Lease renewals in difficult times

In the period from December 2008 to March 2009 four of the leases on our properties either came up for renewal or entered the period when the tenant had the right to break the lease without penalty. In the current market, this was always going to be a tough time for my portfolio. Having been through a few downturns, I kn0w that the key to minimising the pain is minimising the vacancy period and the key to minimising the vacancy period is being willing to accept less than ideal rent levels and, to a lesser extent, being more flexible on negotiating lease terms. I expected to take a significant fall in rental income.

In terms of progress:

1. I have rolled over one lease for two more years with a nominal increase in rent;

2. I have an oral agreement to renew one lease for a further period of one year at the same rent and I am waiting for the tenant to sign the new lease;

3. one tenant exercised his option for early termination. This was no surprise given that the only lease was struck right at the top of the market. It was a little disappointing that the tenant was not willing to even try to negotiate a new rental level. However, a provisional agreement for a new lease has been signed with a new tenant. The rent is 22% below the previous rent. I could have held out for a higher rent but risked a longer vacancy period than the two weeks which this deal will result in. In any case, the new rent is fairly close to recent deals for similar units in the same development;

4. one tenant has said he is willing to renew the lease if we will give him a substantial reduction in rent and agree that he can terminate on one month's notice if he loses his job.

Assuming that I can agree the new rent with tenant #4, I will have managed to get through a period of potential pain with only a two week vacancy on one property (compared to a worse case scenario of having four properties vacant for months).

Also, with the assumption that #4 is renewed, I will still have the luxury of positive cash flow on our investment properties in spite of the net decrease in rental levels.

Definitely too soon to be car buying

I have no idea how representative this article on the build up of new car stocks is, but it sends an obvious message that, unless you really really need to buy a car now, it will pay to wait until the prices start dropping to levels which reflect the amount of unsold inventory. There is no evidence of material discounting in Hong Kong yet.

One of the commentators suggested avoiding cars built in 2009. He/she has a point - if the cars are left sitting outside for a considerable period of time, I would expect that there would be an element of deterioration and, with at least some of the manufacturers in dire financial condition, I would also expect that both maintenance and the ability to stand behind a warranty would be questionable.

I have no serious intention of buying a car, but if I did I would be waiting until we see serious discounting to clear the build up of stocks. In addition I would only buy from a manufacturuer with a solid reputation for reliability and post-sale support (i.e. BMW, Toyota/Lexus, Honda, Mercedes).

Monthly Review - February 2009

February marked yet another down month for my investments. The positive was that the losses were relatively trivial.

I started my new job. However, my income is more erratic than my previous job and, as expected, this month's income was low. I continued to enjoy full rental income from my properties - a state of affairs that will come to an end this month with one property becoming vacant.

Here are the details:

1.my actively managed funds were mixed with a net decrease during the month. I am holding losses on many of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam;

2. my index tracking funds were down slightly. I currently have exposure to Hong Kong, India and Taiwan;

3. my residual equity portfolio appreciated slightly;

4. my commodity investments went sideways. I have small positions in the Lyxor Commodities ETF, nickel and lean hogs;

5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). One has moved out and will cease paying rental at the end of February;

6. currency movements were marginally unfavourable as the USD gained against a number of currencies.

I made no portfolio investments this month but did enter into three OTC option contracts:

(i) long HKD/GBP - the option was exercised against me at levels which produced a net profit for me (i.e. the option premium was higher than the FX conversion loss);

(ii) short HK Tracker Fund - the option expires on 5 March and, with the strike price still out of the money, it looks like I will make the premium on this contract as well;

(iii) long NZD/USD - this is a more aggressive trade.

I intend to continue experimenting with option trades (much like I did with warrants last year), but only with relatively trivial amounts of money and against underlying assets which I am prepared to hold on a longer term basis.

Income was low (it will be erratic under the new job) but sufficient to tip a small loss into a small gain for the month. My spending was also low. I already make accruals against my net worth for holidays, luxuries and tax. This month I have decided to start making a general accrual for long term expenses (such as refurbishment of our flat).

For the month, my net worth increased by 0.09%. The year to date increase is 10.54%.