JAPAN: An Introduction to Capital Markets: Domestic: J-REITs
Current Trends in the J-REIT Market
Based on the performance of the Tokyo Stock Exchange REIT Index, the market for Japanese real estate investment trusts (J-REITs) has been on a downward trend since mid-2021, falling 8.34% in 2022, 4.60% in 2023, and 4.47% in 2024 (as of the end of September 2024). Particularly with regard to its recent performance, the REIT Index has been affected by the Japanese stock market’s performance (represented by Nikkei 225), which encouraged domestic and foreign institutional investors, including financial institutions, to shift their funds towards investing in the stock market.
Against this backdrop, as of the end of September 2024, J-REITs have not conducted any IPOs since June 2021. New entrants generally prefer private REITs, and the amounts procured in the follow-on public offerings of existing J-REITs from 2022 to 2024 continued to be relatively small. However, since the market price for J-REITs has declined, the expected average dividend yield of J-REITs has increased to 4.84% as of the end of September 2024, which is higher than the yields of most high-dividend stocks. Furthermore, the underlying real estate market continues to boom despite several negative factors, such as the expected massive oversupply of logistics properties.
The Japanese economy is now experiencing inflation for the first time in many years, and, in March 2024, the Bank of Japan exited from the negative interest policies it introduced in February 2016. The Bank of Japan further increased its policy rate in July 2024. While increases in the policy rate would result in increasing interest payments for REITs, these factors may positively affect the J-REIT market going forward.
In addition, due to the increase of inbound tourism, hotel assets have been performing well and are relatively active in trade in REIT markets. For example, Heiwa Real Estate Asset Management Co., Ltd., the asset management company of Heiwa Real Estate REIT, Inc. amended its investment policy so that the REIT may invest in hotel assets up to 10% of its portfolio, which is up from 5%.
Another trend is overseas investment. For example, in 2024, Sekisui House REIT, Inc. acquired two overseas real estate properties located in the United States of America. It was the first time in six years for a listed J-REIT to acquire overseas real estate properties. Going forward, we expect to see more cases of overseas real estate acquisitions following this trend.
Reflecting the general increase in awareness of environmental, social, and governance (ESG) issues, the ESG movement (especially the environmental element) has become a trend for portfolio assets and equity/debt financings. More and more portfolio assets have various environmental certificates and some J-REITs have introduced renewable energy to their portfolio of assets. Green and sustainable financings (both equity and debt) are increasing as well.
Boom in Private REITs
As mentioned above, it seems that there is a recent trend where the establishment of private REITs is preferred to listed J-REITs. From 2019 to 2024, four J-REITs were listed while nearly 30 private REITs commenced operations (as of the end of September 2024). In 2023 and 2024, 14 private REITs commenced operations, while no J-REIT was newly listed as of the end of September 2024.
The industry type of private REIT sponsors has diversified to include railways, electricity, gas, construction, and regional banking. There are several small private REITs in the market, but none of the private REITs have experienced, for example, reorganisation or consolidation, because, unlike J-REITs, they appeared after the financial crisis in 2008. Therefore, for private REITs that have yet to undergo any business integration or restructuring, there is a possibility that they will move towards these in the future.
Recent Noteworthy Capital Market Transactions
In recent J-REIT offerings, even if the J-REIT makes placements of investment units to foreign investors, it has become less common for issuers to conduct Rule 144A offerings or prepare an English offering memorandum, mainly because of cost considerations.
However, in large-scale offerings, Rule 144A transactions are still being conducted. For example, Industrial & Infrastructure Fund Investment Corporation (IIF) completed a very large Rule 144A offering in February 2024 to purchase logistics properties from Logisteed, which had received investments from KKR, IIF’s new sponsor. As for hotels, amidst the strong performance of hotels due to strong inbound tourism, J-REITs mainly investing in hotels completed relatively large offerings, including Rule 144A offerings. For example, Japan Hotel REIT Investment Corporation completed a Rule 144A offering and acquired two hotels in Okinawa and two hotels in Tokyo in July 2024. Invincible Investment Corporation completed a Rule 144A offering and acquired twelve hotels, including a hotel in Osaka valued at approximately JPY30 billion, in July 2024. Hoshino Resorts REIT, Inc. completed an offering, which includes sales to foreign investors, and acquired the flagship hotel operated by the sponsor valued at approximately JPY30 billion, in June 2024.
J-REITs meeting certain requirements can rely on the guidelines of the Financial Services Agency (FSA) to shorten the period between the announcement date and the pricing date of their offerings. A number of J-REITs that conducted follow-on offerings relied on this rule. Shortening the period reduces the risk of fluctuations in the price of the investment units after the announcement date.
Increasing numbers of J-REITs are delivering their prospectuses electronically rather than on paper, which promotes environmental protection.
Some issuers have made a third-party allotment to their sponsors to fund the acquisition of properties.
Amidst recent undervalued investment unit price levels and other factors, there has been an increase in the number of cases of REITs (or their sponsors) acquiring their (own) investment units. From 1 January 2024 to the end of September 2024, twelve REITs announced resolutions to acquire their own investment units. Investment unit acquisitions by sponsors are expected to align the interests of unitholders with those of the sponsor.
Recent Noteworthy Corporate Actions in the REIT Sector
The Japanese REIT sector has recently witnessed a hostile unitholder proposal for a merger and a hostile takeover attempt being made against listed J-REITs (in 2019 and 2021), which were previously unseen in this market. Regarding the latter, Starwood commenced a tender offer for the units of Invesco Office REIT, Inc. (IOJ) without the prior consent of IOJ. Starwood’s tender offer failed, but Invesco, the sponsor of IOJ, launched and succeeded in making a counter tender offer as a “white knight”. Consequently, IOJ completed a squeeze-out and delisted in November 2021 – the first delisting in J-REIT history.
In the listed infrastructure fund market, a neighbouring market of the J-REIT market, there were two cases of a buy-out takeover and squeeze-out conducted by the sponsor of the fund (in 2022 and 2023).
In 2023, a unitholder proposal was made to one J-REIT (Ichigo Office) requiring, among other things, the modification of asset management fees and appointment of additional directors. The proposal was opposed by the board and was not approved in the extraordinary unitholders’ meeting held in June 2023.
These cases sparked discussion over the corporate governance of REITs. In particular, the deemed consent scheme in unitholders’ general meetings and consolidation of REIT units to squeeze out unitholders are hot topics.
Also noteworthy are recent changes in the ownership of asset management companies and mergers of J-REITs. For example, in 2022, Mitsubishi Corporation and UBS sold their entire interest in their joint venture asset management company managing J-REITs to the KKR Group.
As for mergers of J-REITs, Mitsui Fudosan Logistics Park Inc. (MFLP) and Advance Logistics Investment Corporation (ADL) announced a merger, which was completed as planned in November 2024. Concurrently with the merger, an absorption-type company split occurred between the asset management companies of these REITs, where the asset management company of MFLP took over from the asset management company of ADL the asset management business related to logistics facilities (among others). This transaction marks a new era where, for the first time, a REIT will be managed in the form of a joint venture by one of Japan’s leading comprehensive developers and a major general trading company after the completion of the merger.
Moreover, in 2024, there was a transaction where the acquisitions of the REIT and its asset management company occurred at the same time. Ichigo Inc. acquired all of the units of Tosho Tokai REIT Inc. from its investors and all of the shares of Toshō Asset Management Co., Ltd. from TOSHO CO., LTD., the sponsor of Tosho Tokai REIT Inc.