it is likely to meet your protection needs, does not contain cash value, and premiums should be low enough.
I can see myself getting a 5-year term worth $50,000 or $100,000 in coverage.
How much is the premium? You would need to approach a Wealth Planning Manager or a DBS Branch to get the quotation. This is because your premiums will differ based on your age, pre-existing conditions, the term you are looking for, and whether there are any riders attached.
However, we can have an estimation.
If you look at my Cheapest Term Life Insurance Comparison, a Manulife Term Plan covering $1 million costs $1523/yr for a 40 year old and $1044/yr for a 30 year old. While $1 mil is likely cheaper than smaller amounts, if you are covering $100,000, your annual premiums could be closer to $152/yr to $104/yr or $12.66/mth to $8.66/mth.
Now, if this qualifies me for the third tier interest, it means by doing this I can earn $50,000 x 2% = $1,000/yr in interest to $50,000 x 3.8% = $1,900/yr in interest.
It looks worth it.
5 Allow you to Optimize Your Family Savings Well
Perhaps the biggest appeal that Kyith cannot enjoy is to use only 1 salary credit to potentially enjoy higher interest on $200,000 of your family’s savings.
I am not sure whether I should write about this, but it seems this is openly discussed in The Burrow, DBS’s own vibrant Facebook Community. So if you wish to find out more ways how to take advantage of DBS’s services, you can join the 10,000 folks in the community today.
So basically, you do not have to credit your salary into the DBS Multiplier Account.
You can credit into any DBS/POSB account and they will be able to track it.
A pro tip: Under your DBS digibank, Under Accounts, there is a Bank and Earn Summary:
This allows you to see whether you manage to hit all the criteria and what is the interest tier you are. This removes a lot of the uncertainty whether your transactions qualify for bonus interest.
The beauty of the Multiplier is that if you credit the salary, and transactions to a joint account shared with your spouse, or another person, both your DBS Multiplier accounts will earn the bonus interest if you qualify for it.
So in the above illustration, suppose you qualify for 3 transaction categories, due to your salary credit both your DBS Multiplier can earn interest on almost $200,000.
This frees up your spouse salary to tackle another hurdle account.
The joint savings account is not the only account that you can maximise.
There are a few accounts that are joint, that can boost the total transactions:
Credit card. Joint and supplementary cards
CDP Accounts. Both your buy transactions will boost the transactions, and so are both your dividends
6 No Minimum Transaction per Category is the Multiplier’s Greatest Advantage
You might not agree with me, but for me the absence of minimum transactions for each category is what made the DBS Multiplier the most appealing.
If I look at the competitors, the one with the lowest hurdle is UOB One Account. That enables me to earn an average of 2.44% on $75,000 in deposits. This is pretty good.
However, in the grand scheme, my transactions would likely give me 2.20% in interest on $50,000 on DBS Multiplier Tier 2 interest.
While we are at this point, we are comparing the different accounts whose hurdles you can realistically achieve:
Salary credit of $2000
Credit card transactions of $500
And the realistic interest that you could earn with this permutation is:
SCB Bonus Saver: 2.05% on $100k deposit
MayBank SaveUp: 1.12% on $50k deposit
BOC Smartsaver: 2.35% on $60k deposit
OCBC 360: 2.1% on $70k deposit
DBS Multiplier, with Tier 2 interest of 2% to 2.30% is not so different from its competitors. For myself, since there is not so much difference, there is little impetus to shift.
What made me stick with DBS Multiplier is that for all of them, credit card transactions of $500 is mandatory.
And over time, the banks have been tightening up on what is considered as eligible transactions that allow you to earn bonus interest:
AXS payment is not included
Some town council payment is not included
Ez-link, flashpay top up is not included
So what qualifies are the telecom spending transactions, real retail spending transactions, cab rides.
For some of you with higher household expenses, this might not be a problem, but for some of us who are more frugal, there might be some months where we do not qualify.
So it is very freeing to know that if I did not spend so much on my credit card, didn’t buy so much insurance or unit trust, I could still enjoy relatively good interest.
Finally, like DBS Multiplier, the other banks challenge you to fulfil higher transaction amounts to earn higher interests:
1. SCB Bonus Saver: 3.13%, if you bank with them, high credit card spends of $2000 and above
2. MayBank SaveUp: A lot of the minimum is just too high
3. BOC Smartsaver: 3.55%, if your salary is $6,000 and above and credit card spends is $1500 and above
4. OCBC 360: 3.0%, High minimum for insurance and investment plans
To earn the higher interest from the accounts of these banks, you need a lot of high, recurring insurance, investment, salary and credit card transactions.
With DBS Multiplier, you might need recurring insurance, mortgage and credit card spend, but you do not need to have high amounts.
It suits me that in certain months I can boost the interest rate if I make a large stock purchase.
I used to think that having a high interest rate is the be all and end all.
That was when I have readers that tell me that for some banks the interest is indeed high, but they cannot get used to the challenging interface.
For others, they are big credit card spenders, and in that case, some other high yield savings accounts might be more applicable.
Our consumption patterns are different, and soon you will realize what worked for me might not work for you.
I do think there are various aspect of the DBS Multiplier account that would appeal to a lot of you and I hope I have highlight them well.
Do check them out if you are interested. The folks at DBS paid me to tell you guys more about the changes to the account, but they did not put a gun to my head to use this account.
Let me know your thoughts.
This is a Sponsored Post with DBS. The views are of..
One of my friends in the community told us that he would be presenting something on perhaps investing, personal finance and life to a niche group of folks.
So the target group from what I gather could be the 30 to 35 year olds, and also those 36 to 45 year olds.
They should be rather savvy if we are talking about investing, such as rate of return, what are financial statements and the workings of listed companies.
In terms of life stage, it is likely that they have formed the nucleus of their family, and doing well in their career, above middle income, navigating married life with kids together with it. For those that are older, they should be above middle income, kids are getting older, at senior management or moving there soon.
The question is that what would be the points that would interest them?
My friend Alvin from Dr Wealth asks “What are their pain points?”
And if we are able to frame that well, we might be able to find some good points for my friend to think about.
So this short Sunday post is to seed some ideas for him.
Now, if you are in this group, or your social circle are people in this group, do comment below and let me know what is close to the heart for these folks, so that this might be of help to him.
This was one of his opening in his recent Seedly event, where he explained to an audience of 1,000 young investors why they cannot afford to rely on what worked for their parents.
If they use that, they will either feel very frustrated, or end up in a rather depressive state in their late 30s.
I would like to think the Singapore Dream is not dead but its more like their Singapore Dream is also rather different from their parents.
Their parents would want an affordable property that they can pay off in 3 to 4 years, then buy an investment property to collect rent. Over time, that investment property, and their own dwelling appreciate in value, and that would be the retirement plan.
For the young investors, they have more concerns because they see their life as more than that steady state.
There is so much to life now, and that there are a lot of things they feel very strongly about. They might felt more fulfillment if what they do is heard and that they are part of some change that impacts other people’s lives. They do wish for more work and life balance as well.
Largely, I think that dream is not restricted to young investors but these group my friend would be speaking to.
The So Called Singapore Dream is not dead, it is just that life has gotten more volatile. Life is more uncertain.
There is no company loyalty because the company is not loyal to you.
However, we are really bad with handling uncertainty. If we are good at it, everyone would be flocking to the stock market, because that is a realm where things are less than certain.
Even for our generation, there are jobs where you can have a long career in one or two organization, can build wealth with them because these organization pay alright.
If you are smart with your money, you should do relative OK.
Nowadays, a lot know the formula is not to stay in one company. Your future employer will ask where is your freaking ambition when you stay in a function in the same organization for so long.
The way HR works also means the growth in compensation comes from moving around.
Finally, the wage structure was killed in the past, because of a lax foreign labor policy, resulting in the country focusing on lower cost labor and not increasing productivity. We lost the opportunity to struggle and learn how to do things productively.
If there is one thing that my friend can tackle, is whether there is a solution to this Singapore Dream being more volatile.
How do you stand strong in this volatile, uncertain life environment?
What is it about Wealth Management that they DO NOT Know?
Since the sharing is about money, I guess for savvy people, they would be interested to know another perspective.
We know the standard formula of building wealth with properties.
For a group that is likely not qualified for Build to Order HDB flats and can afford private residential, upgrading to a private residential, or getting a second residential property for investment remains the most popular way.
However, lately, even some long time property investors like my uncle have this feeling that the growth rate in the future for properties are likely not going to be like the old days. This can be true or untrue as it is not substantiated.
Throughout our 2010s, government have been putting in place a lot of measures to curb property prices. They might be putting them in place, so that when shit hits the fan, they have these levers to stimulate the property markets.
But essentially, there is this signal that government would wish the citizens to rid their addiction to building wealth through properties.
This is easy to say then do.
For the folks that my friend would be speaking to, they are busy people.
They have gone past the stage where they have more time to explore the topic of wealth building in greater detail.
Their children is not old enough that they have more bandwidth to handle this. Due to their senior management work, they have to devote more time that is not for the family to ensuring their performance is good so that the bonus is there at the end of the year.
The biggest value add that my friend to provide is
even with the property curbs, and the higher ABSD, would the math still make sense to use property as their main wealth building vehicle?
how easily upper middle income folks can be scammed by investments that seemingly make sense, even for finance trained folks
what are the portfolio management golden nuggets that people gloss over or did not prioritize?
#2 and #3 is seriously big in light of recent bond defaults and perpetual defaults.
I have a friend who shared with me a very high net worth friend getting scammed in an overseas property venture.
It will be tough for the government, if they would like Singaporeans to have a more diversified portfolio as the property mindset is very strong.
What are the things Outside Their Bubbles that They do not Know About?
This week, ChooseFI interviewed Chelsea Brennan on
transition to an online business
investing in index funds when her main job is to manage an active portfolio
In the realm of financial independence, Chelsea belongs to the high side. She started her career earning $30,000/yr at Goldman Sachs and eventually made her way from Sell Side to Buy Side at Bain earning between $400,000 to $450,000/yr, working 60 to 80 hours work weeks.
She also shares the financial insecurity mindset going to work in such a high salary environment, coming from a less well off background. The typical total compensation is made up of 1/3 base salary and 2/3 bonus. She always had that feeling that her bonus would be zero (which according to her never happened even in challenging 2009) so she sought to save 20-30% of her base salary and all her bonus. That would be 66% of her total compensation.
She eventually walked away from that, when she got really depressed and that they need more time with their family (husband is a stay at home husband). While her savings is far higher than the average, she reckons she still needs 4 to 5 years to reach the wealth require to be financial independent.
She took out her spreadsheet and work the numbers. And decide to use her bonus to fund 2 years of business building (since the bonus can cover their expenses for 2 full years).
The idea is that if the business can cover their living expenses for these few years, their existing wealth machine can grow on its own so that they can retire at age 40 to 45 years old.
They gave up working in a tough job and be financially independent early, with a more sustainable lifestyle and delaying financial independent. This is probably close to what we call Coasting Financial Independence.
In the interview, Chelsea shared some of the observations working in places, where they generally make much, much more than middle income.
If there is one point that could summarize the situation is that we lived in our own bubbles and often we find it difficult to see what is beyond those bubbles.
Chelsea explained that it is very difficult to exit their job, despite making far higher salary then a lot of what middle income folks think.
The dynamics of the work culture contribute to that.
Typically, the people in there work for 20 years in their career. Even if they wish to stop, the most common situation is that the person took two years off work.
They will come back and be a CFO in another company.
Retiring early, is not talked about. We can see why the management do not wish to actively impressed upon their people this kind of narrative.
They have spent so much of their resources to make their people strong, and they can only enjoy their investment for such a short period. If it is in their interest, it is to see their people buy bigger houses and more expensive cars. In that way, they will be in the mindset that they have to work for “the man”.
She shared that at Goldman, things were more transparent (an open floor plan helps as well). As 2/3 of the compensation were made up of bonus, she could spot co-workers who spend so much that they exceed their basic salary. One of the cited reason that they had to leave the firm to go another place is because this job (those that are on half a million) did not pay well enough to cover what they need.
[There was a senior partner] who had been making seven figures for multiple years and he resigned… and I made a comment to some other VP’s like ‘Oh, he’s retiring’ and the reaction was visceral, of like, ‘Oh no, he couldn’t afford to retire! He’s just taking a couple of years off’… and I remember standing there thinking ‘He can’t afford to retire! What has he been doing?!’
I brought up Chelsea’s example because in my friend’s work place, they could be living in this sort of bubble too. Some of the employees could have worked in the company for numerous years, starting from junior positions.
When everyone is of a certain pay, your lifestyle will gravitate towards one another. Ideas are exchanged regarding building wealth, how to handle children, cars, career.
Outside of that, a lot of your circle will be either your ex-colleagues, if you have been with them long enough, or the peers you come through the same education system. If you are from the same junior colleges or polytechnics, the lifestyle will gravitate towards them as well.
What is likely to happen is that your lifestyle becomes very similar to your peers at work and out of work.
I realize folks in the same bubble do not see things very differently. Those with more dissenting views tend to stick out like a sore thumb. And not many people wishes to stick out like that, for all the wrong reasons.
I have 3 professional circles:
The friends who are my users. I would say they are upper middle income
My co-workers. They are lower to middle income
My friends back in my main office. They would be middle income
After a while things become very homogeneous within the group. What can be achieved in building wealth and life, there is a limit. For each group the limit is different.
Money struggles are often not discussed at work, so my friend’s folks do not know what each other’s real money struggles.
The same about worry about life. These 2 items show weakness and possibly something your competitive peers can exploit.
What my friend can provide is a perspective of what he thinks as a person from outside that bubble.
And it might be enlightening enough for them.
Some examples can be
how to plan the finances so that a stay at home parent is feasible
how does a family without a car survive? Why choose not to have a vehicle when the finances allow you to afford?
how much does a family need for retirement, how does that looked like, and whether that is achievable at all
There is probably one area that I did not specifically cover which is the problem facing the sandwich generation.
How to deal with the increase sadness as you enter your 40s.
Chris shared in one of his talk that our unhappiness peaked at 44 years old. Why is that?
I guess it is a combination of:
dealing with your children in their adolescent
your parents facing a lot of traumatic medical issues or outright dying
as you enter your peak earning income, your career have also become the most fragile
And there could be more.
Would good money planning be able to solve that unhappiness? I think it is tough. Not having money would definitely make the problem 2 to 3 times as hard.
But if there is something that is painful and hard to articulate, and that people are looking for direction, it is things like this.
As always, I am not a higher income working adult. So I might be wrong and prepared to change my views.
Let me know your perspectives.
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I think last year Nov 2018, I wrote a post introducing everyone to MoneyOwl.
If you are financial savvy, take control of your finances, you would have an idea how much insurance coverage you are looking for. You can then survey the different prices for the same type of insurance coverage and see which one offers the most competitive prices, and which one suit your needs,
Then you can purchase the insurance protection, and not afraid of advisers hounding you to purchase some higher value added policies.
And there are the readers who knows that you should get protection, are not sure what are your needs, but would want someone dependable and conflict free to speak to, MoneyOwl is also the right solution.
So that is the protection solution.
In March this year, MoneyOwl rolled out a Digital Will Writing service. This will service is useful for you, if the way you would like to will your assets is not too complicated.
What is missing is the investment service and this is what I am here to update everyone.
Implementing Wealth Management the Right Way
MoneyOwl is a joint venture between Providendand NTUC Enterprises. NTUC Enterprise is the holding entity for the Labour Movement’s social enterprises which collectively serve more than 2 million customers.
As a subsidiary of NTUC Enterprise, MoneyOwl’s social mission is to help working families make the best possible financial decisions, so that all Singaporeans can achieve greater financial security, better retirement adequacy and be empowered to live fulfilling lives. NTUC decided to collaborate with Singapore’s first fee-only financial adviser and well-known in the industry for its deep expertise in comprehensive financial planning and for championing ethical advice.
We do get the feeling that the government sense that the current wealth management space is “a little uneven”, and wish to take the lead and shape the direction of the industry by participating directly in it.
As a financial commentator for probably 14 years in this space, I like what I am seeing here.
If I have an acquaintance that needs help to grow her money, evaluate her financial protection, there is always the lingering thing at the back of my mind asking yourself: “Is this the right adviser to help my friend? Will things turned out in ways I didn’t anticipate?”
Having them around solves a fair bit of these issues.
MoneyOwl provides the following service:
Protection Robo. Guides you to pick the right insurance protection to hedge your life risk
Self-checkout Insurance Protection. If you know the protection that you need, you can purchase it from MoneyOwl and not be up-sell on other protection
Digital Will Robo. Allows you to create your own will, so that you can have a peace of mind how your assets would be passed down
Investment Robo. Provides 5 different low cost portfolios, which allows you to build wealth through buy and hold
Comprehensive Financial Planning. More to come later
Leveraging on technology, and automating work flows that used to be crumble-some seemed to be the way to go but MoneyOwl is actually more than that.
They prefer to be known as Bionic, which means a combination of technology and human touch.
I do agree that to a certain extend, not everything can be automated. There are aspect of wealth management that can be automated and others that require hand holding.
Perhaps I will go through some examples to let you have an idea why I think MoneyOwl’s service will provide invaluable to you.
After they have first provide you with a fundamentally sound way to hedge the risks in your life, the next objective is to answer the question: How do I accumulate my wealth in a fundamentally sound way?
This ties in with the third question they already attempt to help you address, which is: How do I ensure that when I passed on, the wealth is distributed in a way that I want.
Everyone has a philosophy how to build wealth and MoneyOwl is no different:
Focus on asset allocation – do not take country, sector or firm-specific risks
Go for market-based return – it is hard to consistently beat the markets through active management
Keep costs low – the difference compounds big time, over time
Stay invested for the long term – time in market, not time the market!
I actually think this is the “default” way we should build our wealth, if we do not have the time to mess around with more active approach to wealth building (even if you mess around, it does no mean that your results would be better. Sometimes it will be worst off.)
MoneyOwl will provide wealth builders in Singapore 5 different portfolios to invest. These portfolios differs based on their allocation between equity (stocks) / bonds.
These are the 5 portfolios:
The 5 portfolios ranges from conservative to equity, with equity being the most aggressive. The aggressive portfolio have a higher equity allocation while, the more conservative portfolio have a higher bond allocation.
MoneyOwl took their time to evaluate the investment products out there, and they decided to work with Dimensional Fund Advisors (DFA) from USA to structure these 5 portfolios with 3 low cost, evidence based funds:
Dimensional Global Core Equity Fund (Developed Market Equities in the table)
MoneyOwl provided the annualized returns, based on the back tested results from 1994 to 2017. There are two returns provided, with fees and without fees. This is so that they are transparent about the fees you are being charged in different ways. (which a lot of financial institutions are not upfront about)
Why use Dimensional Funds?
Dimensional have been in the wealth management business in USA for the past 4 decades.
They are not a familiar name in Singapore, but I suspect there will be more discussions in the future. You can refer to this page to know more about Dimensional.
To put it simply, they are the Smart Beta funds before smart beta became a popular thing.
Here are some of the fund’s characteristics:
They are not exchange traded funds (ETF), which are listed on stock exchanges whose prices are updated real time. Dimensional funds are unit trusts. Their prices are updated end of the day
Unlike the unit trusts that you see distributed in Singapore, Dimensional funds are low cost. Their expense ratio ranges from 0.29% to 0.50% compared to the typical 1% to 3% expense ratio of unit trust
Dimensional funds do not pay trailer fees to the distributors. Not many know that your typical unit trust have a high 1% to 3% expense ratio, but a large proportion of this is paid by the unit trust to the distributors like Fundsupermart, Dollardex, POEMs and the banks as a fee for distribution. So even though they charge 0 platform fee, they get paid from you indirectly. That is how they can survive
Dimensional funds are passive funds but they are not indexed. Savvy investors would know that investing in low cost index funds/ETFs that follows broad based benchmark index like the MSCI All Country World Index is the way to go. Index funds are passive because instead of a human fund manager who selects what stocks or bonds to buy, hold and sell, a machine sought to mirror the index fund’s net asset value as close to the index as possible. For Dimensional funds, they are similar in that they have a machine at the back end to position their portfolio. However, they do not mirror an index. Rather, they systematically buy, sell and hold based on a few persistent and pervasive factors
Building on to #4, Dimensional funds are factor based. They based their buy, sell and hold on factors that are not just persistent but pervasive. These factors are:
Overall Market (Beta)
Company Size (Small Cap over Large Cap)
Relative Price (Low price to book over High price to book)
Direct Profitability ( High profitability over low profitability)
You can only buy Dimensional funds through DFA trained advisors. They believe that advisors play a very big role in delivering alpha
Dimensional funds are taxed optimized and therefore reduces tax uncertainty. Unlike popular low cost index ETFs listed in other countries, these Dimensional funds are domiciled in Ireland, and are much efficient in dividend withholding tax and estate duty / inheritance / death tax for foreign financial asset holdings
The way I look at MoneyOwl’s investment portfolio is this way:
You believe that certain factors are persistent and pervasive. These are backed by extensive research. They will eventually deliver good performance
You believe in keeping your costs low. Dimensional funds have low expense ratios
You wish to have adequate clarity and eliminate tax uncertainties from your wealth building
You do not wish to spend your effort actively managing your investments. You prefer to focus your effort on your job, your family
You know what I am saying, but maybe you don’t really know. You would prefer to have companions that have integrity to guide you along this path
You wish you can setup a recurring payments instruction, and let your bank automatically funnel money to your investments without you triggering it. This will take you out of the loop and be less affected by market fluctuations
If this fits you, then MoneyOwl’s portfolio might be something you are looking for.
My Comprehensive Article on Dimensional Funds
A few weeks ago, I wrote an article introducing Singapore readers to Dimensional funds.
There is only this much that I can cover in this article, so I do hope that those are interested, you can read it. Warning: It is likely you cannot finish it in one sitting. Bookmark and read it over the week on your daily commute.
The article covers:
The targeted market for a group of funds like this
How do we build wealth, on a high level with DFA funds
Introducing the Dimensional Funds
Explaining Evidence Based Investing
Examining DFA Results including rolling equity expected returns data
Breaking down the Cost Stack and Comparisons
Explaining the Adviser’s Alpha
Breaking down Dividend Withholding Taxes and Death Taxes
The Case to Invest in a Global Equity and Bond Portfolio
The Total Fee Stack for MoneyOwl’s Investment Portfolio
When you invest in other investment products, there are great emphasis placed on performance returns.
Less on the cost.
MoneyOwl would like to be transparent with the fees that they are charging.
That is why they provided a cost stack of their portfolio’s versus the industry:
We observe that the total costs for the 5 portfolio range from 1.15% to 1.21%. This compares against the recurring fee of 2.6% to 3.1% that MoneyOwl estimates.
Cost is a big issue because your returns are uncertain, but your cost, rain or shine, make money or not, you have to pay it. And it is worse that you pay a big chunk of it.
If you would like to see how MoneyOwl fare against the DIY ETF solutions and other Robo platforms like Stashaway, Autowealth, Smartly, you can read my comprehensive article, where I go into deeper comparisons.
The summary that I gather is:
The total cost stack for the Robo platforms are roughly the same around 1.2% to 1.7% but mostly around the 1.2% range
The DIY ETF solutions depends on which broker you use. With the right broker, the DIY ETF solution is the lowest cost
MoneyOwl charges a advisory fee or wrap fee of 0.65%/yr. As they are making use of iFast’s platform, you have to pay iFast a platform fee of 0.18%/yr.
Some readers in some Telegram chat have asked, how is the advisory fee, platform fee and expense ratio taken from me?
Let me address the expense ratio first.
Like your typical unit trust or ETF, the expense ratio are incur in the underlying Dimensional fund itself. It is transparent to you (which is why a lot of investors ignore it because they do not see it! They think it does not matter!). The returns that you see in the factsheet, annual report are net of the expenses. In fact, if you read the annual report of the Dimensional funds, you would see how much expense is incurred. It will give you a better understanding.
With regards to the advisory fee and iFast platform fee, they are deducted by selling the units in the best performing fund.
Advisory fee are deducted in April, July, Oct and January. The deductions are reflected in the statements for these months. Note that the months corresponding to each deduction are as follows:
Deduction in April: Fees for Dec to Feb
Deduction in July: Fees for Mar to May
Deduction in October: Fees for Jun to Aug
Deduction in January: Fees for Sep to Nov
For example, the fees for Mar to May are deducted in Jun and this is reflected in the quarterly statement given to the client in July.
The Investment Process
One of the great thing about MoneyOwl is that as a social enterprise, they want to make it easy for people of all income levels to start investing.
Thus the minimum investment amount for lump sum investment is $100 and the minimum amount for recurring investment is $50 per month.
This means the hurdle to give the platform to try is really, really low!
Like a lot of Robo platform, MoneyOwl will not let you choose which portfolio you would like to get invested.
Instead, they would recommend you a portfolio based on:
How long is your investment horizon
Your willingness to take risk
To invest with MoneyOwl, you would have to be at least 18 years old.
The following illustrate the investment process:
You will first go through a needs analysis. The end result of the needs analysis is to identify which of the 5 portfolio is suitable for you to invest
Then you will create an account, or login
MoneyOwl will facilitate the account opening
Then you can fund your portfolio with money to get invested
If you have an account like myself with MoneyOwl, you can click on Start Investing to go through the process.
1. Needs and Risk Analysis
The first part of the needs analysis is to assess your risk ability.
If the tenure to which you need to use the money is very short, then it might not be wise to invest. In the screenshot above, you can see a selection of 1 year (genuine for me, if I were to retire next year), MoneyOwl do not even let me invest.
Which begs the question of, what if I wish to retire and spend down my money? I would still need equities. I will still need bonds.
I think right now, MoneyOwl caters more to wealth accumulation not retirement.
If I select an investment horizon of 5 years, MoneyOwl will let me continue.
The next step is for me to specify how much I would like to invest in one lump sum and on a recurring basis.
I realize that you have to invest a minimum lump sum of $100, even if you decide that you wish to invest on a recurring basis. You will also specify your finances such as your monthly income, your savings rate, the assets and liabilities you have.
I tried clicking that I do not have emergency fund. If I do not have emergency fund, I cannot invest as well. Which is the standard financial planning advice.
You should have at least 3 month’s worth of emergency fund before you invest.
If the percentage of income saved is less than the recurring amount that I wish to contribute, MoneyOwl will warned me as well.