TOKYO -- Investors are increasingly sizing up Japanese real estate investment trusts' growth potential as good dividend yields prove hard to find.
REIT buyers generally look for a spread of at least 3 percentage points over long-term interest rates. But they are being consistently disappointed in this regard by pricey J-REITs. The sector has pulled ahead of its overseas peers: the Tokyo Stock Exchange's REIT index has risen 12% since the end of March, compared with gains of just 2% for the U.S. and 8% for Australia.
Dividend yields have shrunk as a result and now average around 3.4% for listed J-REITs, down roughly 1.2 percentage points from the end of 2012. With Japanese 10-year interest rates hovering around 0.5%, the REIT premium has remained below 3% since late May.
Falling yields typically depress REIT gains, but there is little sign of that happening now. Indeed, some market watchers see the spread thinning to less than 2.5%.
J-REITs are riding high on improved property market metrics. The average office rent in central Tokyo, a closely watched barometer, rose on the year in May for the first time in 65 months. Land prices in Japan's three major metropolitan areas have climbed for two straight years, notes Mototsugu Ota at Sumitomo Mitsui Trust Asset Management, who concludes that "property values have entered an upturn."
J-REITs went through a similar phase in 2004-06, when yields averaged in the low 2% range. Investors had to settle for meager short-term returns, but they could look forward to dividends rising on the back of higher earnings.
"Growth potential is becoming a factor in choosing" REITs, said a fund manager at Mizuho Asset Management.
Tomohiro Araki at Nomura Securities says foreign investors are showing a keen interest in REITs with hotel portfolios, given their potential to benefit from rising numbers of international tourists visiting Japan. One of the country's top regional banks has cut its holdings of large-capitalization office REITs while shifting more money into small- and midcap trusts, which "get a bigger dividend boost from new property acquisitions," according to an investment officer at the bank.
Hoshino Resorts REIT, logistics property-focused Nippon Prologis REIT, and Hankyu REIT, which blends office and commercial holdings, have delivered big capital gains for investors since the end of last year. By contrast, Nippon Building Fund, the country's biggest office REIT, is down nearly 10%.
Like listed companies, REITs try to sell themselves to investors. That may become more important as the market grows selective.