2012 REIT report

Japan: J-REITs are slowly recovering with new IPOs in 2012

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Current market

Although Japan's J-REITs did not have significant property exposure in the region decimated by the country's March 2011 earthquake, their share prices fell as a consequence of investor concern about the earthquake's effects on Japan's economy and real estate markets.

In the short term, J-REITs will continue to benefit from opportunities to acquire properties, raise capital through new IPOs and merge with or acquire other REITs.

Market outlook

J-REITs are expected to continue raising equity and debt capital for property investment in 2012. Office properties account for more than half the value of the properties owned by J-REITs, and office REITs are starting to buy assets in Tokyo, where vacancy rates have begun to decline and the office property market may have bottomed out.

Some foreign investors are starting to buy shares of J-REITs, among other reasons, because returns may be higher than in other global markets and J-REITs provide stable cash flows.

Challenges

Although there are indications that tenant demand for space is beginning to improve, demand could remain soft and rents flat until Japan's economic recovery is further along. In announcing the downgrading of five J-REIT ratings in March, Moody's said the downgrades reflect its concern about the stagnation of Japan's leasing market and what it saw as a tough environment for the J-REIT equity finance market.

For J-REITs, this year may not be as difficult as 2011, but they still may have to weather a challenging period in 2012 and perhaps beyond.

Opportunities

Japan's financial service agencies are looking at improvements to the
J-REIT model to allow J-REITs more flexibility in raising capital and managing their balance sheets.

Among the ideas under consideration are allowing J-REITs to buy back their shares and issue convertible bonds and to engage in rights offerings. This could provide new opportunities for J-REITs to attract more investment and compete on a more even footing in raising capital globally.

Conclusion

In the short term, J-REITs will continue to benefit from opportunities to acquire properties, raise capital through new IPOs and merge with or acquire other REITs.

But to achieve sustained growth, J-REITs need to develop long-term growth strategies, such as diversification into property sectors other than offices.

Growth will benefit not only individual J-REITs, but also the J-REIT market as a whole, for example, by increasing market liquidity. Over time, a larger, stronger, more diversified market could emerge, one that might attract more interest from both domestic and foreign investors.

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