The ultimate carry trade

Quote from piezoe:

The trick in long term investing is to find things that are too cheap, with a price that is irrationally low, and buy them.
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That's what I'm proposing here.

Do any of you have any actual reasons for thinking this is a bad investment? I mean, can you put some logical case for why buying real estate for 40 cents on the dollar, with a yield 3 times higher than government bonds, and with inherent inflation hedging, is a bad idea? Or are you just spouting off for the sake of it?

For example, if you questioned the sustainability of rents and capital values in Japan, that would be a legitimate reason to stay away. If you thought all REITs there are run by Yakuza and will defraud the company or run them into bankruptcy, that would be a legit reason. If you thought interest rates there are going to 25%, that would be a reason to stay away. If properties were yielding 2% per annum and in the midst of a huge real estate bubble, that would be a reason. Come on, give me your reasons against this play? Surely you must have some? Or are you all mouth and no trousers?

Also, feel free to suggest some more attractive opportunities, if you know of any. I'm all ears.
 
The danger in borrow yen and repurchasing into a reit has several inherent dangerous.

1) Exchange rate risk - Yen is appreciating at a steady rate these last few years. Dollar won't be able to strengthen more without an interest rate hike. You may make 10% a year, but you're subject to could loose 10% in that year if you convert back to USD


2) Carry-Rate risk. The spread between you borrow rate and your investment return. If the rates increases, and rental property returns falls, you may produce a real negative return. Deflation in housing + inflation in other assets is common occurance world wide right now. Not sure if japan is experiencing these 2.

3) Riets are typically over-leveraged with little extra cash to protect their assets. If deflation in housing occurs you bet their profits will be squeezed.
 
Quote from Cutten:



REITs are an good inflation hedge. It is disinflation and deflation that is the real danger for real estate - the exact opposite of what you say.

Besides, inflation is not exactly soaring in Japan. Due to their persistent deflation problem, an emergence of inflation would actually be a *bull* factor for the economy and markets (except govt bonds).
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They're suffering from deflation, which you say is the real danger - I don't see how you resolve this conflict
 
Quote from matgallis:

The danger in borrow yen and repurchasing into a reit has several inherent dangerous.

1) Exchange rate risk - Yen is appreciating at a steady rate these last few years. Dollar won't be able to strengthen more without an interest rate hike. You may make 10% a year, but you're subject to could loose 10% in that year if you convert back to USD

2) Carry-Rate risk. The spread between you borrow rate and your investment return. If the rates increases, and rental property returns falls, you may produce a real negative return. Deflation in housing + inflation in other assets is common occurance world wide right now. Not sure if japan is experiencing these 2.

3) Riets are typically over-leveraged with little extra cash to protect their assets. If deflation in housing occurs you bet their profits will be squeezed.
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1) There is no FX risk, that is the whole point in using Yen to purchase. You borrow 10 million Yen, and buy 10 million Yen of stock. Your net FX exposure is zero. The only future FX risk is on any profits or losses (e.g. dividend income will accumulate long Yen exposure), which can be hedged as they accrue.

2) The carry is running at about 8-10% per annum at the moment (avg REIT yield minus Yen carry rates). If rents *halve* (extremely unlikely especially in the residential sector) you would still have a positive carry of 3-4%. Regarding deflation in housing, Japanese real estate already fell 13 years in a row from 1990, and the trend turned after that. Unlike the west the property market is coming off a *historic depression in values*, not a multi-year speculative bubble. Since shares are trading at 50% of net asset value or less, even with a 20-30% decline in values you would still have a nice discount to fair value.

3) Typical leverage is about 50%, but if you think a 25%+ decline in prices is on the cards, you can always choose those REITs will little or no debt on the balance sheet, of which there are several.
 
Quote from Cutten:

1) There is no FX risk, that is the whole point in using Yen to purchase.

The only future FX risk is on any profits or losses (e.g. dividend income will accumulate long Yen exposure), which can be hedged as they accrue.
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:confused:
 
2n23ear.jpg

TSE J-REIT Index
Double bottom in the making?
 
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