Today we will be talking about the most recent trends in the Japanese REIT market since the introduction of minus interest.
REIT stands for "Real Estate Investment Trust" for those of you who don't know. These are a financial product listed by Tokyo Stock Exchange, Inc. (Also known as Toshou or TSE) and similar to individual stocks, can be traded. TSE fully began trading of them in 2001 when it established the J-REIT market. Currently there are 56 listed stocks, with volumes such that some stocks exceed 10,000 shares a day, making it a popular product which allows simple investment in real estate.
As is well known, Nichigin (Bank of Japan) decided to introduce negative interest at the Monetary Policy Meeting held at the end of January. Following this, the yield of 10 year government bonds, which is an indicator of long-term interest rates, continued to drop, and in February interest rates became negative for the first time in history (prices rose).
Why Japanese government bonds continue to be bought under negative interest is another issue we will skip over for now, but with this background of low interest, the average yield of the J-REIT is at a high of 3.53% (As of 30th August 2016, the following is also correct as of this date).
The average yield of stocks listed in the first selection of the TSE is just under 2%, and could be seen as attractive financial products when judged by their yields.
Looking at the movement of the "TSE REIT Index" that reflects the entire TSE REIT listing, there is a clear rebound after Nichigin's introduction of negative interest in January. This is probably because while bond interest, starting with 10 year government bonds, consistently went down, the REIT market with its over 3% rise saw an influx of investment. Following the implementation of negative interest, if we compare the Nikkei average stock price and the REIT index price movements, Nikkei average hasn't pulled above the high point of February first, and currently remains at a low of 4%. In contrast, the REIT index rose more than 10%, with a high marked on the 26th of April. During this, there were several high performance REIT such as the Ichigo Hotel REIT (With a high of 46.2% in the same period) and Daiwa House Residential (27.5% in the same period).
While the REIT index saw a sudden drop in June due to the Brexit shock, prices quickly recovered. Currently, for reasons such as Nichigin not raising the REIT purchase frame due to easing, there further easing has not raised REIT purchase frames there has been a tapering off, but looking at the underlying market we can see that investor willingness to buy is not weakening.
So, what kind of movement is predicted for REIT going forward? REIT pays investors based on dividends of real estate rent payment. Because of this, if rent were to fall significantly them naturally sound would REIT yields. However, currently office and house rates remain high, and do not look likely to erode. Further, redevelopment and creation of accommodation in the run up to the opening of the Tokyo Olympics seems likely to guarantee a rapid pace, making it unlikely there will be a price collapse the metropolitan area.
In addition, inflation is far from Nichigin’s goal of 2%, giving the possibility of further expansion of negative interest rates in the future. If this happens, it is inevitable that the degree of attention REIT are receiving will increase. From September, as part of additional monetary easing, Nichigin are expected to increase the REIT purchase frame. With some price peek outs being pointed out for some real estate etc, it is certainly not the case that prices will rapidly follow this rise, but if there were to be an immediate drop, it might be an investment chance.
Sep. 06, 2016