Japanese Property Market Quarterly Review,Second Quarter 2016-While Housing Starts Robust, Office and Retail Rents Peak Out-

Kazumasa Takeuchi

6.J-REIT and Property Investment Markets

The TSE REIT index has declined by 2.8%, due to the events of Brexit during the second quarter (Chart-23). Office, residential and retail-logistics sectors declined by 3.8%, 2.4% and 1.6% respectively. However, the index still rose by 5.5% in the first half of 2016, outperforming TOPIX which declined by 19.5%.

At the end of June, the J-REIT market value was JPY 11.6 trillion, while the price to NAV ratio was 1.3 times and the dividend yield was 3.4% with a 3.6% yield spread on ten year Japanese government bonds.

J-REITs acquired property assets of JPY 386 billion in the second quarter and JPY 937 billion in the first half (Chart-24), 19% smaller and 1% larger than those in 2015, respectively.

Star Asia REIT with 18 assets valued at JPY 685 billion was listed in April 20, raising the number of J-REITs to 54. Two new REITs are scheduled to be listed and two existing REITs will be delisted as results of mergers in the third quarter.

The negative interest rate policy pushed bond yields down by 0.4% and can lead to incremental values of the J-REIT portfolios. The average CAP rate of the J-REIT portfolios is 4.5% and the total NAV is JPY 8.8 trillion. Supposing that CAP rates can shrink by 0.4% accordingly, the value of the portfolios and the total NAV will increase by 9% and 16% to JPY 16.3 trillion and JPY 10.2 trillion, respectively.

However, the investor survey conducted by Japan Real Estate Institute shows that many investors consider CAP rates will remain unchanged from the time before the negative interest rate policy was introduced. As CAP rates have been already very low, property incomes now have to grow for sustainable value enhancement.