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Is It Time to Invest in REITs in Japan and China?
By J.S. Kim
When an asset class has been downtrodden for a long period of time, I tend to
look at it and assess whether conditions have changed that now favor an
awakening from long periods of hibernation. Japanese REITs, or J-REITs as they
are better known, may just be one of those opportunities, specifically
apartment/residential REITs in Tokyo. On the flip side are REITs that are
emerging and poised for rapid growth. Hotel and resort REITs in Shanghai and
Beijing fit this bill.
Even though most J-REITs seem fairly valued right now, there are other
cautionary factors that must be considered. Because the Bank of Japan had kept
their interest rate at zero for so long to stimulate the Japanese economy and
just raised interest rates several months ago for the first time, as the
Japanese economy strengthens, interest rates are likely to rise further.
Although the average dividend yield for J-REITs is currently 4.6%, to offset an
interest rate increase of 1%, in order for yields to also rise another 1%, it is
estimated that concurrent rents would have to rise 13.5%.
However, many properties owned by JREITs have extremely high occupancy rates, so
tenant income flow is consistent and reliable, offsetting some of the other
risks of JREITs such as bureaucratic REIT laws that currently make independent
management and M&A of the J-REIT industry difficult. For this reason, JREITs
have some of the largest yield gaps (as compared to 10-year bonds) of any
developed country.
However, there are still many positive things to like about J-REITs and many
reasons to consider scouring residential/ apartment J-REITs in Tokyo now rather
than later. Number one, although the average J-REIT NAV (net asset value)
premium is 12%, there are actually some J-REITs now with grade A properties that
trade at a discount to their NAV. That is not a misprint. The combined book
(appraisal) value of properties held in some J-REITs is actually more than the
NAV of the offered JREIT shares. These undervalued J-REITs are the ones that I
believe merit the most attention due to the compelling risk-reward setups they
offer. What better value can you get than buying properties at costs less than
their appraised values?
Furthermore, as some of the regulatory issues governing J-REITs become sorted
out, and the entire legal system becomes less bureaucratic and cumbersome, some
of these J-REITs that sell at less than book value now will become promising
acquisition targets for larger J-REITs and thus could experience a rapid
appreciation in share price upon acquisition. However, a word of warning. These
issues could very well become more bureaucratic before they become less so as
growing pains will undoubtedly happen in the attempt to become more streamlined.
Therefore, I foresee the reward in J-REITs as a long-term outlook. Thirdly, the
valuation of some J-REITs became depressed as foreign money left the Japanese
stock market, and not due to fundamental flaws in the J-REITs themselves. As
foreign money re-enters the Japanese markets as I expect in 2007, which also
would make the Japan i-shares a possibly compelling buy in 2007, this influx of
foreign money should also provide a boost to the J-REIT industry.
I know many people will disagree with me about Japan’s economy but anytime a
long recession has plagued a country, investors, both domestic and foreign,
remain understandably gun-shy and momentum will take some time to build. For
example, a stronger employment environment and stronger wages have yet to show
up in the Japanese economy through increased spending patterns. But it will. And
for this reason, the Japanese finance sector is another area to take a peek at,
for the financial industry always leads the way in stronger growth economies.
For a shorter-term return on REIT investments in Asia, China may be the place to
look. Starwood Asia-Pacific president, Mr. Miguel Ko, stated in the Shanghai
Daily that his hope is that China will contribute 50 per cent of their total
profits from the Asia-Pacific region in the next three to five years as opposed
to their current 20% contribution. Part of these lofty estimated increases is
undoubtedly due to the hotel and resort construction boom that is occurring in
preparation for the 2008 Beijing Olympics.
The director of Beijing Tourism Bureau, Du Jiang, recently stated that there are
over 110 hotels being constructed in Beijing alone in preparation for the 2008
Olympics, “with a majority of them targeting high-end guests.” Beijing hotels
are expected to accommodate about 550,000 guests per day during the Olympics.
Therefore, Beijing and Shanghai REITs that hold high-end hotels and resort
properties may offer some nice investment opportunities now.
In June 2005, Hong Kong regulations were amended to allow HK REITs to invest
overseas, including in properties in mainland China. So for now, HK REITs
invested in Beijing and Shanghai properties may be the way to go.
This article may be freely reprinted on another website as long as it is not
modified, changed, or altered in any way and as long as the below author byline
is included along with the active hyperlink exactly as is.
J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen
years of experience in finance and financial services, and has earned a BA in
Neurobiology from the University of Pennsylvania, a Master in Public Affairs
from the University of Texas at Austin, and an MBA with a concentration in
finance from the McCombs Business School, University of Texas at Austin. He is
the inventor of the revolutionary MoneyPing™ investment strategies, a novel
approach to learn advanced wealth planning techniques and how to build wealth,
not dreams.
To learn more at J.S. Kim's blog "The Zen of Investing", click the following
link,
Advanced Wealth Planning Techniques and Achieve Financial Freedom Ideas