REIT ASIAPAC
MARKET
L I M I T E D B - G R A D E S U P P LY
Within Japan, there has been an extreme divergence in
performance within sectors, and we continue to favour smaller
sized office markets as well as regional city exposure due to
limited supply and strong demand. B-grade office is limited in
new supply due to high land and construction costs, and as a
result, vacancy levels for Grade B have gone down to historic
low levels. Most new supply that is generated in Tokyo’s main 5
wards are A and S class (more than 5,000 Tsubo or 16,500 sqm
total floor area), and rent levels are not affordable for many small
or mid-size corporations. Due to the strength of the economy,
SMEs have been willing to pay higher rents and expect limited
incentives in the current environment which is translating into
strong net operating income growth for B-grade office REITs.
While we remain positive, we also believe that valuations are now
in some cases at a premium to NAV (net asset value) and expect
to see some of the more aggressive REITs to come to market with
secondary offerings, and our concern is that the underlying asset
prices may already be pricing in future growth.
Average assumed achievable rent
JPY 50,000
JPY 45,000
JPY 40,000
JPY 35,000
JPY 30,000
JPY 25,000
JPY 20,000
JPY 15,000
JPY 10,000
JPY 5,000
Mar-05
WHAT IS THE OUTLOOK FOR
J-REITS GOING INTO 2019
By Christian Bernasconi, Managing Director, B&I Capital
While we remain positive, we also believe
that valuations are now in some cases at
a premium to NAV (net asset value) and
expect to see some of the more aggressive
REITs to come to market with secondary
offerings, and our concern is that the
underlying asset prices may already be
pricing in future growth.
Asian REIT markets have had mixed results thus far in 2018
with Japanese REITs (J-REITs) delivering total YTD (year-to-
date) returns of 10.1% in USD versus declines of 7.17% for
SREIT and 7.17% by the Australian REITs in USD terms. There
are many reasons to be sanguine about REITs in Asia going
forward as balance sheets are not overly stretched, and REIT
managements have been locking in long-term debt to reduce
earnings, volatility and refinancing risk in a potential rising
rate environment. Despite the strong performance year-to-
date, we continue to find many sectors in Japan that have
appeal, and we will discuss them below.
12
Mar-09
Mar-11
Nagoya Grade A
Mar-13
Mar-15
Fukuoka All-Grade
Mar-17
Mar-19
Tokyo Grade A
benefited from a strong increase in inbound tourism which has
helped the overall economy. It is likely to be selected for the first
integrated resort which will be another attraction to the city
that acts as a hub to Kobe and Kyoto. We believe that rents will
continue to increase for the foreseeable future due to llimited
supply of office space until 2022 and 2024 and robust economic
activity, and we favour Osaka-exposed J-REITs. Fukuoka, with
the strongest demographic growth and steady job creation, has
almost no new supply in the next couple of years, and according
to Miki Shoji, the vacancy in its latest report fell to 2.4%, the
lowest since it started its survey.
We favour the groups that are focused on driving dividends
higher through asset reshuffling or via rental increases over
those REITs that may end up paying record prices for properties
that are in scarce supply in the office market.
Market
Mar-07
Osaka Grade A
We believe that rents will continue to
increase for the foreseeable future due to
limited supply of office space until 2022
and 2024 and robust economic activity,
and we favour Osaka-exposed J-REITs.
Vacancy rate
20%
15%
U N D E R S U P P LY I N O S A K A
AND FUKUOKA
10%
5%
We believe investors should also consider the regional
metropolitan cities outside of Tokyo. While it is quite well known
that significant supply will enter the Tokyo market in 2020, this is
not the case for the major cities outside Tokyo. Due to very high
vacancy rates in the past few years, developers were hesitant
to plan new developments, and as a result, the supply pipeline
in cities like Osaka and Fukuoka are virtually empty at a time
when vacancy levels are now back to historic low levels with both
regions’ economies growing quickly.
0%
Mar-05
Mar-07
Osaka Grade A
Mar-09
Mar-11
Nagoya Grade A
Mar-13
Mar-15
Fukuoka All-Grade
Mar-17
Mar-19
Tokyo Grade A
L O G I S T I C S S U P P LY T O P E A K
IN THE NEXT YEAR
Exacerbating the undersupply situation is the conversion of office
buildings in Osaka into hotels and residential facilities which
has led to weaker RevPAR (revenue per available room) growth
for hotels in Osaka despite strong inbound visitors and lower
rents on renewals for multifamily apartment owners. Osaka has
Logistic J-REITs, once a darling of the J-REIT sector due to solid
acquisition growth and a firm backdrop of demand for modern
logistics assets have suffered this year due to concerns about
overbuilding in Tokyo and Osaka as well as large equity issuance
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