Inderesin kahvihuone (Osa 9)

[Jarnis]

@xlat

Illiquid funds remind me of small-cap funds investing in Finland. If there were a proper market crash and the liquidity of small-cap companies practically disappeared, would these funds be closed for a fixed period to await market improvement?

Theoretically, yes. In practice, the most illiquid small-cap stock on the exchange is significantly more liquid than any real estate. Stock prices usually have a fairly solid base based on the company’s business value, the penetration of which attracts enough greedy traders that even a large fund can dump its holdings. Losses will occur, and certainly below “fair value,” but not so much that the entire market would be disrupted. Additionally, exchange-traded goods are much easier to move in block trades – the market certainly has deep-pocketed players who will take a large batch as “wholesale” as long as the discount percentage is suitable.

On the real estate side, the problem is that the “goods” are of the decaying kind with continuous running costs, and buying and selling them is a much clumsier process than moving exchange-traded stocks. In this case, the fund has determined that it could not find buyers for its assets in the market at any even remotely reasonable price to continue handling redemptions, and it was forced into a corner. In my opinion, this also reveals worrying data about the price level of real estate in the country. Deep-pocketed “real estate traders” don’t want to buy bulk assets at this market price level (and with a small discount on top of that)? This means the price level is considered expensive.

Edit: Or perhaps the fund has overvalued its properties and cannot realize them in the current market without having to significantly write down the value of the entire property portfolio?

So, while there are similarities, this risk is much smaller in equity funds.

[Pika-Sissi]

Exactly.
You have invested in a fund in a “free market economy,” but a dictator decides your right to redeem and subscribe. You no longer have control over your assets and ownership stake. By investing, you have surrendered control of your property to a dictator.

Shouldn’t those unit holders, however, be able to decide on the allocation of their funds?
The “voting” happens by freely selling, holding, or buying. Exactly the same as in an equity fund.

This place “protects” its members by removing their control over their own assets. Doesn’t sound like my kind of place. I don’t need a dictator’s “protection” in matters concerning my own life and property. I haven’t asked for it, nor have I wanted it. Yet its ominous shadow constantly hovers over the landscape.

[tapiokakari]

@Pika-Sissi

I do not need a dictator’s “protection” in matters concerning my own life and property.

However, this is ultimately the reason why people invest in actively managed funds: the responsibility for decisions is outsourced to a party that knows/is assumed to know its business.

One community I belong to has also outsourced its asset management and pays a rather nice percentage for it. Now, some of the community’s decision-makers, i.e., those who invest themselves, understand these matters and know how things work, have questioned the investment decisions approved by the community because, according to them, they are not in the community’s best interest. And they probably aren’t entirely. However, I think things start to get problematic if the asset manager is overly controlled, e.g., with allocation; what is their fee then based on? Not even on the little it was before?

So, if you outsource your asset management, you have accepted being at the mercy of a “dictator.” The good thing about this dictator is that you can change them if you wish – for communities, of course, by a majority decision. It’s easier for an individual in this regard.

I suspect OP will go from bad to worse in that the capital flight possibly prevented now will occur for different reasons as a result of this decision, as soon as sales are reopened. It’s unlikely they can keep it closed forever or even for very long. Of course, it depends on what kind of stories they manage to feed to the common folk.

[xlat]

@Jarnis

Here, the fund has determined that it could not find buyers for its assets in the market at any even remotely reasonable price to continue processing redemptions, and it was forced into a corner.

This is probably the case. The question then arises as to how much holdings should actually be written down so that the fund unit’s value would be “more real”. Of course, the value may not have practical significance now, as trading is halted.

What I was left wondering about here is a scenario where the market does not recover anytime soon. So, if this becomes a longer-term problem, at some point unpleasant write-downs will have to be made, and the fund reopened (and hope that a mass exodus does not occur). Then there is also the question of moral responsibility, if the market only worsens, that the bank’s actions caused harm to the unit holders. (Of course, this is mainly a moral problem; the matter has been handled according to regulations, so there is no real liability.)

[kabu]

@Denny

It would probably decrease (=settle to the correct value)

Here one can still ponder what the correct value of an apartment means. If an apartment finds a buyer in a month for 200 k€, then it can certainly be sold in a day if you set the price at 100 k€, but what is the “correct” price of the apartment?

[Jackwelshh]

@xlat

@Jarnis

Here, the fund has determined that it could not find buyers for its assets at any even remotely reasonable price to continue handling redemptions, and it was in a bind.

This is probably true. The question then arises as to how much holdings should actually be written down so that the fund unit’s value would be “more real”. Of course, the value may not have practical significance now, as trading is halted.

What I was wondering about here is a scenario where the market does not recover anytime soon. That is, if this becomes a longer-term problem, at some point unpleasant write-downs will have to be made and the fund reopened (and hope that a mass exodus does not occur). Then there also arises a moral question of responsibility, if the market only worsens, that the bank, through its actions, caused damage to the unit holders. (Of course, this is mainly a moral problem; the matter has been handled according to regulations, so there is no real liability.)

Generally speaking, banks should be responsible enough not to sell (or at most with a 5-10% weighting in the portfolio) assets to inexperienced investors where liquidity may completely disappear: Housing funds, private equity, etc.
If you buy a well-diversified equity fund or an investment-grade bond portfolio, prices may be significantly lower, but you can still get rid of it if necessary. The possibility of selling at the wrong time is, of course, a double-edged sword in itself if one has less experience.
From this speaker’s outburst, I would guess that even an equity fund might not suit him, but rather a balanced fund should be sought, where equities are moderately weighted (25-40%), and he should be accustomed to fluctuations through that (if even this would suit the investor in the risk tolerance assessment).

As a representative of the ruling party, he could push through a law stating that bank investment sellers should genuinely be called investment sellers, and the use of the term investment advisor would be illegal.
By law, an investment advisor could be defined as a person who provides advice on what products an investor could buy, on an hourly/monthly/annual fee basis, without receiving a commission from the sale of these products or having any sales targets set for the products in question. This would be the only way to genuinely highlight the conflicts of interest in the current system to inexperienced investors.
In this scenario, investment advisory could become its own industry, where the only interest would be to provide investors with consistently good advice to maintain the client relationship.

Another thing that puzzles me is why it doesn’t occur to anyone that schools could teach wealth creation through investing. The right-wing administration is in power, but nothing happens. Not even the right-wing manages to get financial self-responsibility taught, so who will then (?). If these life skills were taught to young people, the nation might not necessarily be capital-poor in 20, 30, or 40 years.
At this rate, Finns will remain primarily a lottery nation if the mentality doesn’t change.

[Enovene]

@tapiokakari

I’d bet that OP is going from bad to worse, in that the capital flight possibly prevented now will happen for different reasons with this decision, and as soon as sales are opened again. It’s unlikely that it can be kept closed forever or even for very long. Of course, it depends on what kind of stories they manage to feed to the grandmas in Pihtipudas.

Asset values fluctuate in a market economy, and if a few percent drop in asset value leads to the fund being closed indefinitely, then something is seriously wrong somewhere. Is there too tight leverage in use or something similar in the background, involving a big risk that is now being protected? Such a radical measure would not be taken unless there was a real risk of the fund collapsing. Naturally, the real reason will not be disclosed to the market for years to come. The value of the real estate portfolio is artificially kept falsely high, which is highly questionable activity. Doesn’t any law compel regular testing of values and recording them at the correct level, or is the closure precisely so that they wouldn’t have to record them? Wincapita was illegal because of a false valuation behind which there was no corresponding (promised) value. Now the real estate fund is proceeding with the same system of self-invented “virtual values” for properties that have nothing to do with their market value.

Isn’t the situation that currently real estate values are falling, and the fund’s closure prevents sales, i.e., minimizing losses? The closure in a way maximizes investors’ losses because it’s on hold and the decline continues. Some other interest is being protected here by financing it with investors’ losses that accrue during the closure without the investor’s ability to cut them, protecting the bank’s own lending risks with investors’ money, etc.

[Denny]

If and when we talk about market value and the intention is to sell an apartment, it will become clear at the moment the apartment is sold. Of course, the time element plays a key role, i.e., how long one can try to fish for the highest possible price.
It must be remembered that the purpose of the fund (in this case, OP-Vuokratuotto) is not to make a profit from apartment sales, but from rental income. And according to the rules, the fund must have the cash reserves required for its operations. So perhaps the root cause of the problem is not so much a stuck apartment sale (which is certainly also a challenge), but rather that the fund has not been patient enough to maintain sufficient cash reserves from which redemptions could be paid without “discount” sales.

@tapiokakari

I bet OP is going from bad to worse, as the capital flight possibly prevented now will happen for different reasons with this decision, as soon as sales are opened again. It can hardly be kept closed forever or even for very long. Of course, it depends on what kind of stories they manage to feed to the grandmas in Pihtipudas.

If and when, half a year ago, the fund was described like this to grandmas (and other customers), then they certainly got a good impression:

edit. Of course, no cash is left if management fees are sky-high. Also, a good message from a neighboring forum:

I took a closer look at OP-Vuokratuotto’s 2023 annual report, and after that, I no longer need to wonder why the fund’s apartments are not selling at the price desired by the fund manager. The annual report can be found here: https://www.op-mediapankki.fi/l/BVPD_Fs257rm

The net yield calculation for the fund’s real estate securities without value changes for 2023 looks like this:
figures in 1000€

Rental income: 90 686 t€
- Maintenance fees and operating costs 26 462 t€
- Other expenses 7 034 t€
=Net yield 57 190 t€

At the end of 2023, after write-downs of 86 578 t€, the market value of real estate securities was 1 646 063 t€, which gives us a net yield of 3.47%. With such a yield level, those properties will remain unsold forever, even the prime properties in the portfolio.

There is an awful lot of air in those valuations, and I don’t even bother to state my view on the “correct” yield requirement. However, in my opinion, 4.5% is not at all exaggerated, considering that 20% of the portfolio is in commercial properties and the properties are located all over Finland. With a 4.5% yield requirement, however, almost 400 million euros in write-downs would have to be made on the properties, which would mean a more than 30% decrease in the fund’s value.

The fund’s management fee is shockingly high, relative to its yield potential. In 2023, the fee was approx. 26 m€, and with 18 m€ going to interest expenses, the income from rental operations was largely used up. Net subscriptions were already at a deficit of 145 m€ in 2023, which was partly financed by taking on an additional 100 m€ in debt.

[Sijoittaja-alokas]

Interesting comparison, and the result probably won’t surprise many.

https://x.com/MikeZaccardi/status/1875677717901013486

[Enovene]

@Miguel3

Yes, car dealerships have something to think about regarding how to price these used electric gadgets; the price of battery packs is a huge problem, they should definitely be much cheaper.
I would also be very interested in a hybrid, but then again not at all, because if the battery pack costs 10,000 euros…

In videos, they have stated that the cost of refurbishing hybrid batteries in these common hybrid cars, such as small SUVs and passenger cars, is on average in the 2000-3000€ price range, even less if only 1-2 cells are broken, as is often the case, so it’s not that much. The battery’s condition after that is something like 99% of new, etc. They replace all the weakest cells with new ones; of course, if it’s a model where individual cells cannot be replaced, it’s an expensive matter, but that’s rare. The battery pack in hybrids is much smaller than in fully electric vehicles, and it’s an easier job to remove and repair. So, for reference, it’s not worth comparing the cost to replacing the entire battery in fully electric vehicles, which is 10000-20000€.

In hybrids, battery capacity is not so much a problem because you can always drive with the internal combustion engine, but some cars have sensitive diagnostics and do not allow driving with the internal combustion engine at all if even one battery cell is weakened.

At least hybrids don’t scare customers because they sell like hotcakes despite high prices. Actually, only BMW (e.g., X1/X2/X3) seems to be cheaper than others; perhaps battery repair is more difficult for them. Toyota RAV hybrids are seen for sale with 250,000 kilometers, still at high prices.

[Jarnis]

@Denny

At the end of 2023, after write-downs of €86,578k, the market value of real estate securities was €1,646,063k, which gives us a net yield of 3.47%. At such a yield level, those properties will remain unsold forever, even the prime assets in the portfolio.

So, this real estate-rental income-fund-leverage contraption, built by the bank and sold to the bank’s corporate types, was actually designed to generate profit for the bank (maximized management fees, surprising absolutely no one). And then, when the tide goes out, it’s revealed that they weren’t wearing swimsuits. There’s too much leverage, property valuations are ‘Boldly Overestimated’, rents are hardly rising, which eats into rental yields, while interest rates are many times higher than what the scheme was perhaps originally built on. They can’t withstand redemptions, which have already been covered with borrowed money for some time. The door was shut in a last-ditch effort, and now they’re praying that the real estate market will turn around when interest rates fall. This way, the rising tide would cover the problem, and hopefully no one noticed the lack of swimsuits.

I don’t know how common such schemes are, but I could imagine that banks don’t build these out of the goodness of their hearts. Generally, the management fees in such cases are shocking – risks for investors, profits for the bank. A real win-win

[Tomi_Valkeajarvi]

The next three weeks will be spent marveling at the beginning of a new life with our newborn firstborn. So I will probably take some kind of break from the forum for the coming weeks and mainly aim to analyze the little girl’s mood and based on that, time diaper changes, naps, and feedings.

[tapiokakari]

Congratulations! The most important moments in life should be enjoyed in peace without analysis.

So, have a pleasant and experience-filled paternity leave.

[Jarnis]

These “tens of thousands of euros battery repairs” are consistently what happens when an authorized service center offers to replace the entire battery pack as a repair, at the service center’s parts and labor prices. The actual repair of battery packs by replacing components is still largely in its early stages, and the demand for this would probably exceed the supply. It requires expertise, and car manufacturers, less surprisingly, emphasize the safety aspect, trying to curb such repair activities that inconveniently disrupt spare parts sales. The fact is that battery packs can indeed be repaired, and usually much cheaper, but finding a reliable operator to do this can become a problem. An official authorized service center consistently does not offer such a service.

[Jackwelshh]

@Jarnis

@Denny

At the end of 2023, after write-downs of 86,578 t€, the market value of real estate securities was 1,646,063 t€, which gives us a net yield of 3.47%. With such a return level, those properties will remain unsold forever, including the prime assets in the portfolio.

So, this real estate-rental income-fund-leverage contraption built by the bank and sold to the bank’s suits was actually made to generate profit for the bank (maximized management fees, about zero surprised people), and then when the tide goes out, it’s revealed there were no swimming trunks. There’s too much leverage, real estate valuations are “boldly on the high side,” rents are hardly rising, which eats into rental income, while interest rates are many times higher compared to what the scheme was perhaps built on. The financial capacity cannot withstand redemptions, which have already been covered with borrowed money for some time. The door was shut in a last-ditch effort, and now they are praying that the real estate market turns when interest rates fall. This way, the rising tide would cover the problem, and hopefully, no one noticed the lack of swimming trunks.

I don’t know how common such schemes are, but I could imagine that banks don’t build them out of the goodness of their hearts; generally, the management fees in such cases are “shocking” – risks for investors, returns for the bank. A real win-win

Well summarized, how big the conflict of interest is from the perspective of the bank and the client investing their money. I myself cannot put a penny into these contraptions just because of the lack of transparency.

Direct stock investments and index ETFs are a much easier choice for my own investment philosophy. At the same time, those greedy for large management fees stay away from my wallet.

[timontti]

Wonderful, congratulations to the whole family!

[Jackwelshh]

@Tomi_Valkeajarvi

The next three weeks will be spent marveling at the beginning of a new life with our newborn firstborn. So I’ll probably be taking some kind of break from the forum for the coming weeks, mainly trying to analyze the little girl’s sentiment and based on that, timing diaper changes, naps, and feedings.

Huge congratulations! Now is indeed the time to strongly invest your resources in following the early stages of this new life. Enjoy these unique moments. It’s worth imprinting them deeply in your mind and heart, so you can enjoy the memories long after your lap baby is a self-sufficient adult.

[Sfinski]

@Shinjuku-mies

Right, well that’s a clear answer then. So it will go for this year. Thanks!

For larger projects, it is indeed advisable to split the invoice into two parts (if the contractor agrees) and schedule it over two years, so that the deduction can be utilized for both years.

[Hapzu]

@Julius88

Yeah, and Kastehelmi probably thinks this is useless. No matter what Ukraine does, these analysts always consider it futile. Could one at least wait a day or two before getting depressed? Jesus

I always have a fleeting daydream about the final stages of the war where a Ukrainian soldier is banging on Putin’s bunker door with the butt of his rifle. The scene always cuts to Kastehelmi assuring, ‘he won’t last long, this is still going to end badly.’

[Ibidem]

I watched MTV3’s series Konflikti. There would be a lot to ponder about it, but I’ll leave that for another time. But actually, I’d like book recommendations: is there any fiction that would deal with the same subject matter (military conflict in modern-day Finland) but where it would go deeper into the characters and their motives? Preferably as an e-book.