BoJ scores small victory with Japan property boost

TOKYO: For the mere sum of US$55 million (RM167.75 million) Japan's central bank has lit a spark under the property market that if sustained could help the authorities in their prolonged battle with deflation.

When the Bank of Japan (BoJ) set up in October a ¥5 trillion (RM183.1 billion) fund to buy a wide range of assets, it earmarked just ¥50 billion for real estate investment trusts (REIT) — of which just ¥4.6 billion have been spent so far.

Analysts have largely dismissed the plan as too small to have a sizable impact on Japan's US$5 trillion economy, but it clearly boosted the ¥3.5 trillion REIT market and there are signs that this is starting to influence broader economic activity.

A handful of REIT operators have taken advantage of the rally to raise funds and are spending them on residential and office space.

"I would say the spillover effect from the BoJ's asset buying was bigger than the announced amount," said Takashi Ishizawa, chief real estate analyst at Mizuho Securities in Tokyo.

"The BoJ's asset buying helped encourage institutional players such as regional banks to return to the market. It gave a nudge to people who were hesitant to invest."

For the BoJ the positive reaction in the property market is a small step in its effort to stamp out deflation, which has plagued the Japanese economy for more than a decade, stifling consumption and investment.

If sustained, the increased investment in the property market, worth some US$24 trillion in terms of asset value, will eventually translate into higher prices. Combined with an upturn in the economy, it could become a powerful catalyst, analysts said.

"If the economic recovery is coupled with the REIT revival, whose gains are now led by excessive liquidity, there's a chance deflationary pressures will ease in the long run," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"At the moment, the economic recovery is mainly showing up among manufacturers. It has to spread to non-manufacturers for there to be rises in other areas such as rental income and lay the groundwork for a possible virtuous cycle."

Trading of Japan REIT's came to ¥414 billion last month, up 73% from October when the BoJ unveiled the scheme and the index has risen 16% since then. Foreign investors turned net buyers of REITs in October for the first time in seven months and have been net buyers since.

While the REIT index has now recovered close to levels before the Lehman shock in 2008, some analysts see room for further gains, not least because the BoJ — having used up just 9% of its budget — is likely to buy more.

Nomura Securities forecasts that the index could rise further 10% this year from its current levels.

The average dividend yield for Japanese REIT is about 4.6%, putting the spread over the 10-year government bond yield at around 330 basis points. The index could rise until the spread narrows below 300 points, Nomura says.

"As long as investors see the risk of a drop in REIT prices as small, they are expected to continue buying on dips," said Tomohiro Araki, an analyst at Nomura Securities.

The inflow of money into the REIT market is leading to more fund-raising and property acquisitions by investment trusts.

Last month, Nippon Building Fund , Japan's largest REIT, announced a ¥30 billion share offering and that it would spend US$540 million for four office buildings and part of a fifth across Japan, ending an acquisition drought of nearly a year.

Japan Real Estate Investment , another major REIT, bought an office building in Tokyo this month for about US$150 million, while ORIX REIT picked up an office tower for ¥5.5 billion.

"The BoJ's asset buying created an environment where REITs find it easier to carry out public offerings and asset purchases," said Koji Kiyosawa, an executive officer of Japanese property developer Mitsubishi Estate.

The REIT market revival is a welcome sign for Japan's property market, in the doldrums since the country's asset-inflated bubble popped in the early 1990s.

An index of commercial land prices fell to 88.7 in 2010 from a peak of 148.8 in 1991 and compared with the benchmark 100 level set in 1985, data from Toshi Mirai Research Institute shows.

Even so, the BoJ should be cautious about topping up its REIT buying as it risks crowding out other investors and distorting natural price formation, analysts said.

The BoJ also feels there is little room to increase its REIT buying given the small size of the market, even if it were to boost the overall size of its ¥5 trillion asset buying fund.

"The announced ¥50 billion had a pump-priming effect and should be enough," said Mizuho Securities' Ishizawa.

"The market should then be left to grow on its own and the BoJ doesn't need to engage in it in the way other investors do." — Reuters

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