REIT ASIAPAC
F E AT U R E
“Tapering of J-REIT purchases by the BOJ
will likely result in some near-term pain
and suffering, and would be significantly
worse if conducted with a hike in interest
rates. Buying support would be taken away
simultaneous with an increase in J-REIT’s
cost of capital,”
includes corporate governance reforms, has encouraged a series
of share buybacks.
Japan’s stewardship code, published in 2014, asks investors to
be more vested in working with their investee companies to
increase long-term returns. A governance code that took effect
in 2015 requires companies to be transparent and responsive
to shareholders. The codes have inspired more buybacks, which
have helped to boost share prices and shareholder value.
Rico Kanthatham
Invesco Office J-REIT was the first to conduct a buyback in
2017, and Ichigo Hotel, Global One, Japan Retail Fund and Japan
Logistics Fund followed suit. The buybacks also come at a time
when finding attractively valued properties to acquire—assets
that generate accretion to DPU (distribution per unit) and NAV
(net asset value) —is no longer as easy as it was a few years ago.
Managing Director & Portfolio Manager,
Asia Pacific Real Estate Equity Securities at Barings
Japan’s REIT market has been a beneficiary of Abenomics.
Besides a significant yield pick-up in an era of Quantitative
Easing (QE), which pushed short-term interest rates into the
negative, J-REIT equity has gained from Bank of Japan’s (BOJ)
asset purchase programme. The BOJ buys 90 billion yen (US$809
million) of REIT units annually as part of its stimulus programme.
A M OV E AWAY F RO M T R A D I T I O N
This wave of buybacks marked a change in how J-REITs utilise
excess capital. J-REITs had been more inclined to use the capital
to acquire assets to increase portfolio size. Investors have
pointed to the number of J-REIT managers who are remunerated
based on the size of their portfolios as an example of how
investors and REIT managers have a divergence of interest in
capital management policies.
These purchases, and the introduction of the Negative Interest
Rate Programme (NIRP) had helped boost J-REIT premiums to
as high as 60% in 2013. From then through 2016, premiums have
stayed between 20% and 30%, and they are currently hovering
around 10%, meaning investors pay more than the appraised
values of the properties that the J-REITs own.
Fe a t u r e
WILL JAPAN’S REIT
SHARE-BUYBACK TREND
RUN OUT OF STEAM?
Abenomics has triggered share buybacks by J-REITS—a move welcomed
by fund managers and shareholders. But what happens after the end of
Quantitative Easing and are buybacks a good use of capital?
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This incentive system has meant that J-REITs have tended
not to buy back their shares as retaining earnings would help
boost the value of their assets under management and thereby
REIT manager fee income. J-REITs also generally prefer to
hold accumulated depreciation on their balance sheet to cover
future capital expenditure requirements. This practice implies
that most J-REITs have a ready stockpile of cash potentially to
allocate to buybacks.
“The programme has acted as downside protection for J-REIT
pricing and has also provided J-REITs with the ability to compete
against private equity buyers,” says Rico Kanthatham, Managing
Director & Portfolio Manager, Asia Pacific Real Estate Equity
Securities at Barings.
B OJ ’ S TA P E R I N G R I S K
“Share buybacks as an alternative use of capital is good in
principal. A J-REIT that is trading at a meaningful discount to
NAV and without the ability to make NAV accretive acquisitions
funded by debt, cash or equity should seriously consider share
buybacks as a means of generating shareholder return,” says
Kanthatham.
However, a risk remains that the BOJ will join other developed
economies in ending its QE programme, the world’s largest
relative to GDP, although Governor Haruhiko Kuroda has been
elusive on the timing of Japan’s eventual exit from QE.
“The tapering of J-REIT purchases by the BOJ will likely result
in some near-term pain and suffering, and would be significantly
worse if conducted with a hike in interest rates. Buying support
would be taken away simultaneous with an increase in J-REIT’s
cost of capital,” says Kanthatham.
“However, while buying back shares may be a short-term positive
for shareholders, it may be long-term negative for a J-REIT’s
capital position”, warns Kanthantham. “Precious working capital,
once taken off the table, may not be so easily recovered via an
equity raise at a later time, as conditions and investor sentiment
could sour. Share buybacks should only be pursued if the NAV
discount is severe, and there is truly no better use of capital.”
While uncertainty remains over the long-term sustainability
of Japan’s stimulus programme, the support provided by the
government, in particular, the third arrow of Abenomics, which
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