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Apartments with rental yields of 4.95% to 7.3%.

Sunday, March 23, 2014

In the INVEST section of The Sunday Times, it was reported that more Singaporean investors are feeling bullish about investing in Japanese real estate. 

One agent who is marketing Japanese residential properties said that he would not have expected the craze he is seeing now when he started just a year ago.

It seems that local banks are also jumping onto the bandwagon as UOB and OCBC now provide loans to Singaporeans for purchases of Japanese real estate for up to 70% of the property's value. A year ago, only Bank of China was providing such loans.

Someone who bought a 275 sq ft studio apartment in Tokyo last year for $400,000 is very pleased that he did so. Apparently, similar apartments now go for some 9% higher in price.

I believe in investing in real estate for income. So, what I would like to know is how much is such a property able to generate in rental income. It was not reported in the article.

A search online shows that similar properties in central Tokyo could fetch some $1,800 a month in rent which gives a gross yield of 5.4% per annum. Not bad.

So, am I interested in buying an apartment in Japan now for rental income? Well, apart from the fact that prices are a bit higher now which means that the gross yield for the same 275 sq ft apartment is probably lower now in the region of 4.95%, everything else remaining equal, I am also not comfortable with the idea of plonking so much money in one single property in a country which arguably I am less familiar with than Singapore.

If we were to take a loan for 70% of the value of the property (current value being $436,000), we would still have to fork out $130,800, not including other costs related to the transaction. This is quite a bit of money for most average Singaporeans.

Of course, the beauty of this arrangement is leverage. Taking a 70% loan would mean amplifying the rental yield by more than 200%. So, the gross yield on cost, based on current prices of similar properties, could be above 10%. 

Another attraction of such a purchase is the possibility of selling the property for capital gains in future.

If we are pretty risk averse and would buy such properties without taking any loans, I believe that becoming unit holders in Saizen REIT would make more sense.

1. Buying into Saizen REIT means buying into a portfolio of more than 130 residential buildings (not individual apartments) across Japan which reduces concentration risk.

2. Buying into Saizen REIT means buying these residential buildings at a hefty 20% discount to valuation. I do not think we will be able to buy an apartment in Japan at 20% below valuation.

3. Buying into Saizen REIT means getting a 7.3% distribution yield with current unit price at about 88c. This could reduce to 5.7% if cash of up to 20c per unit were to be returned to unit holders. (Read related post number 1 below.)

4. Buying into Saizen REIT means having a team of managers take care of our properties and we don't have to worry ourselves with work such as rental collection, hedging against foreign exchange risk (if at all possible) and the repatriation of funds.

For someone who is investing for income, who does not wish to take on too much risk and who rather not have too much work in being a landlord, given a choice, investing in Saizen REIT seems like a pretty good idea compared to buying a single apartment in Japan.

Related posts:
1. Is the half yearly DPU of 3.25c sustainable?
2. Below valuation and replacement cost.
3. Fukushima and investing in Japanese real estate.


Unknown said...

Hi AK,

I read this article with great interest. While Saizen Reit has many properties across many regions, how do we assess the risk of earthquakes? This is my main concern since the probability is higher with properties in different regions. Can you share how we can assess such a risk and how to factor that in when considering this reit?


AK71 said...

Hi Cindy,

Not something we can do easily but there are service providers in Japan which estimate the probability of a total loss in the event of an earthquake.

Saizen REIT only owns properties which have less than a 15% chance of a total loss. In the earthquake of March 2011, none of the REIT's buildings suffered any major damage.

The risk of a total loss of our investment is greater if all our funds are locked up in a single property in a single location, definitely, compared to being invested in a portfolio of properties.

SnOOpy168 said...

I am still curious as to how Saizen is performing , vis a vis the other residential REITs in Japan. Prices has drop a bit recently. Only peeve about this REIT is that it pays half-yearly.

AK71 said...

Hi SnOOpy168,

I don't think we can get the kind of yield that Saizen REIT is offering from any residential property J-REITs. ;)

SGYI said...

Hi AK,

Earthquakes is always the concern i hear people saying. When i told my friends i bought Saizen Reit, most of them said what if there is an earthquake?

I didn't know none of Saizen's buildings were damaged by the march 2011 earthquake. Seems like they really know how to choose their properties location.

AK71 said...


I always tell people that very few places on earth are like Singapore to be free of natural calamities. ;)

SnOOpy168 said...

I just wished that Saizen will pay quarterly DPU. Anyway, for a counter whose NAV is $1.1+, I am happy lah.

AK71 said...

I said this in FB and for the benefit of readers who don't follow me on FB, I have reproduced it here:

We should always ask one important question about a REIT's NAV. Is it realistic? An unreal NAV has consequences.

If the NAV is realistic, then, buying at a discount to NAV can be considered a type of asset play.

In the case of Saizen REIT, for example, we can say that the NAV is realistic because when it had to sell some of its properties when it had trouble with YK Shintoku's CMBS a few years ago, the buildings were sold very close to valuation. This was in distressed circumstances too.

Now, a good percentage of Saizen REIT's NAV is in cash. So, that makes the NAV more realistic. ;p In fact, if Argyle, a substantial unitholder, gets its way, we could see a return of this cash to unitholders. Could be as much as 20c per unit. Realistically, this is exciting. ;p

There are many things we can say about NAV and being able to buy at a discount to NAV. The reasons could differ from case to case.

This was in response to a question brought up by someone in FB regarding Saizen REIT trading at a discount to NAV.

AK71 said...

Japan Post on Friday (Dec 26) will announce details of its long-awaited initial public offering in what could be one of the world's biggest-ever share sales.

Plans for the IPO come amid hopes that the move by what is effectively the world's biggest bank could boost investor sentiment and spur efforts to cut red tape in Japan's highly regulated economy. Executives from the government-owned company, which sits on assets worth up to 14 trillion yen (US$117 billion), will discuss their plan at a press conference later in the day, a Japan Post spokesman said.

Japan Post boasts a network of some 24,000 bureaux across many of the thousands of islands that make up the archipelago. The branches also offer services for cash deposits and insurance, and a local branch where many of Japan's ageing retirees withdraw their pension payments.

That system has long drawn criticism both inside and outside Japan, with financial institutions, carrier services and foreign governments arguing that the public body was operating in sectors where it competed directly with private businesses. The government of former Prime Minister Junichiro Koizumi split the state-owned behemoth into four units in 2007, to handle deliveries, savings, insurance and counter services at each of its post offices.

The government retained full ownership of the group at first, with plans for the bank and insurance units to go fully private by 2017. But the plan was stalled after the long-ruling Liberal Democratic Party lost power to the Democratic Party of Japan between 2009 to 2012. After returning to power in 2012, the current LDP-led government has resumed privatisation project.


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