Tokyo Beating Paris Property Lifts REIT Bond Sales: Japan Credit

The strongest bond sales in three years by real estate investment trusts are showing confidence in the property revival sparked by Prime Minister Shinzo Abe.

REIT sales jumped 33 percent this year to 95.8 billion yen ($944 million), outpacing the 5.9 percent increase in Japanese corporate issuance and the 2.2 percent climb for that in the U.S., according to data compiled by Bloomberg. Japan Excellent Inc., whose properties house units of Toshiba Corp. and Fujitsu Ltd., raised 5 billion yen of 0.46 percent debt last week due 2018 at a 5 basis point yield premium over the yen swap rate, down from the 48 it paid in 2011.

Tokyo beat Paris to become the world’s third most-active real estate market this year, as office vacancy rates fell to a 2009 low and housing starts extended the longest growth streak in more than 19 years ahead of a planned consumption tax increase. The Japanese capital’s properties also stand to receive a windfall of about 152 billion yen from the 2020 Olympic Games, according to International Olympic Committee.

“Investor perception of Japan Excellent’s profitability is improving in tandem with the office space market,” said Mikio Namiki, an analyst at Mizuho Securities Co. in Tokyo. “The bonds are also offering a spread that is quite attractive to investors which have seen yield premiums decline across the board.”

Narrowing Spreads

The spread on the Tokyo-based REIT’s 1.01 percent notes due 2016 dropped 28 basis points since the offering in October 2011 to 20 basis points. Japan Credit Rating Agency Ltd. ranks the company AA-, its fourth-highest investment grade. The spread for Japan’s similarly-rated issuers plunged 36 to 7 in the period, Bank of America Merrill Lynch indexes show.

Japan Excellent has 29 billion yen of bonds outstanding, including 12 billion yen maturing in March, according to data compiled by Bloomberg. The fund’s weighted average fixed coupon declined to 1.2 percent from 1.45 percent in the last quarter of 2010, the data show.

“The overall office market is improving which is positive for the REIT market,” said Kenta Anami, general manager at the finance and accounting department of Japan Excellent. “We refinanced the debt earlier because we see now as a good timing.”

Abe’s economic stimulus campaign includes monetary stimulus to encourage finance activity. Stepped-up borrowing by Japanese companies has to translate into increased capital spending for the measures to succeed in ending deflation and reviving the world’s third-largest economy.

Volumes Swell

The volume of real estate transactions in Tokyo jumped 58 percent to $15.6 billion in the first nine months of this year, according to a report by Jones Lang LaSalle Inc. That’s $400 million short of New York, which ranked second with $16 billion after a 16 percent decline. Paris was fourth with $10.9 billion, while London topped the list with $23.2 billion.

Tokyo’s office vacancy rate, a measurement of unoccupied space, dropped to 7.56 percent last month from 7.9 percent in September and was at its lowest since June 2009, according to broker Miki Shoji Co. The gauge reached a record 9.43 percent in June 2012.

Commercial land values in Japan’s three biggest metropolitan areas rose for the first time since 2008 this year, gaining 0.6 percent, according to the land ministry’s annual land survey report released in September.

GPIF Investments

Japan’s property-related securities may also receive an infusion of from the country’s pension assets. An expert panel recommended that the 121 trillion yen Government Pension Investment Fund diversify its investments into other financial products, including REITs, where returns may be higher than on local sovereign bonds, according to a report released by the advisory group on Nov. 20.

“We see a growing possibility of GPIF investment in REITs via baby funds with outsourced specialist management,” Tomohiro Araki, a Tokyo-based senior analyst at Nomura Securities Co., wrote in a report on the same day. The pension fund’s REIT investment would help lift land values, Araki said in the report.

Japan’s sovereign notes maturing in three years paid 0.12 percent yesterday. The currency strengthened 0.2 percent to 101.5 yen against the dollar as 8:50 a.m.

Japan Hotel REIT Investment Corp. raised 2.5 billion yen of 0.89 percent bonds due 2016, at a yield premium of 60 basis point over the yen swap rate, according to data compiled by Bloomberg. JCR has an A rating on the fund, its fifth-lowest investment grade.

“Hotel assets tend to be riskier than offices,” prompting investors to seek higher returns, said Roko Izawa, a Tokyo-based analyst at Standard & Poor’s. “There are operational risks such as fluctuation in occupancy rate and seasonality.”

Japan Retail Fund Investment Corp., Japan’s third-biggest REIT, said on Nov. 22 it hired Mitsubishi UFJ Morgan Stanley Securities Co. and Mizuho Securities Co. to handle a 10-year bond sale. The fund last offered debt in 2007.

“A majority of Japan’s REITs have recently had their cost of debt reduced because of an improving market condition,” S&P’s Izawa said. “They want to lock down the cost of funding because the outlook for interest rates is not clear. They want to be prepared.”

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