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Invest in Japanese real estate: Saizen REIT and Croesus Retail Trust.

Monday, July 8, 2013

Over the weekend, I spoke with a friend who told me that his uncle is interested in investing in properties in Japan. Actually, he is not the first person to talk to me about the subject. Two other people spoke with me in the last 3 or 4 weeks expressing the same interest.

Ever since Prime Minister Shinzo Abe launched "Abenomics" in order to break the country out of vicious deflation which has lasted some 20 years, there has been renewed optimism that Japan could finally grow its economy once more. Although some might claim that Japan has joined USA and Europe in devaluing currencies, Japan has claimed that it is only bringing its currency down from an over valued position to a value that is more in sync with the current value of the US$.

Against the S$, the JPY has come down more than 20%. So, not only is Japan once again a less expensive destination for holiday seekers from Singapore, together with early signs of economic growth, it has also become a more attractive investment proposition.

Therefore, it should come as no surprise that some in Singapore should be looking at investing in Japanese real estate now. Indeed, anecdotal evidence shows that American and Chinese investors have already started doing so.

However, unless we have a lot of money and we have someone whom we can absolutely trust in Japan, I would caution against investing directly in Japanese real estate. It is complicated for foreigners to actually own a piece of real estate in Japan and we also do not have access to housing loans in the country. So, 100% cash down is required.

If we are really interested in investing in Japanese real estate, be it for rental income or possible capital appreciation, there are options right here in Singapore. Regular readers would have guessed the answer.

Off the top of my head, Saizen REIT is currently trading at about 20% discount to NAV even after the JPY has weakened so much against the S$. Gearing level has increased to 39%. At 18.7c a unit and a more conservative estimate of a 1c annual DPU due to the much weaker JPY, we are looking at a distribution yield of 5.35%. 

I do not think we can do better than this by directly buying an apartment in Japan without any leverage. The theoretical non-leveraged yield of Saizen REIT is about 3.85% and it is truly passive income compared to being a landlord of an apartment.

What about Croesus Retail Trust? It is now 96c a piece. Before the launch of "Abenomics", I was pessimistic about the retail sector and, consequently, shopping malls in Japan. In its 2011 report, Starhill Global REIT's  management said as much although not in the same words.

However, anecdotal evidence shows a revival in the Japanese retail sector since the launch of "Abenomics". As inflation returns to the Japanese economy, the people no longer defer purchases in the hope of lower prices in a deflationary environment. Consequently, this means brighter prospects for Japanese shopping malls.

At its IPO price of 93c a piece, it projected a distribution yield of 8%. However, the Trust's gearing level of 48% based on the appraised value of its properties is much higher than Saizen REIT's current gearing. Of course, gearing will magnify gains. Nonetheless, the theoretical non-leveraged yield of Croesus Retail Trust is 5.41%.

With a brighter outlook for the Japanese economy and retail sector, Croesus Retail Trust is beginning to look attractive as an investment for income.

In conclusion, with Japan's fortunes seemingly turning up, there will be an increasing level of interest in investing in Japan and real estate will be a natural consideration. We don't have to look too far to benefit from the improving fortunes of the country.

Related posts:
1. Croesus Retail Trust
2. Saizen REIT: Refinancing.

"REITs that buy apartments benefited from a shortage of new supply and a stable number of tenants in a nation where less than half of Japanese under the age of 40 own their own home. Japan has accelerated efforts under Prime Minister Shinzo Abe to end deflation and boost the world’s third-largest economy, including measures to revive the property industry, which has been struggling since an asset bubble burst two decades ago. The government has a target to increase assets owned by REITs by 40 percent by 2020. "
(Source: Japan Apartment Real Estate Proving Best: Riskless Return)


Mervin said...

Sorry to ask a stupid qn.

How do you calculate non-leveraged yield?

AK71 said...

Hi Mervin,

This is something I came up with to put things in the proper perspective for people who are going to buy Japanese real estate with 100% cash (i.e. no leverage).

So, let us assume an apartment that costs $500k gives us a rental income of $20k a year. This gives us a gross yield of 4%.

Now, if we paid for the apartment 100% in cash, the return plainly is 4%.

However, let us say, of the $500k, we only paid $250k and the rest we borrowed. That is a leverage of 50%. So, $20k rental income on our cash outlay of $250k means an 8% return!

So, if we work backwards, we will get the non-leveraged yield.

Obviously, there are other costs involved in the ownership of a property, so unless the net non-leveraged yield from such ownership is higher than what we can get from Saizen REIT's non-leveraged yield, for example, it doesn't make much sense to directly own Japanese apartments for rental income.

ken ken said...

Hi Dw

I would like to explore in REIT stock
DO you think it is the right time to get in saizen reit, first reit and croesus reit?

ken ken said...


I would like to explore in REIT stock
DO you think it is the right time to get in saizen reit, first reit and croesus reit?

AK71 said...

Hi ken ken,

Are you sure you got the right blog? ;p

I do not know if the timing is right or wrong but I am not adding to my long positions. I haven't increased exposure to REITs since November 2011, iirc.

You might want to read this:
REITs: Are we asking the right questions?

Anonymous said...

I believe REITs still have the potential, mainly because of the high yield.

But the million dollar question is, should we invest in Japan REIT, or other countries? No doubt Yen is weaker, so do the economy of Japan. Still not much confident in their industry. Even electronics, cars are not coming up strong nowadays.

AK71 said...

Hi Vanson,

Well, we just have to remember that all investments are good at the right prices. ;)

AK71 said...

Hi Capricon,

See my reply to Mervin above. :)

AK71 said...

The Bank of Japan ramped up its vast monetary easing programme on Friday (Oct 31) - sending the yen plunging and stocks soaring - in a surprise move aimed at reviving growth just as the Federal Reserve winds down its own stimulus spree. After a one-day meeting, policymakers said they would add up to ¥20 trillion (US$182 billion) to the central bank's current asset-buying scheme, bringing it to ¥80 trillion annually.

The decision sent the yen sinking to 110.90 against the dollar, levels not seen since January 2008, while Tokyo's Nikkei 225 stock index soared more than five per cent.


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