Business / Financial Markets

REIT rally is short-lived after pension fund, BOJ boost

Bloomberg

The rally that sent Japanese real estate investment trusts to their highest in almost seven years appears short-lived as more state buying paves the way for higher taxes, said Deutsche Bank AG and Nomura Securities Co.

The Tokyo Stock Exchange REIT Index jumped as much as 5.3 percent Tuesday but fell back to close 1.1 percent up on the day, after the nation’s pension fund and the Bank of Japan said they would boost property-related investments.

The gains will not be sustained if the Abe administration increases the consumption tax a second time, Deutsche Bank and Nomura analysts said.

Prime Minister Shinzo Abe will decide by year-end whether to raise the levy to 10 percent next year, after lifting it to 8 percent from 5 percent in April. Nomura says the BOJ’s additional easing comes with the tax in mind.

“Although the Bank of Japan said that this move had nothing to do with the government’s decision about whether to hike the consumption tax for a second time, we think it has increased the likelihood of this,” Nomura analyst Daisuke Fukushima said.

“One risk is that investors may regard the announcement of additional quantitative easing as the peak of positive news for the housing and real estate sector.”

The Government Pension Investment Fund will invest as much as 5 percent of its ¥126 trillion portfolio in alternative investments, which include private equity, infrastructure and real estate, it said Friday. The BOJ said it plans to triple the purchase program of REITs to ¥90 billion

The GPIF is a latecomer to alternative assets and the amount it plans to allocate to real estate is low compared to other retirement funds such as the California Public Employees’ Retirement System, or Calpers, according to SMBC Nikko Capital Markets Ltd. Calpers has a 10 percent target allocation to real estate, the fund’s website says.

“Property has been a major part of most long-term pension investment in the rest of the world for decades,” said Jonathan Allum, a strategist at SMBC. “I am really surprised more hasn’t been made of GPIF’s complete lack of property investment. That is being addressed, but the numbers are still very modest.”

The rally will continue for the time being, said Tim Gibson, co-head of property equities at Henderson Global Investors, who manages about $2.5 billion in real estate equities.

The Topix Real Estate Index dropped 29 percent from a peak in December 2013 through Oct. 17 after the government increased the tax in April. The Japanese economy shrank an annualized 7.1 percent in the three months through June.

“There is a high possibility the government will increase the consumption tax,” Yoji Otani, a Deutsche Bank property analyst who accurately predicted the effect of the last tax increase. “I see profit-taking after that announcement. The consumption tax hike will kill the monetary easing effort.”

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