Japan’s Surging Property Values Stir Further Investor Interest

Japan Investment Property

Japan Real Estate

03 June, 2016 –

Surging property values have delivered Japanese real estate investment trusts their largest-ever latent gains, stirring further investor interest with the prospect of higher returns to come. Listed REITs held a total of 1.48 trillion yen ($13.6 billion) in unrealized gains on properties in their portfolios during the October 2015-March 2016 period, based on earnings announced for halves or fiscal years ending during that time. This is double the year-earlier level, and the highest since Japan’s first listing of a REIT in 2001.

REITs’ latent gains comprise the difference between the appraisal value of held properties and those assets’ book values, which are close to their purchase prices. Because investors in the trusts receive returns based on the sale of properties as well as rental income, swelling unrealized gains indicate the potential for larger payouts down the road. Brisk demand for office space, high hotel occupancy due to growing tourism from overseas and other factors are behind the surge, having pushed up appraisal values.

The market for conveniently located office space in city centers is particularly strong. Office vacancy in the five wards making up central Tokyo has fallen from the 9% level in 2012 to the lower 4% range this year, according to rental agency Miki Shoji. Appraisal values have risen accordingly. Latent gains on a major downtown development owned by Mori Hills REIT Investment reached 12.7 billion yen at the end of January, up 30% from a year earlier.

Swelling tourism from overseas has given a boost to hotel-centric REITs as well. High occupancy has helped to roughly double Japan Hotel REIT Investment’s latent gains over the past year. Retail investors are finding REITs more appealing as their values rise. The trusts typically return more than 90% of their profits to investors. This translates into an average payout yield of 3.5% for listed REITs, compared to 1.8% for the components of the Nikkei Stock Average.

The Tokyo Stock Exchange REIT Index of all such funds on the bourse climbed 9% between the end of 2015 and Wednesday, in contrast to the Nikkei index’s 11% tumble over the same period. REITs “have a good deal of appeal now that long-term interest rates are in negative territory,” making them a prime target for investors such as pension funds, said Hiroto Iwasa of the NLI Research Institute.

Still, REIT shares entail the same type of downside risk as stocks. Factors such as weakness in the office market and climbing long-term interest rates can cause prices to slide. REITs are also quick to be sold off when investors turn risk-averse, such as during the 2008 financial crisis.

(Source – “Nikkei Asian Review“, Pic – Roppongi Hills / “picdrops“)

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