TOKYO -- Listed Japanese real estate investment trusts seem about to regain their footing as yield-hungry regional banks move in, potentially stopping a downturn that began in the summer.
The Tokyo Stock Exchange REIT Index slid 0.77% Friday to 1,773.06. The index has sunk substantially since approaching 1,900 at the end of July. "Foreign investors are selling, and buying by domestic financial institutions, which are supposed to provide downside support, is rather weak," says a market observer.
The Bank of Japan's January decision to adopt negative interest rates was expected to drive regional banks -- already struggling to generate investment returns -- to the REIT market for greater yields. But data from the TSE shows banks have often been net sellers of REITs this year. From January to September, banks besides the BOJ sold about 50 billion yen ($481 million) more in REITs than they bought.
The tide began to turn this month. A regional bank with a long history of investing in REITs had held back for a few months, seeing little prospect of rent growth this fiscal year. But the bank says it has resumed buying as many REITs have become a bargain. Thanks to the market correction, the weighted average of REIT dividend yields has risen to 3.6%.
A fund manager at Sumitomo Mitsui Asset Management says that regional banks' appetite for REITs is growing. He closely follows offerings of new REIT shares, noting that some recent issues have been eight to 10 times oversubscribed. Public share offerings allow investors to buy in at discounts of few percent to market prices. For regional banks desperate for as much yield as possible, these sales present a golden opportunity.
Reflecting solid demand, REITs that have announced additional share issuances since July have underperformed the TSE REIT Index by just 0.4 percentage point on average between the date of announcement and the date of pricing, compared with a nearly 2 point gap in the first half of the year. Investors who could not get in on recent issuances are buying shares on the market, the fund manager explains.
A recent change in BOJ policy is partly driving REITs' popularity among regional banks. With the BOJ now trying to keep long-term interest rates around zero, volatility on the long end of the yield curve has subsided. "Stable interest rates reduce volatility in REIT prices, so we can now invest with peace of mind," says an official at a regional bank in western Japan's Chugoku area.
Another thing going for REITs is a lack of other options. Regional banks have actively invested in foreign bonds, but with foreign-currency-funding costs running high, holding the bonds does not generate enough of a return in yen terms. Expectations of a U.S. interest rate hike are pushing up Treasury yields. Miscalculating the timing of investment could generate losses.
As a result, regional bank money is flowing into REITs. But an asset manager at one major regional lender describes the sector's predicament.
"Its hard to boost earnings by lending, so there is more riding on the asset management side," this person says. "Even so, taking on risk could get us cautioned by the Financial Services Agency."