Japan's battered REIT market headed for shakeout

By Nathan Layne

TOKYO (Reuters) - Japan's once-booming real estate investment trusts have been brought low by the global equities sell-off and appear headed for a shakeout being pushed by an activist fund.

The Tokyo Stock Exchange's REIT index has fallen nearly 40 percent from a peak in May and could tumble further as the global credit crisis deepens. But some investors are positioning themselves for when the market turns.

"There is no question the buying opportunity is now," said Yuya Shimizu, who looks for buys in Japan's $40 billion REIT market at Dalton Investments. "The number of attractive REITs has increased significantly."

The market rout will likely accelerate realignment in an industry ripe for it with more than half of the country's 41 REITs trading below the value of the property on their books. Most of those are small players and in need of outside help.

Mergers or acquisitions are unlikely because REITs tend to be held closely by domestic financial institutions that are stable shareholders and not likely to sell. Hostile bids are also improbable as they are frowned on in Japan.

But activist investor Prospect Co is trying to kick-start the consolidation process by urging struggling REITs in its portfolio to sell control of their asset management companies to a big-name sponsor that can supply them with quality properties.

"Somebody has to be the catalyst," said Prospect Chairman Curtis Freeze. "There is a lot of housecleaning to do."

Prospect plans to do just that with its own REIT, Prospect Residential Investment Corp 8969.T, which trades at 0.7 times book value, and is emblematic of the struggles of smaller REITs without the building pipeline needed for steady growth.