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Land boom gives boost to REIT bonds

Bloomberg

The nation’s real estate investment trusts are offering the most bonds since 2012 as Prime Minister Shinzo Abe’s stimulus steps spark a property-market boom and cut costs for REITs to refinance.

Five issuers, including Sekisui House SI Investment Co. and GLP J-Reit, have sold ¥25 billion in notes so far this month, the most since November 2012, data compiled by Bloomberg show. Sekisui offered five-year debt at 0.374 percent on Feb. 18, compared with 0.63 percent for similar-maturity bonds a year earlier. The average yield on U.S. REIT debt was 3.1 percent, according to Bank of America Merrill Lynch data.

Abe’s stimulus program to beat deflation has spurred a revival in the real estate market that has seen one gauge of prices stay near the highest in more than four years. Mizuho Securities Co. expects the trusts to focus on refinancing debt after industry data showed they raised ¥1.1 trillion via equity sales last year, more than double the amount in 2012.

“J-REITS can’t make investments now even if they boost equity because real estate prices have gone up so much,” said Takashi Ishizawa, the chief real estate analyst in Tokyo at Mizuho Securities, a unit of the nation’s third-largest bank by market value. “They are instead trying to improve their finances by issuing bonds at a low cost.”

A measure of investment yield fell as real estate prices rose. The capitalization rate for office buildings, or a property’s net income as a percentage of its purchase price, in Tokyo declined to 4.88 percent in October, the lowest since August 2009, and was at 4.98 percent in December, according to New York-based Real Capital Analytics Inc.

Investors are encouraged by an improvement in the outlook for the office market, where rents climbed 0.2 percent in January after five straight annual declines. Office vacancies, a measure of unoccupied space, in Tokyo fell to 7.2 percent in January, the lowest since May 2009, according to brokerage Miki Shoji Co.

Property transactions in the Tokyo metropolitan area more than doubled to ¥1.51 trillion for the six months that ended in September from the same period a year earlier, while sales in the rest of the country gained 75 percent to ¥446.5 billion during the period, according to a survey by Urban Research Institute Corp.

Japanese property prices have more scope to rise as a falling local currency may lure money from abroad into the market, according to Credit Suisse Group AG.

“There’s a possibility that not only J-REITs but overseas investors through private placement funds will buy Japanese real estate,” Masahiro Mochizuki and Atsuro Takemura, analysts at the Swiss bank, wrote in a report dated Wednesday.

“The more the yen weakens and interest rates fall, the more that Japanese real estate will be an attractive asset for overseas investors.”

The Japanese currency depreciated about 18 percent last year as the Bank of Japan, led by Abe’s hand-picked Gov. Haruhiko Kuroda, poured about ¥7 trillion a month into the market through sovereign-bond purchases.

The yen will fall to 110 per dollar by the end of 2014, according to a Bloomberg survey of analysts, versus 102.29 as of 9:42 a.m. Thursday, in Tokyo.

Borrowing costs for Japanese REITs have dropped in the past year, as the benchmark 10-year government bond yield fell to 0.605 percent Thursday from 0.735 percent a year earlier.

Mori Hills REIT Investment Corp. sold ¥5 billion in bonds on Feb. 7, including ¥2 billion of seven-year notes with a yield premium of 34 basis points, the lowest it’s ever paid for that maturity, according to data compiled by Bloomberg. The Tokyo-based trust has an “AA-” grade from Japan Credit Rating Agency Ltd., the fourth-highest level.

Sekisui House SI also offered 10-year debt, its longest maturity ever, at a spread of 46 basis points, or 0.46 percentage point. The trust will use ¥4.9 billion of its latest ¥5.5 billion issuance to pay back short-term loans, said Ichiro Nitta, who is in charge of investor relations at Sekisui.

“We’ve been able to lengthen our borrowing period,” Nitta said. “The issuance environment is good.”

The average spread on Japanese corporate bonds has fallen 16 basis points in the past year to 26 as of Wednesday, according to Bank of America Merrill Lynch index data.

J-REITs acquired properties worth ¥2.23 trillion in 2013, almost triple the previous year, according to the Association for Real Estate Securitization.

“There’s strong demand among J-REITs to acquire properties once again this year,” said Credit Suisse’s Mochizuki.

“Total capital costs including equity and debt have come down a lot, so there’s good incentive to acquire properties,” Mochizuki added.