Japanese Property Market Quarterly Review, First Quarter 2016 -Office Rents Rise Again, Foreign Visitor Arrivals Boost Hotels and Land Prices-

Eriko Kato

4.J-REIT and Property Investment Markets

The TSE REIT Index rose by 8.5% in the first quarter, affected by the decline of bond yields following the announcement of the negative interest rate policy by the Bank of Japan. The office sector rose by 9.0%, residential sector by 4.8% and other sectors – including retail and logistics – by 9.3% (Chart-20). At the end of March, the J-REIT market value was 11.7 trillion JPY, while the price-to-NAV ratio was 1.3 times and the dividend yield was 3.3% with a 3.3% yield spread on 0% of ten year JGBs.
J-REITs acquired properties amounting to 550 billion JPY in the first quarter increasing by 11% y-o-y (Chart-21). The pace of acquisition by J-REITs slowed down significantly in the fourth quarter, however, it has accelerated again. Lasalle Logiport REIT was listed with 8 assets valued at 161 billion JPY, and the number of J-REITs increased to 53.
The negative interest rates can lead to incremental dividends of J-REITs. The average interest rate on existing debts of J-REITs is 1.2% and the current interest rate on a new debt for J-REITs is 0.7%. Considering that refinancing can reduce the average interest rate on debts of J-REITs by 0.5%, J-REITs can increase their dividends by 9%.

Chart-20 TSE REIT Index (Dec.2015=100)/Chart-21 J-REIT Property Acquisition

According to Nikkei Real Estate Market Information, foreign funds and J-REITs noticeably sold their properties at high prices in the first quarter. However, it looks like foreign funds sold only minor properties and intend to hold large-sized core assets. Japanese developers, construction companies and other sector companies have been noticed as main buyers, while foreign funds acquired only small properties shifting to the suburbs. As a representative deal, Nippon Tochi-Tatemono acquired two properties in Toranomon, Tokyo, where integrated redevelopment has been underway.
Under the negative interest rate policy, property investment yields can be even lower, however, prime properties are held tight and are seldom seen for sale. In order to secure certain investment yields, investors have to consider properties in suburban locations or non-core sectors.