TOKYO -- Real estate investment trusts in Japan are quickly shifting to bond offerings as lower interest rates make issuing them a relatively attractive fundraising method.
In fact, the value of bonds floated by REITs in the January-March term is on track to set a record for the quarter.
Profits will likely grow as the trusts slash their interest burdens, meaning investors may see larger dividends. At the same time, the trend would seem to reflect that REITs are slipping into a less favorable position to buy desirable properties.
The trusts use investors' money to buy real estate and distribute income from rents and other sources as dividends. They can raise funds needed to purchase properties by issuing shares or bonds, or by borrowing from banks.
Bond issuances have become a particularly salient means of procuring money. GLP J-REIT, for instance, in late February raised roughly 6 billion yen ($57.5 million) through its first bond offering since going public, and used the funds to pay off loans early.
Yoji Tatsumi at the REIT's operator, GLP Japan Advisors, notes that raising money this way is preferable to loan financing. "If interest rates stay low, we'd like to conduct more offerings," he said.
According to I-N Information Systems, the value of bond offerings by REITs between January and March -- including pending issuances -- totals 63.5 billion yen, roughly four times the figure for the year-ago period. The sum has already reached 60% of the 2013 full-year tally of 108.3 billion yen.
The January-March bond floatation proceeds also stand in stark contrast to the amount REITs raised through share issuances during the first two months, which fell to less than half the figure seen in the same period a year ago.
The uptrend owes to the fact that REITs are now able to offer bonds at lower interest rates due partly to the improved real estate market. When Mori Trust Sogo REIT issued three-year bonds last month, it offered them at 0.24%, down 0.21 percentage point on the year.
"This has a big impact in reducing our interest burden," said Satoshi Horino, president of the REIT's operator, Mori Trust Asset Management.
Since REITs dole out almost all their profits to investors, lighter interest burdens make for fatter dividends. For example, in the six months through June, Japan Prime Realty Investment will likely see lower finance costs boost per-share dividends by nearly 100 yen over the previous six months.
At the same time, the trend would seem to indicate that it is becoming more difficult for REITs to acquire choice real estate. They had been using loans and other funding sources to buy properties, despite high interest rates.
But with the recent price hikes, "More REITs are devoting efforts to improving their financial standings through refinancing or other means," said an official at Mizuho Securities.
Some market watchers see REITs beginning to change the way they grow, shifting away from acquiring properties and focusing more on building profits by cutting costs.