Kyoto Bank Weighs Purchasing More J-REITs for Higher Returns

Bank of Kyoto Ltd. is among a few Japanese regional lenders that are weighing additional investments in real estate investment trusts as low interest rates limit returns on government bonds.

The Japanese bank said it will consider boosting purchases of so-called J-REITs in the year ending March, according to a Bloomberg News survey of 11 local lenders. Bank of Yokohama Ltd. and Bank of Fukuoka Ltd. said they may buy more of the securities, without specifying when. Eight respondents said they will keep their J-REIT investment policies unchanged.

Regional banks are divided on whether to turn to J-REITs in search of higher returns as the Bank of Japan steps up bond purchases to lower interest rates and join Prime Minister Shinzo Abe’s deflation-fighting campaign. An index of J-REITs has a dividend yield of more than 3 percent, while benchmark 10-year notes haven’t yielded more than 1 percent since April 2012.

“Even though some banks are planning to maintain their investment plans, depending on how the bond market moves, they could review their portfolios and allocate more money to the J-REIT market,” said Masahiko Sato, an analyst at Nomura Securities Co. in Tokyo. “Government bond yields are unlikely to rise much under the Abe administration’s policies, so if you don’t act, your investment returns will fall.”

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Regional banks rely more on investments in marketable securities for revenue than the nation’s three biggest banks, which can tap overseas operations and brokerage units for additional income.

Japan’s banks accounted for about 14 percent of the 6.25 trillion yen ($61 billion) worth of J-REIT transactions in 2012, Tokyo Stock Exchange data show. Of that portion, 80 percent was from regional lenders, according to Mikio Namiki, an analyst at Mizuho Securities Co. in Tokyo.

“J-REITs are one option when we seek more yield in a low interest-rate environment,” said Yoshihiro Yamanaka, general manager of the treasury and investment division at Bank of Kyoto. Japan’s monetary easing policies “seek to push up asset values, and our expectations that J-REIT prices may rise are prompting us to consider buying more of them.”

Bank of Yokohama, Japan’s biggest publicly traded regional bank by assets, said asset diversification was a reason for considering an increase in REIT purchases, according to the survey, which was taken from April 22 to May 7. Bank of Fukuoka cited a desire to boost earnings.

REITs pool investors’ money to buy real estate and are publicly traded like stocks. The dividend yield for trusts on the 6.7 trillion yen Tokyo Stock Exchange REIT index as of May 21 was 3.24 percent, compared with a 0.88 percent yield for 10-year government bonds.

At the same time, J-REITs have underperformed Japanese stocks this year. The TSE REIT index fell 2.6 percent at 12:40 p.m. in Tokyo, paring this year’s advance to 32 percent after a record 34 percent gain in 2012. That compares with a 49 percent increase in the benchmark Topix Index of shares in 2013.

Bloomberg News received replies to its questionnaire on J-REITS from the following 11 financial institutions:

Bank of Fukuoka Ltd.
Bank of Kyoto Ltd.
Bank of Yokohama Ltd.
Chiba Bank Ltd.
Chugoku Bank Ltd.
Hachijuni Bank Ltd.
Hiroshima Bank Ltd.
Kansai Urban Banking Corp.
North Pacific Bank Ltd.
Senshu Ikeda Bank Ltd.
Shizuoka Bank Ltd.