Friday, September 30, 2005

Time for a Market Correction?

A few market observers have warned that the Tokyo property market is overheating and may see price adjustments on property prices. The main causes are REITs and funds buying properties at unreasonably high prices, and a looming interest rate rise.

Investors surveyed by Waseda University (see previous post) said recently that while they expected to see less price increases in the coming months, they still saw further yield compression. Yesterday, Ryosuke Homma, the CEO of Kenedix, said that many investors have paid too high prices for properties that may not give sufficient return on investment (see this Bloomberg interview): “You will see price adjustment for properties, just like bonds or stocks, depending on economic environment. Competition leads to higher prices, and rapid changes in real estate prices may result in an adverse correction …when interest rates go up, cash flow may shrink tremendously.”

JREIT share prices may also fall further. In mid-July, the Tokyo Stock Exchange REIT Index reached a peak of 1,600, but since then it has fallen to1,500. Why? Interest rates. The dividend yield of real estate investment trusts listed on the Tokyo Stock Exchange used to be around 5%. Now it has declined to 3.36 percent, which gives a spread of 1.9 percent over the 10-year Japanese government bond yield of 1.46%. Now, Shinsei Bank’s Hitoshi Ito predicts that the JGB will rise to 1.6% towards the end of 2005. This will make REITs less attractive to insitutional investors like Japan’s regional banks, who have been large buyers hitherto. It may be the case that there will be winners and losers among the JREITs in the coming months.

On a contrary note, I should add that some other analysts such as Mizuho Securities' Takashi Ishizawa say that investors have already factored in a possible interest rate rise (until 2%) in the current JREIT prices, and the recent fall reflects an appopriate reaction. So a precipitous decline in the short term seems unlikely. However, previously I have mentioned that when compared to underlying asset value, Japanese REITs trade at a 30-40% premium, while globally it is –20% to 0% (Morgan Stanley). So even with the relatively larger spreads vis-à-vis bonds, current prices may be unsustainable in the long run.

Related: Nikkei Industrial Daily - JREIT Outlook: Yields Down, Price Adjustments Seen Likely

Japan Real Estate Blog
Tags : japan, real estate, property, investment, 不動産


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