The catastrophic tsunami, earthquake and nuclear reactor events in Japan have increased fears and led to the cancellation of some deals in the stock market. The Bank of Japan has bought assets to help stabilize the markets. The purchases include real estate investment trusts, which are threatened by the potential of plummeting property values.
If you have an investment portfolio or have wanted to diversify your portfolio, you may have heard of real estate investment trusts, also known as REITs. This is either a company or business trust. In this case, investors combine capital to acquire and provide financing for real estate such as apartments, hotels, offices, warehouses and shopping centers.
Right before Japanese Real Estate Investment Trusts, or J-REITs, were introduced, Japan changed its Investment Trust & Investment Corporation law. This helped to create the investment tool because it “expanded the allowable use of capital by investment trusts to include real estate,” according to the Journal of Real Estate Literature’s 2006 report “The Growth of the REIT Market in Asia.” This was part of Japan’s effort to make its financial markets more competitive after its severe recession in the early 1990s.
“The Tokyo Stock Exchange followed up in March 2001 with a listing system for REITs to be traded on its market,” the report stated. “Six months later, Japan became the first country in Asia to launch REITs…” By June 2005 17 J-REITs were trading and worth more than $1 billon. Nippon Building Fund led with nearly $3 billion.
Credible sponsors and strict regulations were just a couple of reasons why they became so attractive, according to PricewaterhouseCoopers report, “The Growth of J-REITs in the Japanese Real Estate Market and Real Estate Investment Structures: An Overview.” Most of the J-REITs investors included local banks, individuals and foreign investors.
J-REITs struggled during the recent global recession, but lately the Asia-Pacific Real Estate Association, which promotes and represents the real estate sector, indicated in its news release, the Asia-Pacific REIT market’s capitalization increased by 22.8 percent year-on-year in 2010 to $156.8 billion. This marked a strong recovery since the global financial crisis when it stood at $66 billion in March 2009.
FRI, a J-REIT, which specializes in retail properties, held a leading position in the market. According to Reuters, its real estate portfolio included 24 properties across the country.
Jon-Paul Toppino, president of SCJ Investment Management remained optimistic telling the Wall Street Journal in the article “Japan Spooks Its Property Recovery,” that “absent the nuclear uncertainty, I don’t believe there would be any long-term negative impact to the Tokyo real-estate market.” The firm has an office building in the hardest hit area, Sendai, but it was barely damaged.
However, the paper indicated that “Japan’s publicly traded landlords have lost as much as 20 percent of their value since the earthquake struck.”
How at risk are J-REITs? How do you think they will recover?
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