IJ reports quarterly on Japan’s REIT market in cooperation with the Association for Real Estate Securitization (ARES), an industrial body for companies operating in a range of sectors related to real estate securitization in Japan.
This report covers REIT market movements in Japan from July to September.
J-REIT (Public REIT) market
Total assets of properties held by J-REITs, based on acquisition prices, amounted to JPY 18,801.1 billion at the end of August.
The J-REIT market in July-September showed strength continuing from its previous quarter. The global trend of interest rate reduction, which was accelerated by the US Federal Reserve's rate cut in July, was a positive for rate sensitive J-REIT stock prices and the domestic real estate market. Additionally, prices of export goods and related stocks declined over concern about continuing US-China trade friction, causing institutional investors to shift assets from stocks to J-REITs to avoid risks. The Tokyo Stock Exchange REIT Index rose about 10% in 3 months from about 1,950 at the end of June to nearly 2,200 at the end of September.
Robust sectors in the July-September domestic market included office space, residential, and logistics, as in the previous quarter. Most large, new office buildings in central Tokyo area are fully occupied. Prosperous companies tend to move into the newest buildings with the most modern facilities to attract quality employees and increase efficiency by consolidating scattered offices in one location. Rents for residential properties are on the rise, mainly in central Tokyo. The logistics sector is increasingly popular because of their fixed fees and long-term contracts. Also, e-commerce warehouses and distribution centers continue to refine and grow operations and operators pursue development of new warehouses and logistic terminals.
The recent "price/nav ratio" (REIT price divided by net asset value) was 1.2, the same level as the 10-year average. Any recent fluctuations in the ratio have been quite mild compared with movements in 2013 and 2015. The market show no signs of overheating and investors seem unconcerned for now.
Among investors, domestic life insurers and property and casualty insurers were active in J-REITs. The consistency with which J-REITs have delivered relatively higher returns has brought increased attention as investment choices dwindle under Japan's negative interest rate regime.
Private REIT market
Total assets of properties in private REITs, based on acquisition prices, were valued at JPY 3,199.8 billion at the end of August.
Private REITs remained popular among domestic institutional investors, especially financial institutions and pension funds who face difficulties in asset management. Private REIT stock prices, which are not listed on the market, are less affected by global and domestic financial conditions. This advantage attracts investors as an alternative real estate asset or investment products.
According to a newspaper report, Dai-ichi Life Insurance Company, one of the largest life insurers of Japan, will begin managing a private REIT in April 2020, with a target AUM of JPY 100 billion in 5 years. Nippon Life Insurance Company (Nissay), Japan's largest life insurer, previously established its private REIT in 2016. Meanwhile, Mitsubishi UFJ Trust Bank announced the creation of MUFG Private REIT Investment Corporation, which began operating in September. Starting with assets of JPY 13 billion, it plans to expand to more than JPY 100 billion as soon as possible. The private REIT market is active and expanding.
According to Nikkei on October 2, the British index FTSE announced it will include J-REITs in the FTSE Global Equity Index Series (FTSE GEIS) in four 25% tranches between September 2020 and June 2021. Investment monies that adopt FTSE GEIS as a benchmark can be expected to flow into the J-REIT market. FTSE GEIS includes 49 stock and REIT markets worldwide and is widely adopted by institutional investors. It may help development of the J-REIT market in the middle to long term.