Thursday, September 08, 2005

Japanese Real Estate from a Global Perspective

Owen D. Thomas of Morgan Stanley Real Estate gave a fascinating presentation during the ULI Japan Council Meeting in July. Thomas expects continued improvement in both the operating performance (income) and value appreciation of Japanese real estate, although he warns that compared to other countries, JREITS are trading at very high valuations. In view of the increasing convergence and globalization of real estate this could prove unsustainable.

Here are some of the points which he raised:

Less than 8% of all commercial real estate is held in securitized form. Economically developed Asian markets of Hong Kong, Australia, Japan and Singapore (ranked 2, 3, 4 and 9 respectively after the US) comprise $200 billion, or 33%, of global industry market cap, and enjoys the highest share of listed real estate to total equities

Real estate is globalizing. Major industry participants increasingly operate global business platforms. Global funds operators and expansion minded publicly listed property companies are driving cross-border capital flows. Spreads between yields and local borrowing costs for prime office assets in major gateway cities have significantly converged over the past decade.

ProLogis, a US-based REIT with property operations in North America, Europe and Asia exemplifies the new model of the modern
property company:
– Operates globally
– Accesses capital in both public and private debt and equity markets globally
– Owns properties directly, in asset specific joint ventures, in private investment funds and via interests in related public entities which it manages

Japan accounts for nearly $2 Trillion or 14% of the global commercial real estate universe and is the world’s second largest market, behind only the US. Tokyo is by far the world’s largest office market, the size of London and New York's combined. Although yields/cap rates for prime office assets in Tokyo are well below most other major global cities, on a spread basis vs. government bonds, Tokyo prime office yields look attractive compared to most other major world cities. Listed property company share premiums to underlying net asset value appear to be converging globally, except for J-REITs, which are trading at very high valuations.

His report, and many other reports from the meeting, is available at the ULI Japan website.

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