Japan - Japanese REITs are set to boost the already substantial cross-border investment flows in Asia. From 2007, they are expected to be free to acquire foreign properties and incorporate them into their portfolios.
The Japanese government ministry responsible for property law has announced that it plans to set up a body to formulate guidelines on valuation methods and disclosure rules for foreign real estate. By law, J-REITs must have independent appraisals performed to determine the profitability of their assets. Because the appraisal rules have not been set, J-REITs have thus far been unable to invest in foreign assets.
Cross border activity, ex Japan, represents 30% of the total transactional Asian real estate investment; $20bn out of an Asian direct property investment total of $67bn and a doubling in the last two years. With foreign investment flows increasingly targeting the Asian region, Japan remains a key market.
There are currently 36 REITs listed in Japan, with the market having grown to around 4 trillion Yen (over $30bn ) since the first IPO in 2001. Domestic private funds have also grown fast and their total assets exceed that of J-REITs, with 5 trillion Yen.
Although J-REIT dividend yields and prime office yields are low at 3.7%, the 200 basis points yield premium over 10 year government bonds remains attractive for investors. Jon Tanaka, Director for RREEf in Tokyo, is just one who feels Japan still offers "the most attractive spread propositions in the region".
LaSalle Investment Management's CEO for Asia Pacific, Jack Chandler, suggests that improving market transparency will compress the yield premium further, which will attract domestic institutional investors who are currently shy about real estate.
Chandler says, "Cap rates have constantly declined in the last few years and we forecast it will further decline through the end of this year, followed by a modest increase in 2007."
