REITs May Double Down as Bond Spreads Reach Three-Year Lows: Japan Credit

Japan’s real estate investment trusts may double property purchases in the next fiscal year to 1 trillion yen ($12 billion) by boosting bond sales amid the lowest borrowing costs in 3 years, Credit Suisse Group AG said.

The extra yield investors demand to lend to Japanese real estate firms instead of the government has fallen to 26 basis points, or 0.26 percentage point, on Jan. 17 from 230 in April 2009. The comparable premium for U.S. REITS has narrowed to 199 basis points from 1,079 in the same period, according to the Bank of America Merrill Lynch Global Bond Indices. J-REITs sold 179.5 billion yen of bonds last year, the most since 2007, according to data compiled by Mizuho Securities Co.

Investment trusts’ purchases may hit a four-year high in the period starting in April, compared with as much as 600 billion yen during the current fiscal year, boosted by the Bank of Japan’s economic stimulus, according to Masahiro Mochizuki, an analyst at Credit Suisse Securities (Japan) Ltd. in Tokyo.

“The Bank of Japan’s purchasing plan will make it easier for them to raise capital,” Mochizuki said. “Since J-REITs play a main role in the commercial property transaction market, the buying will push asset prices up.”

Vacancy rates in Tokyo’s prime office buildings declined to about 4.1 percent in the three months ended December from a record 7.8 percent a year earlier, a report dated Jan. 12 by CB Richard Ellis Inc. showed. Manhattan’s office vacancy rate fell to 10.5 percent at the end of 2010 from 10.9 percent at Sept. 30, according to Cushman & Wakefield Inc.

Real Estate Market

J-REITs represent 20 percent of Japan’s 45 trillion yen securitized real-estate market, according to the most recent government data published in August. The market was created in 2001 to be a financial tool that pools assets into tradable securities, making it easier to invest.

The Bank of Japan’s economic stimulus plan unveiled on Oct. 5 as part of efforts to end a decade of deflation has helped drive the Tokyo Stock Exchange REIT Index up 15 percent. The central bank has allocated 50 billion yen of its asset-buying fund to purchasing shares of J-REITS with credit ratings of AA or higher.

Land prices in Japan have declined for almost two decades and values are about half of what they were after the peak of Japan’s asset bubble economy in the late 1980s. Nationwide land prices fell 4.6 percent in 2009, the government said in March. The decline will probably slow to about 4.3 percent to 4.5 percent when the government releases land price data in March 2011, Credit Suisse’s Mochizuki said.

Low Yields

The difference between yields on five-year Japanese government notes and inflation-linked debt was negative 0.59 percentage point yesterday, reflecting expectations for the average decline in consumer prices over the life of the securities. Yields on five-year government notes that aren’t indexed declined one basis point to 0.5 percent.

“The Japanese REIT market is the only one that has the backing from the central bank in the world,” said Noriyuki Sato, who helps manage $109.9 billion at DIAM Co. in Tokyo. “That puts them ahead of others in terms of raising capital and seeking external growth.”

Japan’s five-year rate to swap floating debt payments for fixed interest, a gauge of borrowing costs, fell to 0.626 percent on Jan. 14 from 0.734 percent a year ago, the least among 32 developed markets tracked by Bloomberg.

‘Looking for Opportunities’

“Bank of Japan’s aim is to revitalize the real estate market by lowering the cost of capital for the J-REITs,” said David Fan, who helps manage $2.5 billion at CBRE Global Real Estate Securities in Tokyo. “We are looking at opportunities to invest.”

The REITs raised 39.8 billion yen of debt after the central bank’s October announcement, according to data compiled by Mizuho. Nomura Real Estate Office Fund Inc. sold 10 billion yen in November, followed by United Urban Investment Corp.’s 15 billion yen of three-year bonds in December.

U.S. REITs sold $18.8 billion of debt in January to November last year, the most since 2006 and 81 percent more than all of 2009, according to the National Association of Real Estate Investment Trusts.

Real estate trusts get most of their profit from rental income, paying the majority of it as dividends. While investors receive a yield that is competitive with bonds, they can also benefit should the value of the underlying properties rise.

United Urban, Mizuho

United Urban’s three-year, 1.38 percent bonds priced to yield 88 basis points more than the yen swap rate on Dec. 3, according to data compiled by Bloomberg. That compares with a 98 basis-point spread on its similar-maturity 1.55 percent notes priced on June 6, the data shows.

Investors in J-REITs including units of Mizuho Financial Group Inc., Japan’s third-largest bank by market value, and Tokio Marine Holdings Inc., the nation’s second-largest casualty insurer, have already began raising funds to invest in REIT shares. Mizuho Asset Management Co. set up a 17.7 billion yen fund this month and Tokio Marine Asset Management Co. started a 21.2 billion yen fund in November, the companies said.

The 35 companies in the TSE REIT Index rose 27 percent last year, its first annual increase since 2006. That compares with the benchmark Topix index’s 1 percent decline in 2010.

More financing options for J-REITs may also help boost Japan’s biggest developers including Mitsui Fudosan Co. and Mitsubishi Estate Co., according to Barclays Capital, which forecasts the stocks to rise as much as 40 percent this year.

“The increase in share prices of J-REITs will make it easier for them to issue equity to buy properties,” said Hideyasu Yamamoto, an analyst at Moody’s Japan K.K. in Tokyo who changed his outlook for the real-estate industry to “stable” from “negative” in September. “This would be a good thing for the credit of J-REITs because they can hopefully deleverage their portfolio, too.”

To contact the reporters on this story: Kathleen Chu in Tokyo at kchu2@bloomberg.net; Katsuyo Kuwako in Tokyo at kkuwako@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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