Tai Sang Land sold/NWS Holdings purchased

As part of my efforts to remove "too small to justify the time spent on them" positions from the portfolio, I have sold my shares in Tai Sang Land (HK:89) for HK$3.00 per share. While Tai Sang Land still sells at a substantial discount to NAV (as do most property companies in Hong Kong), I couldn't see myself adding to the position and decided  to sell. I took a loss of 8% (net of expenses and dividends) on the investment.

The sale proceeds have been reinvested in NWS Holdings Limited (HK:659) which is now one of my top ten shareholdings. I paid HK$11.70 for the additional shares.

Risks of not making early mortgage payments #2

As a follow up to my recent post on the risks of not making early mortgage repayments I ran a more detailed sensitivity analysis and came away with the following:

• the Hong Kong investment properties will still be cash flow positive if rents drop by up to 14%
• the Hong Kong investment properties will still be cash flow positive if interest rates increase from the current average of around 1% pa to around 3% pa

The analysis assumed a standard 12% allowance for repairs, maintenance and vacancies. In a downturn I would expect vacancies to increase. I ignored taxes.

These numbers were run as at end of April 2012.

One mortgage will come to the end of its natural life in mid 2013. At that time the sensitivity looks like this:

• the Hong Kong investment properties will be cash flow positive if rents drop by up to 23%
• the Hong Kong investment properties will be cash flow positive if interest rates increase from the current average of around 1% pa to around 4.3% pa

Of course the sensitivity to rising interest rates will decline by a small amount each month as more principle is paid off and cash flow sensitivity will take a jump each time a mortgage is fully paid off.

I have ignored the impact of rising interest rates on the mortgage on our home and the positive cash flow from the debt free properties outside Hong Kong.

Given the above analysis, other assets, cash on hand and the ability to cut household expenses if the need arises, I am no unduly worried about cash flow on the Hong Kong investment properties going forward.

Famous last words, I am sure.

Hong Kong to issue more iBonds

While the Hong Kong government's plan to launch a second issue of iBonds in June is not exactly news, the upcoming issue has generated some recent debate in the media with views ranging from "it's the best free lunch on offer" to "they are a cynical political tool and a lousy investment".

While the iBonds are touted as bonds designed to protect investors from inflation, this is grossly misleading - they will do nothing of the sort. In the first place, there is no adjustment to the principal - you subscribe at face value and redeem at face value. Second, the coupon is linked to HK CPI - there is no premium over CPI to offer a "real" yield and, in fact, the yield is guaranteed to be less than CPI becuse (i) it is a trailing yield and (ii) bank charges on each coupon payment will have to be paid. Even this assumes that you believe that CPI is a realistic proxy for household inflation (not even close in my household). The floor of 1% is noted but I would be surprised if inflation dropped below 1%.

So why buy an investment that offers a guaranteed negative real return?

The investment rational is that I will be keeping a reasonable amount of money in the form of cash or near cash as I enter retirement (at least two year's worth of expenses). This asset allocation is all about reducing risk rather than maximising returns. While the returns on the iBonds are poor, they are better than anything else I can get in the short term debt or deposit market without taking on FX risk or material credit risk. This makes them more or less a no brainer.

Of course, like last time allocations are expected to be limited so it will be very much a case of taking what I can get (and, no, I wont pay a premium in the secondary market).

All this assumes that the terms of the new issue are the same as the first issue - which is yet to be announced.