Tokyo Report: REITs Market Likely to Stay in Slump

Tokyo, Sept. 8 (Jiji Press)--Japan's market for real estate
investment trusts appears likely to remain in the doldrums in the long term as an unfavorable business environment continues to deter investors.

The Tokyo Stock Exchange REIT Index, calculated on the basis of the
total market value of REITs listed on the exchange, closed at 1,114.04 on
Friday, the lowest since Oct. 1, 2003.
Behind the faltering REIT market are financial institutions'
reluctance to extend real estate loans in the wake of the U.S. subprime
mortgage crisis, a slump in the domestic housing market, and the stalled
growth of land prices.
The credit crunch is the most serious blow to REITs, which grow in
scale by buying and selling properties. "There is little room for
negotiating new loans with banks," says an official at a REIT management
company. Some banks' strong reluctance to lend is reminiscent of forcible
withdrawal of loans seen in the post-bubble years, according to the
official.
Foreign financial institutions, which used to provide large loans
to REITs, can no longer afford to do so as they have been hit hard by the
U.S. housing market turmoil and have to shut down or drastically restructure
their operations in Tokyo.
REITs are having hard time not only purchasing real estate but also
selling it.
Real estate prices are calculated under a "discount cash flow"
approach in which all future cash flows are estimated and discounted to give
a present value. In other words, prices are unlikely to fall endlessly as
they did after the bursting of the speculative bubble in the early 1990s.
Many experts consider current realty prices undervalued, and
transaction agreements are reportedly concluded without difficulty. But
deals often end up being cancelled because buyers are unable to get loans
from banks.
Unable to sell property holdings as planned, REITs have to cut back
on their distribution of profits to investors, who sell their shares as a
result.
Many REITs are striving for "internal growth," as market officials
put it, by such means as renovating buildings in which they have invested.
But the effort is "too low-key to arouse strong investor interest" in REITs
because rents cannot be raised sharply even if a building is refurbished,
says a brokerage house official.
REITs therefore need investors who will hold on to their shares on
a medium- to long-term basis to help prop up real estate prices. In
particular, now that domestic financial institutions and overseas investors
have come to shun realty investment, REITs are trying to lure individual
investors.
But individual investors remain cautious, as they are still
unfamiliar with REITs and haunted by the post-bubble image that realty
prices eventually drop, another brokerage house official says.
More than 10 REITs were listed last year, but so far this year
there have been none.
The REIT market is undeniably at a crucial stage, with no solutions
to turn the situation around found so far. The market faces the test of
whether it can grow by itself, rather than thanks to external factors such
as upturns in realty prices.