IJ reports quarterly on Japan’s REIT market in cooperation with the Association for Real Estate Securitization (ARES), an industry body for companies operating in a rage of sectors related to real estate securitization in Japan.
This report covers REIT market movements from October to December of 2019.

図1 ARES 10-12

Total assets of properties held by J-REITs and private real estate funds (private REITs), based on acquisition prices, amounted to JPY 19,022.8 billion and JPY 3,323.5 billion respectively at the end of November 2019.

J-REIT (public REIT) market

On November 5, the Tokyo Stock Exchange REIT Index reached 2,257.08, its highest level since May 2007, and ended 2019 at 2,145.49. The index rose more than 20% in 2019, outperforming the 18.1% annual appreciation of the Nikkei Stock Average. At year-end, the expected dividend yield was 3.6%, and the price/nav ratio (REIT price divided by net asset value (NAV)) was 1.2. At these levels, REITs were not overvalued, as investors from many struggling sectors continued to seek refuge in J-REITs.

Robust sectors in the October-December domestic market included office space, residential, and logistics, as in the previous quarter.

According to Miki Shoji Co. Ltd., the office vacancy rate in five wards of central Tokyo at the end of November was 1.56%, and 1.49% in existing buildings. Both rates represented historic lows. In addition to enjoying generally good business performances, the office sector has been boosted by a surge in office employment, mostly in Tokyo. In response to work style reforms, companies are hiring more employees to lessen individual workloads, and improving work spaces to attract quality employees and prevent defections.

The residential rental market in central Tokyo is getting tighter as demand rises. Residential REIT companies have raised rent prices to record levels under positive market conditions. Residential REITs traditionally have provided stable rent profits with diversified tenants and downward price rigidity. As residential REIT companies continue to exceed investors' expectations for earning growth, their valuations have risen concurrently.

The logistics rental market is improving despite growing discomfort with the oversupply of massive properties. According to CBRE, the vacancy rate for multi-tenant properties in the Tokyo metropolitan area was 2.4% at the end of September, down from 2.7% at the end of June. It is the lowest level since 2004 when the survey began. Newly supplied floor space for multi-tenant properties reached 206,000 tsubo (approximately 680,000m²) in July-September, a quarterly record. Demand for new floor space in the same quarter was even higher, at 212,000 tsubo (approximately 700,000m²), another quarterly record.

Topics

On November 19, 2019, Japan Rental Housing Investments Inc. (JRH) and Nippon Healthcare Investment Corporation (NHI) announced a merger by absorption, effective April 1, 2020, with JRH as the surviving corporation, operating as Daiwa Securities Living Investment Corporation. Upon the merger, JRH will issue new shares to NHI shareholders at 2.05:1.

According to their press release, the merged REITs will dispose of 27 residential properties with a total anticipated disposition price of JPY 13.6 billion, and will acquire healthcare facilities comprising 28 properties with a total anticipated acquisition price of JPY 62.6 billion. The total value of assets will reach approximately JPY 303 billion, ranking the new company 24th among 63 J-REITs (based on the acquisition price as of November 1). After the merger, the company's portfolio will be 60-80% in residential facilities and 20-40% in healthcare facilities.

This latest combination is Japan's fifteenth REIT corporation merger following the merger of Sekisui House Reit, Inc. and Sekisui House Residential Investment Corporation completed in May 1, 2018.