Nippon Building Plans to Buy More Assets on Rent Increases

Nippon Building Fund Inc. (8951), Japan’s biggest real estate investment trust, plans to acquire more assets on expectations that office rents in Tokyo will recover, ending declines since 2008.

The REIT (TSEREIT) may acquire more than 50 billion yen ($623 million) a year if there are good properties, said Kenichi Tanaka, president and chief executive officer of Nippon Building Fund Management Ltd., which manages the REIT. The REIT has bought 36 billion yen of office buildings a year on average in the past three years, according to the company.

The office vacancy rate, a measurement of unoccupied office space, has dropped for three straight months in Tokyo after rising to a record high in June as excess supply decreased, according to Miki Shoji Co., an office brokerage company. Nippon Building Fund’s REIT, which owns 68 office buildings in Tokyo and other major cities in Japan worth 921 billion yen, has started asking for higher rents for new tenants in some buildings, Tanaka said.

“We can finally see signs of an upward trend in office rents in Tokyo,” said Tanaka in an interview in Tokyo. “It’s important for us to acquire good quality assets in anticipation of that turnaround.”

Nippon Building Fund gained 0.7 percent to 871,000 yen at the close of trading in Tokyo. The Tokyo Stock Exchange REIT Index and the Topix Real Estate Index fell 0.4 percent and 0.5 percent respectively.

The REIT has risen 38 percent so far this year, outperforming the Tokyo Stock Exchange REIT Index’s 26 percent gain. The index tracking Japanese property companies has been the best performer among the 33 industry groups that make up the benchmark Topix index this year, rising 47 percent.

Vacancy Recovery

The vacancy rate for office buildings in Tokyo’s central five wards has remained above 8 percent for more than two-and-a- half years, while rents have declined since September 2008, according to Miki Shoji.

Japanese real estate investment trusts have been buying new properties as a way to increase total revenue and offset rental declines for buildings in their portfolios, Tanaka said.

REITs raised 326 billion this year through Oct. 31, the highest since 2007, according to data compiled by Japan’s Association for Real Estate Securitization.

Nippon Building Fund plans to first ask higher rents for large properties that are close to major train lines, Tanaka said. The rental income for the buildings in its portfolio will probably start to increase by 2014 because it will take some time to raise the amount tenants actually pay, he said.

Rising Rents

“We expect office rents to rise in Tokyo’s five central wards,” said Masahiro Mochizuki, an analyst at Credit Suisse Group AG, in a report on Oct. 26. “The vacancy rate for relatively new buildings has declined to a point that will support an uptrend for asking rents for new tenants.”

Mochizuki rates Nippon Building Fund’s REIT outperform.

Nippon Building Fund, one of the first two REITs in Japan, was set up by Mitsui Fudosan Co. (8801), Japan’s biggest developer by sales. Mitsui Fudosan owns 3.6 percent of the REIT and is responsible for supplying properties.

Tanaka said the support from the Bank of Japan for the country’s real estate market is contributing to a recovery. The bank plans to increase its holdings of the REITs to 130 billion yen in 2013, from the 120 billion yen expected this year, as part of efforts to tackle deflation, the central bank said on Oct. 30.

“In addition to the Bank of Japan (8301)’s support, people have started to notice signs of recovery,” Tanaka said.

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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