Thursday, March 04, 2010

10 points on Japanese reits

Confession - I seldom cut and paste entire article from elsewhere just to have an article. But I really thought this is a good piece on Japanese reits. This article came from this site, which I liberally copied and pasted into this article. I give full credit to the author and shame on me for copying it here. Whatever lah.

This is purely for my own reference.


Japanese real estate prices have had a terrible time over the past two decades. In fact, the market experienced a run where property prices fell for sixteen years in a row despite the government trying desperately to reverse the trend and get people to invest.

Now in many countries, real estate booms have created millionaires in a very short space of time. Some of these local booms have run out of steam – others, like Japan, could be on the very verge of starting a staggering up-trend.

The reason that investors are safer to break into the Japanese real estate market via REIT’s is that they are a safer and more convenient form of Japanese property investment for profits. Non Japanese investors directly looking to invest in Japanese real estate would face significant hurdles presented by law, logistical difficulties in viewing properties and linguistic challenges in communication. Instead REITs are fairly liquid investments that enable a non Japanese investor to own a stake in Japanese real estate including commercial and residential property, industrial structures, shopping complexes and hotels.

The argument in favour of stepping into Japanese REITs are as follows:

1. The Japanese real estate market has performed awfully over the past 15 years. This is a classic example of a market that has fallen to lows and now reversing as property prices have recently began to buck this downward trend.

2. Interest rates in Japan are extremely low, and the Japanese public are fairly cash rich compared to their debt ridden counterparts in UK and USA. Usually, low interest rates causes an eventual boom in house prices as people generally buy property when they can afford to service the debt.

3. The Japanese government has been trying to kick-start Japanese real estate for some time. They have kept mortgage rates extremely low. In fact, longer term mortgages in Japan can be fixed at about 2% to 3%. Astoundingly, Japan real estate prices continued it’s downward spiral even as the government slashed short term interest rates to 0% (a level which it kept for six years). Such was the level of mistrust by the Japanese towards real estate as an investment.

4. Real Estate Investment Trusts are potentially better than stocks because the companies that operate them are entitled to specific tax benefits, and according to law REITs must give investors their earnings. In fact, Japanese REITs are exempt from corporation taxes as long as they pay out over 90% of their profits to shareholders in the form of dividends.

5. If (as many experts predict) the yen strengthens against the US dollar, it could prove useful as a good hedge.

6. Japanese REITs often payout yields of 3% to 4% - a good return given the potential capital gains expected over the next decade.

7. According to general statistics, not only has the price of Japanese real estate started to rise, but it is thought that there has been an 80% increase in the number of investors looking to purchase real estate with the expectation of future profits.

While Japanese REITs are becoming fairly established, and there has already been some appreciation from them it could be just the beginning of a very long story if we really are seeing the beginning of an upturn in the Japanese real estate market.

What about the drawbacks of Japanese REITs? Here are some of the factors that you should keep in mind before stepping in:

1. While it’s generally thought that the incredibly depressing bear market in the Japanese real estate market has now turned, there is always a certain element of risk and unpredictability in any investment. You can never call the top or bottom of any market.

2. As more global investors and funds understand the potential of the Japanese real estate scene there will be an increase in the number of REITs and foreign investment into Japanese property. This could inflate the price of the REIT market in general and the investor should keep in mind the amount paid for the REIT share against the net value of cash & properties per share. Do not get sucked into paying too high a premium.

3. Any future interest rate rises imposed by the Japanese government could have a negative effect on the value of REITs.

All in all, the underlying potential of owning Japanese REITs is exciting because if, as expected, the Japanese real estate market does go on a bull run over the next decade, holders of these REITs will benefit significantly from their ownership.


AK71 said...

Hi LP,

This article is somewhat outdated and was written when the Japanese real estate market went through a mini-boom a couple of years ago. Other than that, most of the points are valid.

The Japanese real estate market has declined for 20 years now. Japanese real estate is unloved but it won't go on being unloved. Things will change for the better.

I believe that money will always go where it is treated best. If the writer believed a 3% or 4% yield from a REIT is good, just look at what Saizen REIT is able to generate. The number of believers in Saizen REIT is growing by the day.

Am I beginning to sound like a cult leader? ;-p

Createwealth8888 said...

Nothing wrong to cut and paste if the author name is placed at the beginning of the article to identify the source. I believe the author is more than happy to share it with others.

Same as using other people's quotes

Dou said...

I have no confidence in Japanese reits...their economy getting from bad to worse. Long gone are their glory years

la papillion said...

Hi AK,

Ya, I knew it was outdated, but the points are still good :)

You are really relentless :)

la papillion said...

Hi bro8888,

Still considered plagiarism leh, even if you quote the name, unless permission is asked and accepted.

But I guess you're right, most pple should be happy as it creates publicity.

la papillion said...


I really can't comment as I don't know much. Investing is not a certainty afterall. I just cover my downside and hope for the best :)

Anonymous said...

lp, so did you invest in saizen?

la papillion said...

Hi anonymous,

Yes, I did invest in it. Had a small position, and going to build a larger position.

Jessie said...

Hotels in japan are really unique, like the capsule hotel.

Hoteles Rio