Japanese real-estate investment trusts (J-Reits) have enjoyed an exceptionally strong start to the year, with the J-Reit index boasting a 45 per cent gain to date aided by a Bank of Japan policy to buy their shares as part of its economic stimulus package. And while shares in Aim-traded Japan Residential Investment Company (JRIC) have benefited a bit, rising 20 per cent in 2013, they have missed out on much of the gain, leaving them looking substantially undervalued compared with Japanese rivals.
- Very lowly rated relative to Japanese peers
Attractive dividend yield
Improving occupancy
Measures to end deflation
Exposure to weakening yen
History of rental deflation
Indeed, JRIC's largest J-Reit peer, Advance Residence, looks typical of the sector, trading at a 47 per cent premium to book value with a dividend yield of 3.9 per cent. Were JRIC priced at such a multiple, its shares would gain nearly 50 per cent. This highlights its clear attractions as a bid target for J-Reits. Last year the company decided not to pursue various "unsolicited approaches" for its portfolio. Yet it would surely relent at the right price, not least because it faces a continuation vote this autumn.
As well as the valuation anomaly, JRIC offers a compelling investment case based on its underlying property portfolio. There have been so many false dawns over the deflationary Japanese economy that UK investors can be forgiven for ignoring the latest glimmers of light. Yet prime minister Shinzo Abe's economic stimulus looks far more radical than its predecessors and one sector likely to benefit is real estate.
JAPAN RESIDENTIAL INVESTMENT COMPANY (JRIC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 68p | MARKET VALUE: | £128m | |
| TOUCH: | 67-68p | 12-MONTH HIGH: | 72p | LOW: 51p |
| DIVIDEND YIELD: | 5.3% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO NAV: | 1% | |||
| INVESTMENT PROPERTIES: | £249m | NET DEBT: | 88% | |
| Year to 30 Nov | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 93.0 | -22.5 | -22.7 | nil |
| 2010 | 65.2 | -11.6 | -8.5 | 2.5 |
| 2011 | 71.2 | 7.8 | 4.0 | 3.3 |
| 2012 | 69.7 | 15.2 | 7.8 | 3.6 |
| 2013* | 69.0 | 17.0 | 8.7 | 3.6 |
| % change | -1% | 12% | 11% | 0% |
Normal market size: 5,000 Matched bargain trading Beta: 0.3 * Liberum Capital forecast | ||||
Rents in Japan seem to be bottoming out. The Japanese population is shrinking, yet migration to the big cities and the trend towards smaller households has been exerting pressure on the housing stock in Tokyo, Osaka and Nagoya, which together account for some 87 per cent of JRIC's portfolio. The company's rents fell 0.7 per cent on average for the year to 30 November. Yet that was an improvement on the previous year, when rents fell 1.1 per cent, and falling vacancy rates - down 0.3 percentage points to 4.8 per cent in November - should also support the market.
Besides, rental deflation is being offset by an improving investment market. JRIC's portfolio was actually marked up 2.6 per cent last year. The onslaught of quantitative easing is only likely to consolidate investors' interest in real estate. JRIC sold a 14-unit apartment block last month at a 21.5 per cent premium over the year-end valuation. The price gave the buyer a net rental yield of 4.3 per cent, whereas JRIC's portfolio is on average valued at a yield of 5.8 per cent.
A potential fly in the ointment is currency risk, as JRIC does not hedge and Mr Abe is committed to devaluing the yen. Last year JRIC's 6p currency loss more than offset a 4p leveraged rise in property prices. While sterling's own weakness offers some protection for UK investors, the currency headwind may well persist.
