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Re: Bad Idea: Borrowing to Invest

Posted: Fri Jun 21, 2019 6:34 am
by 0x143
I enjoy talking about stuff like this but if it causes you guys distress, maybe I should mention that I am within my risk profile and am still in the accumulation phase of my life.

From reading some other threads I have come to understand TokyoWart that you are likely much further along in life. As such you should of course be off-risking.

Anyway, I am old enough to have grown out of my "snarking on web forums" phase so I will avoid replying to that comment about contract duration.

Responding to challenges to the investment thesis seems like a reasonable sanity check so I'll try to reply to what has been said.

Future NAV of a solar REIT is more predictable than one might expect. NAV being the assets under management, and those assets being solar panels plus a little land means NAV will slowly go down overtime by the rate of depreciation on the Panels. A panel's life is 20 years, which is why the Mega Solar fixed price contracts are such a duration. There are cases where NAV might change if the fund makes a public offering or buyback. If the REIT is trading at a premium to NAV, such as the largest regular REITs are, then issuing more units will increase the NAV for even existing investors. Likewise if the fun is trading at a subsidy to NAV then selling assets and buying back units would increase NAV.

What I think you might care more about than NAV though is the unit price. This is mostly a ratio of the NAV but itself can fluctuate. For example if a fund is managed well the unit holders might be willing to price the fund at a premium. This is the case for the big Japanese commercial REITs, they tend to trade at 1.2-1.3 NAV with a 3-4% return. Meanwhile you might have a startup fund like Mirai Corp which due to its newness and smaller size trades at only a small premium to NAV and thus has a higher "risk premium", which is just a way of saying that it is giving a 5-6% return.

Notice though that the raw rate of return of the real estate in those funds is mostly the same, all funds try to charge similar to the market rate.

Side note: this is why the Oedo Onsen REIT is paying such a higher yeid. Investors do not trust that the Oedo Onsen Hotel company, which 100% owns the REIT's management company, will put the investors first. As well that Oedo Onsen is the only tenant of the REIT brings low-diversification risk.

Solar REITs have less downside than regular REITs, but also 0% upside. There is no scenarios where the panels generate more than they were designed to. Nor is there a chance of the energy company's asking to pay more. Thus while their raw rate of return of 7-8% looks high, when you price in the depreciation (-5%) they are actually returning more similar to the large regular REITS.

PS: That article you linked does indeed word it poorly, it makes it sound as if the existing mega solar plants will have their contracts changed. There is of course nothing of the sort happening. A few years ago the government moved to issue Mega Solar contracts based on an auction with the goal of reducing the issued prices. This does not affect existing contracts. My suggestion is you should read multiple sources and do your own research before you go into investments. If you want to research mega solar either reading the japanese articles/press releases or this site might be better: https://tech.nikkeibp.co.jp/dm/solar-power-plant/ <- they have journalists who actually know/understand what they are writing and not just poorly rewriting press releases.

PPS: How much leverage is appropriate for your individual situation is more important than trying to get the biggest loan possible. Use the Kelly Formula to know what is appropriate and ensure your own operating cashflow can maintain the debt.

Re: Bad Idea: Borrowing to Invest

Posted: Fri Jun 21, 2019 2:16 pm
by mighty58
Sounds nearly foolproof, what's holding you back?

Re: Bad Idea: Borrowing to Invest

Posted: Mon Jun 24, 2019 7:09 am
by Petronius
I know a little about solar PV so I'll jump in.

I am also of the opinion that it is extremely unlikely that the existing signed FiT contracts would be lowered.
However that happened in Spain a few years ago so it is not a totally crazy idea.

Solar projects in Japan build in the past years usually yield north of 10% equity IRR after taxes. They are usually leveraged at 70%, sometimes 80%.
FiT are for 20 years but the life of a properly maintained solar project is 25 years or even 30.

The devil is in the details however, before buying a solar REIT I would check how many projects it contains and who takes care of the operating & maintenance. The technical side can make or break a project and have a significant impact on returns, which is a very different risk profile than real estate.

I invested in something similar in Europe, the YieldCo Encavis. I like their transparency and technical expertise.

Edit: I also invest in Crowdfunded renewable projects through the platform Enerfip in France. Investors provide debt to individual renewable projects and there too one can access most details of the project.Sadly I haven't found anything similar in Japan

Re: Bad Idea: Borrowing to Invest

Posted: Mon Jun 24, 2019 4:53 pm
by 0x143
Petronius wrote: Mon Jun 24, 2019 7:09 am Edit: I also invest in Crowdfunded renewable projects through the platform Enerfip in France. Investors provide debt to individual renewable projects and there too one can access most details of the project.Sadly I haven't found anything similar in Japan
Have you seen SBI's SocialLending, https://www.sbi-sociallending.jp/ , a good chuck of those projects appear to be solar.

I would love to hear more of what you have to say on this stuff.

When it comes to REITs my expectation is that the "pipeline" of new projects is important. Since all the old 30-40yen contracts were signed ages ago there are many such projects which are only now coming online. Having a managing company which owns these contracts would be useful for the REIT.

Those extra operating years is a plus-alpha, but they would occur at the market rate which for many projects is 1/3 of the contract rate. So it feeds into why I feel comfortable ignoring part of the "return of capital" aspect of the financing.

Re: Bad Idea: Borrowing to Invest

Posted: Tue Jun 25, 2019 12:46 am
by Petronius
Thank you for the link. I need to look more into it but my first understanding is that the fund 23 for example is used to develop solar projects. That means that the money is used to purchase land and rights and obtain permitting. This is the riskiest phase of renewable projects and usually banks and funds will not touch it.
It is likely that developers will then sell the development rights to investors who then build and own the project.
If my understanding is correct and without details on the projects being developed I would not invest in it, this is too risky for me. Especially as solar projects still being developed in Japan come with high hurdles.

The fund 22 on the other hand was used, if my understanding is correct, for the construction phase of the project. PV technology is bankable and construction risk is now very low. I would be interested in investing in something similar.

Please, keep in mind that the risk is very different from the type of investments we usually look at on retirejapan (low cost diversified index funds).
Solar projects can fail. A bank can influence the technical decisions to save a project, we cannot.


As for REITs the pipeline of solar projects in Japan, it is almost depleted now. There are very few projects left to be developed and those left are usually complicated (need to remove a forest, high slope land etc.). Policies will change from FiT to tender process which means that the pipeline will not be as liquid as these past years.
The secondary market on the other hand is hot and completed projects are being sold and acquired. Returns are of course lower, they usually loose a couple %point with each flip.

By no mean am I saying that solar REITS are not a good investment. They might contain very good projects. I am just saying that to manage the risk I would want to have more details at least on the portfolio composition and on who manages the operation and maintenance.

Edit: I am not a financial adviser and I invest most of my money in low cost index funds. I am very risk averse.
I work in the renewable industry and believe that investing in renewable projects can be profitable and is also a good thing to do for our planet. This is why I do so when I find projects that fit my risk profile. But the risk of projects (technical and financial) is very different from index funds.
And I would NOT borrow money to invest in renewable projects. Projects are usually leveraged through project financing and not corporate financing.

Re: Bad Idea: Borrowing to Invest

Posted: Tue Jun 25, 2019 6:04 am
by captainspoke
Well then, maybe go for it, and check back in here after 3, 5, and 10 years with how it has done? :)

Re: Bad Idea: Borrowing to Invest

Posted: Wed Jun 26, 2019 7:51 am
by jcc
Why borrow to invest when you could just leverage your investments rather than paying a high interest rate on a loan? If you want to increase the risk(and thus the return) that's just another way to do it, and I'm pretty sure the costs would be lower than those of an expensive loan. I haven't tried to do this since I have no interest in leveraging up at this time, but it's doable

Re: Bad Idea: Borrowing to Invest

Posted: Wed Jun 26, 2019 2:09 pm
by 0x143
jcc wrote: Wed Jun 26, 2019 7:51 am Why borrow to invest when you could just leverage your investments rather than paying a high interest rate on a loan? If you want to increase the risk(and thus the return) that's just another way to do it, and I'm pretty sure the costs would be lower than those of an expensive loan. I haven't tried to do this since I have no interest in leveraging up at this time, but it's doable
The costs of margin even at the cheapest brokers are about %3 give or take a few tenths of a percent. In fact the cheapest method of borrowing I think I've seen is using an "any purpose" loan from Nomura against stock. That was advertised at 1.5%. Sadly Nomura's high transaction fees make it a waste unless one was intent on maxing the margin beyond what the Kelly Criterion would suggest is safe/reasonable.

Re: Bad Idea: Borrowing to Invest

Posted: Mon Jul 08, 2019 10:03 am
by jcc
0x143 wrote: Wed Jun 26, 2019 2:09 pm
jcc wrote: Wed Jun 26, 2019 7:51 am Why borrow to invest when you could just leverage your investments rather than paying a high interest rate on a loan? If you want to increase the risk(and thus the return) that's just another way to do it, and I'm pretty sure the costs would be lower than those of an expensive loan. I haven't tried to do this since I have no interest in leveraging up at this time, but it's doable
The costs of margin even at the cheapest brokers are about %3 give or take a few tenths of a percent. In fact the cheapest method of borrowing I think I've seen is using an "any purpose" loan from Nomura against stock. That was advertised at 1.5%. Sadly Nomura's high transaction fees make it a waste unless one was intent on maxing the margin beyond what the Kelly Criterion would suggest is safe/reasonable.
Maybe this is one of those things where you just need to be rich enough to have access to the good stuff. I really haven't looked into it, but there are some funds that are already leveraged

Re: Bad Idea: Borrowing to Invest

Posted: Mon Jul 08, 2019 11:47 am
by captainspoke
jcc wrote: Mon Jul 08, 2019 10:03 am ...there are some funds that are already leveraged
ProShares has some Ultra and UltraShort funds that go twice the daily move of an index (long or short). They're supposedly for very short-term holding, but I know someone back home who has done well with their ultra technology fund (ROM) over a relatively long period. (Try to buy SDS just before the next 'correction'.)

The closed-end funds (CEFs) that pimco (and others) offer can be leveraged to a little over 30%. PTY is a classic, which has a record back to its 2002 inception, but there are lots of others. These have high management fees (the cost of having someone do the leveraging for you), but they also yield a steady 9-10%. Of course NAV can fluctuate, and there can be a premium over that NAV (sometimes a discount to it). I'm not sure if these are available to non-US investors.