Are share buybacks by REIT inviting a market turnaround?

Are "share buybacks" by REIT inviting a market turnaround?

A new trend is beginning to surface in the Japanese REIT market. REIT stands for "Real Estate Investment Trust". It is a system where real estate is bought using money gathered from investors, and they are paid back with dividends from the revenue from rent or sales of said property. This is attractive due to the fact that they are listed on the Tokyo Stock Exchange, allowing them to be bought and sold, thus making them highly cashable. The REIT market was stagnant between 2008 to 2012 due to the Lehman shock, but since 2012 the market cap has steadily increased. At the end of 2016, the market cap had increased by 14.8% compared to the end of 2015, breaking 12 trillion yen. In 2016, the number of listed stocks increased due to events such as 7 achieving IPO, the highest number in the past 10 years, with 58 listed as of the end of this March.

However, the TSE REIT index, which reveals the overall movement of REIT prices, continues to be in a phase of adjustment since the start of 2017. One REIT analyst has said regarding the current sluggishness that (1) REIT is not influenced by currency trends, meaning the depreciation of the yen has led to investment money flowing to export related stock, and (2) Foreign investors were largely the net buyers of REIT in 2016, causing concern about foreign investors selling, among other issues may be the cause, but it is hard to say for sure. As it is, the concerns over a 2018 office supply rush seem to be holding down the REIT price.

However, as mentioned in our previous column "Japan's 2018 problem", looking at things in the long term, the period around 2018 does not seem likely to see a prominence in regards to office supply. Considering this, there is a good chance that the REIT index will rebound as a result.

What seems likely to trigger this is "stock buybacks" by REIT. On April 21st, Invesco Office J-REIT, Inc (IOJ) announced that they had changed their operating rules to allow them to acquire and cancel their own investment units. Acquisition of their own investment is equivalent to a corporation buying their own stock. In short, going forward the IOJ is capable of purchasing their own shares.

Although share buybacks by REIT were deregulated in investment trust law in 2013, until now there had been zero implementations. If the IOJ actually wants to acquire investment units this time, it would the first time a REIT has tried this. Acquiring or canceling one's own investment units decreases the total number, thus raising the value of each individual. As a result, the yield of REIT will rise, which is likely to lead to price increases. In fact, on the 24th when they announced the change in regulation, the IOJ price rose by 3%.

This was simply a change in regulation, and not an actual acquisition of investment units, so the market price has become transient. However, the previously mentioned REIT analyst points out that "IOJ has launched a policy of repaying investors, meaning there is the possibility that others will acquire asset units among REIT that have split the NAV multiplier* decimally". If this is the case, it will lead to a rise in the REIT market as a whole, and the investment evaluation will likely increase.

According to the Real Estate Securitization Association, the amount of property acquired by REIT in 2016 was equivalent to 1.769 trillion yen, a 10.8% increased compared to the previous year. Split by application, logistics and facilities (with an increase of 204% compared to the previous year) and hotels (increase of 47%) are impressive increases in acquisition values. In the past few years there has been a rush for hotels and accommodation facilities due to the increase in foreign tourists coming to Japan, and this is one of the key components in the acquisition of property and hotel and investment by REIT.

Currently, REIT is an important receptacle for real estate investment. If the REIT market recovers, then this is likely to have a positive effect of the overall real estate market.

* NAV (Net Asset Value) multiplier - The net asset multiplier by unit. Equivalent to the stock's PBR (Price to Book Ratio).

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