BOJ Action Raises Developer Bond Sales to ’10 High: Japan Credit

BOJ Governor Masaaki Shirakawa
Masaaki Shirakawa, governor of the Bank of Japan, is due to step down in April after a five-year term. Photographer: Kiyoshi Ota/Bloomberg

Bank of Japan Governor Masaaki Shirakawa’s decision to boost purchases of real estate funds to stimulate the economy may spur debt sales by developers that reached the highest in 2 1/2 years this month.

Daiwa House Industry Co., Japan’s biggest home builder, and Mori Building Co. drove 97.8 billion yen ($1.2 billion) in offerings by property issuers this month, the highest since April 2010, according to data compiled by Bloomberg. The 9 basis point yield premium over government debt that Daiwa House is paying on its six-year notes compares with the 43 basis point average for Japanese companies and the 168 gap for peers worldwide, according to Bank of America Merrill Lynch indexes.

Refinancing debt at record-low yields will allow Daiwa House, Mori Building and Tokyu Land Corp. to boost investment as demand recovers for office space in central Tokyo. The yield spread for Japan’s developers has dropped eight times faster than the corporate average in the past year. It may narrow further as the BOJ’s plan bolsters investor confidence in an industry rebounding from record high vacancy rates.

“The BOJ’s additional stimulus measures and the increase in Japanese REIT purchasing will improve the financing environment for real estate and housing companies,” Roko Izawa, a Tokyo-based analyst at Standard & Poor’s, said by telephone yesterday. “The bond markets are likely to remain a stable source of financing for the industry.”

BOJ Stimulus

The BOJ plans to increase its holdings of real estate investment trusts to 130 billion yen in 2013, from the 120 billion yen expected this year, according to a statement from the central bank yesterday. The holdings were at 100 billion yen as of the end of September, it said.

The central bank expanded its asset-purchase fund, its main policy tool, by 11 trillion yen to 66 trillion yen, it said in the release. It added to monetary stimulus for the second time in two months, the fastest pace of easing in nearly a decade, as government data this month showed that consumer prices and industrial output decreased.

The extra yield investors demand to own the debt of Japan’s developers fell eight basis points in the past 12 months to 17 on Oct. 29, according to Bank of America Merrill Lynch indexes. The spread for the country’s corporates narrowed one basis point and dropped 91 for real estate companies worldwide, the data show.

Tokyo’s office vacancy rate fell to 8.9 percent in September from a record high of 9.4 percent in June as the excess supply of new office space decreased, according to Miki Shoji Co., an office brokerage company.

Office Rents

Mitsubishi Estate Co., Japan’s largest developer by market value, expects a shortage of space in Tokyo’s Marunouchi business district to allow it to raise office rents next year to help reverse a decline in profit, President Hirotaka Sugiyama said in an interview last month. Office vacancies pushed average rents in Tokyo’s central five wards to the lowest ever in September, according to Miki Shoji.

“We expect office rents to rise in Tokyo’s five central wards,” Masahiro Mochizuki, an analyst at Credit Suisse Group AG, said 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,” he wrote, referring to buildings up to 10 years old.

Elsewhere in Japan’s credit markets, Tokyu Land sold 10 billion yen of 0.56 percent five-year notes, according to a statement from Mitsubishi UFJ Morgan Stanley Securities Co. yesterday.

J. Front Retailing Co. hired Nomura Holdings Inc. to sell about 10 billion yen of three- and five-year notes, the brokerage said in a statement yesterday.

Bond Return

Japan’s corporate bonds have handed investors a 0.04 percent gain this month, matching the return on Samurai notes, Bank of America Merrill Lynch data show. Company debt worldwide has gained 0.99 percent in the period, according to the data.

Yields on Japan’s benchmark 10-year government debt fell half a basis point to 0.765 percent in Tokyo yesterday. The rate was as low as 0.72 percent on July 23, the least since June 2003. The bonds yielded 95 basis points less than similar-maturity Treasuries, versus 128 a year earlier, data compiled by Bloomberg show. One basis point is 0.01 percentage point.

The yen rose after the BOJ’s easing, and was up 0.5 percent to 79.41 per dollar as of 6:56 p.m. yesterday in Tokyo. The Japanese currency depreciated to 80.38 per dollar on Oct. 26, the weakest since June 25.

Capitalization Rate

The capitalization rate, a measure of investment yield, for Japanese office buildings was 5.3 percent in July after declining from 5.4 percent in April, according to Real Capital Analytics Inc. A drop in the cap rate, which is a property’s net income divided by the purchase price, usually signals an increase in real estate prices.

Hulic Co., Japan’s best-performing real estate company, registered in July to sell as much as 50 billion yen of bonds. Borrowing rates under 1 percent mean that redevelopment projects offer more than 10 percent return, according to spokesman Shin Ito.

“The spread is narrow enough and the cost of issuance is extremely low,” said Ito in a telephone interview. “This is the perfect timing and environment for real estate companies, if the market starts rebounding. We can see signs of that already.”

Bond Pipeline

Mori Hills REIT Investment Corp. hired banks for a sale of three-year and five-year notes, according to an Oct. 29 statement from SMBC Nikko Securities Inc., which will manage the offering together with Mitsubishi UFJ Morgan Stanley and Mizuho Financial Group Inc.

Daiwa House sold 30 billion yen of notes, including 10 billion yen of 0.249 percent four-year bonds and 20 billion yen of 0.413 percent six-year debt, according to data compiled by Bloomberg. Both securities are priced to yield nine basis points more than government debt, the data show.

“The calming of the financial markets and expectations of investor demand going forward prompted us to choose to refinance our bank loan with a bond issue,” said Noboru Kaiho, a spokesman at Daiwa House.

Daiwa House expects profit to surge 75 percent to 58 billion yen for the year ending March 31, as sales gain 2.8 percent, the home builder said in August. That compares with the average estimate for a 61.2 billion yen income by 10 analysts compiled by Bloomberg.

“The market environment is very receptive to real estate borrowers right now, which may prompt some companies to push forward their bond offerings,” said Mitsuyoshi Takahashi, a senior credit analyst at Mizuho Securities Co., a unit of Japan’s leading bond underwriter this year. “Positive earnings expectations are helping tighten the spreads for the industry.”

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