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* NISA helps power listed REIT index to 13-month highs
* Demand for private REITs also growing-Goldman
By Lisa Twaronite and Ayai Tomisawa
TOKYO, June 12 Yield-hungry investors have been betting that Japanese real estate investment trusts will pay off as asset prices rise and interest rates remain stable, with the instruments growing in popularity among both retail and institutional investors.
The Tokyo Stock Exchange REIT Index pushed to 13-month highs this month, and has risen around 3 percent so far this year, helped by the introduction in January of the Nippon Individual Savings Account (NISA).
The tax-break facility was set up to give Japanese retail investors incentive to move their funds to other assets from historically low-earning saving accounts, whose cash value erodes as the Bank of Japan slowly moves closer to meeting its 2 percent inflation target.
"People have started realizing inflation is really coming," said Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas in Tokyo, to explain REITs' appeal.
"I think it's an inflation hedge," he said. "This kind of fear is pushing some money into higher-yielding assets instead of just bank deposits."
Listed REITs are similar to stock mutual funds in that they are shares of a portfolio of properties and trade on exchanges, with dividend yields derived from the rental income. REITs are somewhere between stocks and bonds in terms of risk/reward metrics.
The REIT index's return of 3.8 percent based on forward dividend projections dwarfs the 10-year Japanese government bond (JGB) yield, which trades around 0.60 percent. It is also solidly above the U.S. benchmark 10-year yield , which closed at 2.64 percent in U.S. trading on Wednesday.
Strategists at Nomura put their upside target for TSE REIT Index at of 1,750, compared to its current level around 1,550. The target is approximately a 200 basis point yield spread over a cautious assumption of a 10-year JGB yield of 1 percent.
"When you compare REITs yields with long-term government bond yields, it is obvious which is more attractive," Takatoshi Itoshima, chief portfolio manager at Commons Asset Management. "So if long-term yields start rising, REITs will become less attractive."
Higher interest rates could also raise borrowing costs for REIT managers, making it harder for them to maintain their dividends.
For now, though, rates in Japan are still low compared to the rest of the world, and are effectively moored to ranges by the BOJ's massive asset-buying scheme, under which it buys the equivalent of 70 percent of new JGB issuance each month.
"There are a lot of optimistic views that [interest rates] won't change so drastically," said Hiroyasu Kaizuka, who manages Goldman Sachs Asset Management's private $600 million Japan REIT.
Japanese institutions comprise most of its investors, he said, but inquiries from overseas institutions began rising last year.
Traditionally, Japanese investors have also used REITs to hedge against not inflation but deflation, expecting their dividends to exceed potential gains from stocks as asset values dropped.
"We see an inverse correlation between the performances of the stock market and REITs," Yoji Otani, a real estate analyst at Deutsche Securities. "When the market is weak, we see more investors making defensive investments by expecting steady dividend yields than chasing the market higher for capital gains."
REITs whose portfolios include top-notch buildings in Tokyo's Marunouchi area like Nippon Building Fund Inc are less attractive because their popularity has cut into their upside potential. Toru Ibayashi, executive director at UBS Wealth Management, sees more value in second-tier REITs which own office buildings in other Tokyo neighborhoods, or even outside the capitol.
These include Orix Jreit Inc, which invests in buildings in Tokyo areas such as Shinagawa and Shinjuku, and Mid Reit Inc, which invests in office buildings in Osaka.
Ibayashi also says GLP J-REIT, which operates logistics facilities, has growth potential as e-commerce transactions rise in Japan. (Editing by Kim Coghill)
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