Martin Lee @ Sg
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Should I Subscribe to CapitaMall Bonds?

The recent CapitaMall bonds seem to be quite popular, and someone asked me whether it is good to subscribe for it. There’s not a standard answer I can give, as it really depends on your individual circumstances.

CapitaMall-BondLet’s us take a look at the good and the bad of the CapitaMall bonds.

First, the good.

  1. The yield of 3.08% p.a. is much higher than instruments like fixed deposits. It is even higher than what CPF OA is giving you. It is way superior than a recent 5-year product from LIC that was only giving 1.6% p.a.
  2. The quality of the trust is decent and chances of a default is low.

Now, the not so good.

  1. The duration of 7 years is pretty long. The trading price will be lower than the issue price in a rising interest rate environment. So if you need your money back before maturity, you may not get back your full capital.
  2. You are also locked in at rates of 3.08% p.a. when you can get higher rates later on. I think CapitaMall is actually quite smart. They are trying to lock-in their cost of funds now with a view of rising interest rates.
  3. Although the returns are decent, it is lower or close to our inflation rate. For wealth accumulation purposes, it might be insufficient.

My overall assessment:

  • Subscribe if you have spare cash lying around doing nothing that you are unlikely to need for the next 7 years. This is especially so if you are not much of an investor.
  • However, use only a portion of your spare cash. This serves two purpose:
    • Diversification in case the trust fails.
    • You will not be too badly affected when interest rates rise. For example, when the next 7-year bond giving 4.0% p.a. comes along, you will still have money to utilize.
  • The cons of using only a portion of your cash is that the rest of your money will continue to earn pathetic returns from the banks until the next better deal comes along.

Another question that is commonly asked is that should we buy the CapitaMall bond or the REIT?

These two are very different instruments and I consider them for completely different groups of people.

Even though the REIT might give a higher yield, it has a much higher risk as the instrument is more equity-like and is also leveraged. In a rising interest rate environment, the REIT suffers from a double whammy:

  1. Cost of debt increases which leads to a lower dividend payout.
  2. Attractiveness of other instruments (compared to REITs) increase as they start paying a higher interest rate. To maintain the same interest rate spread in the yield, the trading price of the REIT will have to reduce.

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