Brief History & Current Status

Japan’s real-estate investment trust market, first launched in 2001, currently holds just under 60 listed J-REITs.

These REITs cover all property sectors, from residential and commercial to logistics, hotels, senior assisted living and even infrastructures. Many of the major players cover two or more sectors, and provide nation-wide coverage, while others specialize in specific, localized cities or prefectures, to suit all investor appetites.

The Effects of the Covid-19 Pandemic

Since Feb 2020, with the onset of the Covid-19 global pandemic, things have changed slightly – J-REITs, which tend to be far more liquid and volatile than their underlying assets due to their very nature, have been trending down significantly in their share cost to Net Asset Value (NAV) ratios – and while the assets under ownership themselves have not decreased in value significantly, the funds holding them have been heavily discounted – in the office and hospitality sectors in particular – and are thereby presenting excellent opportunities for value investors interested in capitalizing on this trend.

Sector-wise, J-REITs focusing mainly on residential & office assets have done better during the crisis (although office REITs dealing in lower grade assets have suffered more than others) – retail REITs have suffered considerably, although those dealing in essential retail spaces such as supermarkets and department stores have actually gone up in value, whereas non-essential retail assets and luxury good stores have gone down – logistics focused REITs have remained stable or gone up in value, due to the increase in e-commerce brought forth by the pandemic – while the biggest value loss was suffered by hospitality focused REITs, which now offer some of the best opportunities for opportunistic investors, as they are being traded at a much lower P/NAV (price per net asset value) than previously due to the complete lack of international tourism – as the second ranking table below demonstrates clearly.

Dividend yields for J-REITs vary from 2.88-8.39%, with the average resting at approximately 3.84%. Considering the average return of the underlying core assets is normally about 3-4%, this return is more than reasonable, and on par with market benchmarks.

Major J-REITs in Japan

(Source – “Japan Real Estate Investment Trust Portal”)

The current top-rated J-REITs (30 Mar 2021) by dividend yield (best cashflow value) are as follows –

• Takara Leben REIT – 3492 (Diversified, app. 50b JPY cap) – 5.71% yield
• Marimo Regional Revitalization REIT – 3470 (Residential/commercial, mainly rural/secondary cities, app. 18b JPY cap) – 5.57% yield
• Star Asia Investment Corp – 3468 (Diversified, app. 88b JPY cap) – 5.52% yield
• Tosei REIT – 3451 (Residential/office, mainly Kanto area, app. 46b JPY cap) – 5.33% yield
• Escon Japan REIT – 2971 (Diversified, mainly Osaka/Nagoya area, app. 36b JPY cap) – 5.24% yield

The current top-rated J-REITs (30 Mar 2021) by P/NAV (best equity value) are as follows –

• Ichigo Hotel REIT – 3463 (Hotels, mainly Osaka, Nagoya & secondary cities, app. 21b JPY cap) – 0.63 P/NAV
• Ooedo Onsen REIT – 3472 (Hotels, mainly Osaka, Nagoya & secondary cities, app 19b JPY cap) – 0.73 P/NAV
• XYMAX REIT – 3488 (Mainly office/commercial, mainly Tokyo, app. 24b JPY cap) – 0.76 P/NAV
• Japan Hotel – 8985 (Hotels, diverse locations, app. 278b JPY cap) – 0.84 P/NAV
• Invincible – 8963 (Mainly hotels, diverse locations, app. 254b JPY cap) – 0.85 P/NAV

Pros & Cons of investing in Japan REITs

While the advantages of REIT investing are many (affordability, liquidity, centralization, accountability and diversity are just a few of those), it is widely considered to be a solution for those wishing to stay within their comfort area of stocks and equity trading, while increasing their exposure to the real-estate property investment market sector.

When investing in REITs, one benefits from the traditional stock market fundamentals of relatively cheap entry levels and liquidity. Even though the dividend yields may be lower on average when compared with direct property ownership, one gains the following:

• The hassle-free nature of a centrally managed investment
• The ability to “cut out the middle-man” as far as asset management is concerned
• The ability to potentially gain further profits on equity trades

Furthermore, the attraction of J-REITs is in providing access, albeit limited, to Japan’s property investment market, the largest in the Asia-Pacific region, and second globally only to the USA – without the need to navigate around the daunting language and cultural barriers normally associated with doing business in the land of the rising sun.

The dwindling stock of lucrative core assets in the market, however, has seen most prominent J-REITs purchasing less and issuing smaller numbers of share units in recent years – a trend further enhanced by the Covid-19 pandemic environment, which has seen most cash-rich landlords “sitting on their assets” and waiting for the storm to pass them by.

This situation is unlikely to change significantly before the 2020 Tokyo Olympics, as the supply of new properties is still struggling to meet demand from both local and international investors.

The Near Future of Japan REIT

There are three major property market segments which will likely see an increase in asset allocation in coming years. These sectors are likely to attract ever-increasing J-REIT attention:

1. Logistics – with the high uptick in internet shopping and the commitment to same or next day service in most parts of the country, warehouses and packing facilities on the outer suburbs of these cities are already enjoying, and will most likely continue to enjoy, popularity.
2. Senior assisted living – as Japan is considered to be the world’s fastest ageing population, the country is facing many unique challenges. These serviced properties and community centers are already being highlighted as increasingly attractive investment targets. While profitable investment models are still slightly lacking, it can be expected that J-REIT exposure to these assets will increase accordingly.
3. Data centers – similar to logistics assets, data centers have benefited significantly from the uptick in e-commerce – coupled with the upcoming rollout of the 5G global network, there is an ever-increasing demand for adequate data center assets in the market – and the fact that these require specialized operators with high technical expertise makes this market segment less accessible to the average investors – investing in REITs, however, eliminates this barrier, and makes the funds active in this space doubly attractive to investors.

(Source: Ziv Nakajima-Magen|Pic: Nippon Tradings International)