Morgan Stanley prime broker woes seen lasting
NEW YORK Morgan Stanley survived the recent panic in financial markets, but its prime brokerage business may never fully recover.
TOKYO 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 .TREIT 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.
Similiar deals were struck last year by eAsset Investment, which sold a controlling stake to LaSalle Investment Management, and by Crescendo Investment (8966.T), which formed capital ties with Morgan Stanley (MS.N) to breathe life into the REIT.
Those REITS are still wallowing below their book value but analysts predict that more deals are on the way. Some sponsor funds that bought in during the boom in 2005 are eager to sell out while foreign investors are looking for a way in.
"There are some foreign investors eager to put money into the rent business in Japan," said Mizuho Securities analyst Takashi Ishizawa. "The chance for activity is high."
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Proponents of investing in the REIT market point to very high risk-adjusted returns. The average dividend yield is about 5 percent, putting the spread over 10-year Japanese government bonds now at about 350 basis points.
"You are not going to find anything else domestically where you can get a return like this," Ishizawa said.
But with the data on Japan's property market looking increasingly mixed, investors will need to be selective.
Office rents are rising and vacancy rates remain low. But condominium sales have dropped sharply recently and it's unclear to what extent a slowdown in the U.S. economy and falling equities will impact demand for real estate in Japan.
Dalton's Shimizu said some investors got burned because they didn't thoroughly investigate the actual buildings held by a REIT and focused only on the yield. He will typically go and see at least 30-40 percent of the market value of a given REIT.
"It's the same as stocks. If its a manufacturer you check the product. You have to go and look at the buildings."
He likes Top REIT Inc 8982.T, which is trading at 0.94 times book value after being beaten down last year by investors upset that it was forced to slash the rent for a big supermarket tenant at one of its buildings.
Management at the REIT was reshuffled and is taking a more pro-active stance, Shimizu said. He expects the market to reevaluate the REIT given the new management strategy and because its building portfolio is sound.
A rare bright sign for the REIT market came late last month when Nippon Building Fund (8951.T), Japan's largest REIT by market value, said it would raise about 40 billion yen by selling new shares.
But new listings have dried up.
Only two REITs were listed last year and three listings were cancelled in December alone, one of them by insurer AIG (AIG.N).
Underwriters probably won't be able to take any new REITs public until the gap between the winners and losers in the market narrows and fewer REITs trade at such a deep discount to their book value, Prospect's Freeze said.
"The reason the listings failed is you can buy existing REITs well below the book value. Why would you pay the full price for a new REIT if you can buy a listed REIT at a discount?"