Of Interest


Thursday, September 30, 2010

REITs Back to Life as Buyers

Acquisitions exceed 150 billion yen, deals for condos also become active.

Nikkei Real Estate Market recorded 288 cases of sales during the
period from January through March 2010, representing a year on-
year gain of 13% and a sign that the market is recovering. The
demand is being pulled by major J-REITs that have switched to
the offensive with the improved capital raising environment. The
REITs are in fact rebuilding their portfolios, with their more than
150 billion yen [$1.6 billion] in acquisitions offset by 90 billion
yen [$960 million] in sales. The residential market is seeing more
transaction activity, including condominium sites and mid-development

The trend of a recovery in the REIT market has
become clear with the improvement in the capital
raising environment. Figure 1 shows the history of
transaction amounts for REITs by quarter, and the
trend of capital raising through REIT public offerings
by quarter is indicated in Figure 2. There were 34
acquisitions between January and March 2010 for a
total of 159.1 billion yen [$1.7 billion]. Although this
is far less than previous levels, it is the second straight
quarter following the period from October through
December 2009 in which 150 billion yen [$1.6 billion]
has been exceeded. Although the deal is not shown in
the figure, in April Mori Trust Sogo REIT acquired
50% joint ownership in the Tokyo Shiodome Building
for 110 billion yen [$1.2 billion].

An analysis of the capital raising conditions of REITs
shows that there have been repeated capital raisings
since November 2009, when a public offering was
conducted for the first time in 15 months. Most of
the capital that has been raised has been applied to
the acquisition of properties. January 2010 saw the
first issuance of investment corporation bonds in a
public offering in 20 months. The first, conducted by
Nippon Building Fund, raised 10 billion yen [$110
million] and was followed by four other REITs.
While there have been repeated acquisitions of largescale
properties, another feature of recent REITs is that
there has also been an increase in sales. In the January
to March 2010 period, there has been 91.2 billion yen
[$970 million] in sales. These include such REITs as
Invincible REIT, which sold 46 properties including
Growth Maison Ginza over several deals to raise 27.3
billion yen [$290 million] as a means to suppress
interest-bearing debt. However, there are also more
cases of REITs rebuilding their portfolios through
dynamic sales and acquisitions of assets. Japan
Retail Fund sold Urawa Parco for 26.1 billion
yen [$280 million] and used that money to acquire
seven properties in Tokyo and Osaka consisting of
retail facilities and plots of leased land under the
facilities. Their acquisitions totaled
approximately 24.4 billion yen
[$260 million]. ORIX JREIT
sold two office buildings in Tokyo
for a total of 13.1 billion yen [$140
million] and acquired six properties
consisting of logistics facilities and
retail buildings for a total of 31.5
billion yen [$340 million].
An analysis of the entire market
including non-REIT transactions
reveals that the number of deals
posted a year-on-year increase
following the October to December

2009 quarter. Figure 3 shows a
history of deals by property type
through year-on-year comparisons.
Hous i n g r ebounded f r o m i t s
preceding drastic slump to increase
by 153% and post deals roughly 2.5
times that of the same period a year
F igu r e 4 i s a l i s t o f m a j o r
transactions during the period.
Of the transactions for which the
prices are known, there were 12
transactions worth at least 10 billion
yen [$110 million] including bulk
sales. The most expensive property
was the former Mitsukoshi Ikebukuro
store, whose sale agreement was
concluded in September 2008 and
which was sold in January 2010
with all cash provided by home
appliance retailer Yamada Denki.
The second largest transaction was
the 45 billion yen [$480 million]
acquisition of the Aoyama Building
by a fund of Mitsubishi Jisho
Investment Advisors. The seller
was Mitsubishi Estate, which
registered a valuation loss on its
equity investments of 54.4 billion yen
[$580 million] due to the impairment
loss of Tokyo development sites and
other reasons in its settlement for the
March 2010 period. Nevertheless,
the company secured a profit for the
year by generating 22.9 billion yen
[$240 million] in profit through this deal. Nippon Oil bought 27% of the interest in the
Resona Maruha Building from Mitsubishi Estate for
42 billion yen [$450 million] and simultaneously sold
11.64% of the interest in GranTokyo South Tower for
40 billion yen [$430 million].
Figure 5 below takes the office buildings sold during
this quarter and the previous quarter for which the
price is known and indicates the sales price per square
meter of rentable floor space (unit price per square
meter). Figure 6 indicates the distribution of cap rates
estimated based on new closing rents and vacancies
using the weighted average by area.
In this case, the average unit price per square meter
for the five central wards of Tokyo is 1.95 million
yen [$21,000] and the cap rate is 3.7%. The average
unit price per m2 for Chiyoda Ward is high at 2.69
million yen [$29,000] and the cap rate is low at 3.2%.
These numbers were impacted by two large deals:
GranTokyo South Tower and the Resona Maruha
Building. An analysis of the cap rate distribution
shows that there are many cases in Chiyoda Ward and
Minato Ward where the cap rates are on the 3% to 4%
level and that the cases in Shinjuku Ward and Shibuya
Ward often surpass 5%.
Further, note that there are cases where the cap rates
differ from the actual returns since the cap rates
assume that vacant buildings are filled by tenants and view all buildings as solely office buildings, even when
a building contains retail stores and/or residential
Price of Ark Mori Building drops by 40%
Figure 7 indicates the cap rate of office buildings
transacted during this period in ascending order by
cap rate. Clearly, the highest unit price per square
meter was the 4.31 million yen [$46,000] registered
with the GranTokyo South Tower and the lowest cap
rate was 2.5% for the same transaction.
The next lowest cap rate was the Roppongi Hills
Mori Tower transaction in which Mori Hills REIT
acquired a portion of the tower from its sponsor
Mori Building. After the acquisition, Mori Hills
REIT is leasing the property to Mori Building at
a fixed rent. The cap rate calculated based on the
disclosed rental income is 4.1% but according to
our calculations, which take into consideration the
high vacancy rate in the area, the cap rate is 2.6%.
Similarly, the Ark Mori Building acquired by the
same REIT had a unit price per square meter of 2.43
million yen [$26,000]. The REIT also acquired part
of the same building in March and September 2008
and the respective unit prices per square meter at
those times were 4.15 million yen [$44,000] and 4.21
million yen [$45,000], respectively. This means that
the unit price in the past two years fell by around

In areas other than the Tokyo metropolitan area,
the number of overall deals remains low and office
buildings transactions are rare. The JPR Nagoya
Sakae Building and NBF Hakata Gion Building were
both sold as a part of the process of REITs rebuilding
their portfolios. The price of the NBF Hakata Gion
Building fell by 16% compared to its acquisition in
2001. In Osaka City, the former Access Headquarters
Building and one other building sold for about 7
billion yen [$75 million], 30% of the price three years
In accordance with the increase in residential
transactions, the acquisition of condominium sites
particularly stood out during this period. Among
the noteworthy cases are the acquisition of entire 
buildings in in-process developments as well as
finished rental condominiums and conversion of them
into for-sale condominiums. Figure 8 shows the
deals for condominiums being subdivided and resold,
and Figure 9 indicates the deals for condominium
Four condominiums bought to be subdivided and
resold were acquired from the bankrupt Morimoto
and Eisen Realty. The buyers, Clearth Life and
Daiichi Realter, are focusing on this business of
acquiring condominiums whose entire buildings are
sold and subdividing them for resale. Meanwhile,
Confort Yotsuya and Fabian are properties that were
built several years ago. These will be subdivided and
sold after renovations.


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