Factor Analysis of the JREIT Direct Cap Rate

Kazumasa Takeuchi

■index

1. Analysis of the Change in JREIT Asset Valuations
2. Factor Analysis of the JREIT Direct Cap Rate
3. Factor Analysis of JREIT Direct Cap Rate

■introduction

The appraised valuation of JREIT assets plummeted immediately after the collapse of Lehman Brothers. For office assets, the change in valuation can be equally attributed to changes in NCF (net cash flow) and DCR (direct cap rate). On the other hand, the change in JREIT residential and retail valuations is mostly attributed to the change in DCR.
By JREIT asset type, we found a strong correlation between the office DCR and lending attitude DI of financial institutions toward real estate (BOJ Tankan Survey) with a lag of 2H to 3H (half-year periods). Moreover, there is a strong correlation between the lending attitude DI and change in gross rent at large office buildings in Tokyo’s three major wards.
We also found the residential DCR to be correlated to the lending attitude DI with a 1H lag, while the retail DCR is correlated to the office DCR. These results imply that for residential and retail assets, the DCR is also influenced by the effect of office rent on the lending attitude of financial institutions, rather than by their relatively stable NCF.
Based on the above, we forecast the office DCR will peak out in 2010 H1 at 5.2%, the residential DCR in 2009 H2 at 5.2%, and the retail DCR in 2010 H1 at 5.6%.
The JREI survey indicates that the office DCR has stabilized since 2009 H1. However, the office DCR has not yet reached the level indicated by our analysis, suggesting that Japanese financial institutions could be trying to stabilize the office cap rate below this level. If so, we are concerned that it could discourage foreign investment in the real estate market.