REITs Set for Bond Sales as Record Debt Comes Due: Japan Credit

REITs Set for Bond Sales as Record Debt Comes Due
Residential buildings stand in Tokyo, Japan. J-REITs are looking to refinance their debt as they seek to buy new buildings to increase revenue amid record low rents. The Photographer: Tomohiro Ohsumi/Bloomberg

A decade after the industry began, Japan’s real estate investment trusts, the country’s biggest property buyers, are set to sell more bonds as they face a record amount of debt coming due next year.

A total of 159 billion yen ($2.1 billion) worth of bonds will mature next year, the most since Japan established its REIT market in 2001, according to Mizuho Securities Co. J-REITs so far this year have registered to sell as much as 1 trillion yen of bonds in the coming years, exceeding last year’s 800 billion yen-registration, according to IB Research Inc.

J-REITs are looking to refinance their debt as they seek to buy new buildings to increase revenue amid record low rents. The extra yield investors demand to lend to Japanese property firms instead of the government has fallen back to 25 basis points, or 0.25 percentage point, on Oct. 5, the level prior to the record March 11 earthquake. The comparable premium for U.S. REITs has widened to 316 basis points from 166 in the same period, according to Bank of America Merrill Lynch bond indexes.

“We plan to sell bonds in March to boost our repayment capability,” said Masahiko Tajima, director of financial planning division at Kenedix REIT Management Inc., the asset manager of Kenedix Realty Investment Corp. in Tokyo. “We aim to continue to tap into the bond market.”

J-REITs, which represent about 20 percent of Japan’s 45 trillion yen securitized real-estate market, have 600 billion yen worth of bonds outstanding, according to UBS AG. The REIT market was created in 2001 to be a financial tool that pools assets into tradable securities, making it easier to invest.

‘Attractive Returns’

The 35-member Tokyo Stock Exchange REIT Index fell 0.02 percent at the 3 p.m. close in Tokyo and is down 22 percent this year.

A total of 179.5 billion yen of bonds were sold in 2010 and about the same amount will be issued this year, said Takashi Ishizawa, a Tokyo-based real estate analyst at Mizuho Securities, declining to forecast the amount for 2012.

Last month, Global One Real Estate Investment Corp. and United Urban Investment Corp. each registered to sell as much as 100 billion yen of bonds, according to filings with Japan’s Ministry of Finance. Nippon Building Fund Inc. and Kenedix Realty also sold debt in the past month.

“Given the maturity schedule, we should see at least the same amount of issuance next year, if not more,” said Chinatsu Hani, a credit analyst at UBS Securities Japan Ltd. in Tokyo. “Refinancing risks for REITs can be considered to be quite low at the moment and REIT bonds do provide attractive returns.” Hani has ‘buy’ rating for all seven REITs she covers.

Nippon Building, Kenedix

Nippon Building Fund’s 10 billion yen of five-year, 0.64 percent bonds was priced to yield 14 basis points more than the benchmark yen-swap rate on Sept. 9, according to data compiled by Bloomberg. The REIT’s five-year 1.23 percent bonds sold in January 2010 were priced at a spread of 0.46 percentage points more than the yen-swap rate, the data show.

Kenedix Realty sold 1.5 billion yen of two-year, 1.59 percent bonds at a spread of 120 basis points more than the benchmark yen-swap rate on Sept. 8, according to Bloomberg data. That compares with an average 142 basis-point spread over the Tokyo interbank offered rate, or Tibor, for bank loans due in an average of 3.4 years for the six months ended April, according to the company.

“J-REITs are attractive because with government support, default risks have gone down significantly and it offers stable cashflow,” said Hideyuki Shinkai, a fund manager at Norinchukin Trust & Banking Co. in Tokyo. “J-REIT bonds are attractive because you can benefit from the spread now.’”

Property Buying

Total commercial real estate investment transactions almost tripled to 272 billion yen in the third quarter from the previous quarter, according to DTZ Holdings Plc, a property brokerage and research firm. J-REITs accounted for 62 percent of the total volume in the quarter, it said.

Tokyo’s office vacancy rate, a measurement of unoccupied office space, has stayed above 8 percent since December 2009, while rents have declined since August 2008, according to Tokyo-based Miki Shoji Co., a privately held office brokerage company. Vacancy rate was at 8.64 percent in September, compared with 8.65 percent a month earlier, a Miki Shoji report today showed.

Declines in Japan’s land prices slowed for the second year, helped by housing demand before the temblor that was driven by tax incentives for home buyers amid low interest rates, a government report last month showed.

The Bank of Japan, which has kept the benchmark overnight rate between zero and 0.1 percent since October 2010, is buying assets ranging from corporate debt to REITs in an effort to beat deflation. The central bank has bought 56.9 billion yen worth of J-REITs since December.

Government Backing

The yield on Japan’s 10-year government bond was at 0.978 percent in Tokyo today, the second lowest after Switzerland among 32 bond markets tracked by Bloomberg. Ten-year debt yields 1.866 percent in Germany and 1.899 percent in the U.S. The yen, the best-performing major currency against the euro and the dollar this year, reached a post-World War II high of 75.95 versus the dollar in New York trading on Aug. 19. The Japanese currency was at 76.74 yen per dollar in Tokyo today.

“Thanks to government support, it’s become a lot easier for J-REITs to raise funds,” Norinchukin Trust’s Shinkai said. “They shouldn’t have any problems refinancing the bonds that will mature next year.”

J-REITs have financed their borrowings through a combination of bank lending and bond sales. The latter only accounts for 16 percent of their total debt because only those with an A rating or above have managed to raise money from investors, according to Roko Izawa, an credit analyst at Standard & Poor’s in Tokyo.

Sponsor Support

One way to identify an attractive investment may be to compare the yield of J-REIT bonds against its so-called sponsors, which are responsible for supplying properties for the trusts and choosing managers, said UBS’s Hani.

While the spread on J-REIT bonds are wider against benchmarks such as yen swaps, suggesting more risks, those that are backed by sponsors with stable creditworthiness, will allow investors to reap higher returns, she said.

The extra yield investors demand to own Advance Residence Investment Corp.’s 1.27 percent bond due 2016 over the yen-swap rate was little changed at 81.2 basis points on Oct. 4, according to Japan Securities Dealers Association prices on Bloomberg. That compares with 8 basis-point spread on the similar-maturity 0.51 percent bonds sold by its sponsor Itochu Corp., a Tokyo-based trading company.

“The existence of sponsors is an important point of consideration when investing in J-REIT bonds,” Hani said. “This is because J-REITs’ operations and access to financing have a lot to do with sponsor support.”

Bucking Trend

J-REIT bond issuances come as sales of Japan’s corporate bonds this year declined 12 percent to 6.14 trillion yen from the same period a year ago because no nuclear plant operators have offered notes since the March 11 earthquake and tsunami crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant, according to data compiled by Bloomberg.

The Markit iTraxx Japan index of credit-default swaps fell 6 basis points to 225 basis points today in Tokyo, Deutsche Bank AG prices show.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

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