Friday, September 14, 2007

Attention: Puking Japanese Real Estate Shares

Oh how quickly (and viciously) things do change! Less than a quarter ago, investors were falling over themselves for Japanese Real estate, while developers themselves had picked up the pace (and prices) of acquisitions for projects. And, even after investors had pushed cap rates of REITs to below 3%, GE and others made public pronouncements about allocating further billions to the asset class in Japan. Ummmmm, yeah.

But woe be she who bought such such securities in the public market!! For the pendulum has swung, though one would be forgiven for thinking it was actually a trebuchet, and no a pendulum. By way of disclosure, I am not recommending any of the following, however, with authorities seemingly unwilling to to normalize rates, and whatever reval of USD & EURO vs East & South Asian exporters, hard assets in YEN still appear to yield nice positive net carry in YEN, and very attractive implied positive carry while buying the assets at or below book. Have a look at the following, which potentially are the jetsam of distressed hedgie sales made necessary to repay investors for Sept 30.

Here we have Keihanshin Real Estate (Code 8818). OK, so it's Osaka based, but at 0.75 book and 13.5x FY07 earns(7.5% Cap rate net of tax!), on moderate leverage this is a steal. Mostly nice modern office blocks, but some seedy pari-mutuel betting offices, it so compelling that a prominent Tokyo lawyer Kanehide Yoneyama has been hoovering up shares now for the past four years and is now the 2nd largest shareholder next to a mutual insurance association.
Nippon Commercial Real Estate (Code #3229). REIT listed in 2005, now at 0.83x historical book and 18X next year's earnings for a 5.5% cap rate. Viewed as very attractive by most analysts for their nice high quality and growing portfolio with fair value seen up at 600,000++ vs. 380,000 current. Seems to be a large forced seller into the end of the calendar quarter.
Code#8981 Japan Hotel and Resort is now at 0.93x book and 17x 2007 estimated earnings (>8% cap rate). Morgan Stanley Real Estate owns 6% of this one and further falls will make these acquisition targets themselves. Market cap of $400mm puts this below the radar but a 33% fall in the last 3 months - all which is valuation compression - makes this worth a closer look.

Shoei (code# 3003) was a pathetic textile also-ran before they reoriented themselves first into electronics, and then more importantly and timely into real-estate. They are now trading at book value with an implied 10% cap rate. Jean-Marie Eveillard discovered this hidden asset play before the big run-up (and before Fidelity and JF/JP Morgan piled in). Shoei is famous as being the first target of a Japanese-led hostile takeover bid back in 2000 when its potential asset value was first recognized. Rising rents, good performance of properties acquired on the cheap, and completion of in-house financed developments makes this something to look at more closely, now that its been puked from its YEN 3500 top to a more realistic and interesting level of YEN 1600. I will admit to having been short at times in 2006, but only for a trade. Now, however, I'll admit to readying for a punt on the long-side.


Richard said...

Perhaps a dumb observation, but what is the longer-term investment merit of investing in real estate in a country with a declining population?

"Cassandra" said...

Richard, Thank you for the comment.

Might I suggest that while Japan indeed is demographically challenged, so to are Italy and Spain, with fertility rates only a pubic-hair away from Japan's own grim stats, and longevity that is also near to Nippon. And ask my friend Charley Butler about Spanish prices! Why the price of his Olive trees must have ddoubled in the past five years alone, and Spain too will face a declining population of umm m Spaniards.

Switzerland, too, that little gem of moutnain lakes, chocolate and xenophobia mirrors demographics not dissimiliar from Japan, and go have a look at the skycranes surronding nearly every city and village en Suisse. Everyone desirious of Lebensraum?

Lets be for real: at the moment Japanese live in shoeboxes, so the combination of the desire for Lebensraum in combination with money illusion could easily push up nominal prices in excess of the rate of inflation.

But frankly, I was talking about a trade: borrow yen, buy real estate. At 2004 prices for 8818, with a stable 8% earnings yield and still-depressed valuations and rents, it is easy to conceive of scenarios where it doubles and investors remain comfortably better off than postal savings (without currency risk). As it stands, the rush in NZD, Turkish Lira, AUD or Icelandic Kronor comes with some incremental yield pickup, but with reasonably large mark-to-market risk to capital.

Mrs Watanabe would be well-advised to consider leveraged spec in real estate rather than leveraged spec in FX.

Anonymous said...

It's earthquake risk that makes me hesitate about Japanese real estate.

"Cassandra" said...

....eq risk hasn't deterred the Californian punters.

Anonymous said...

NYT on Mrs. Watanabe:

Japanese Housewives Sweat in Secret as Markets Reel

Manc Trader said...

Cassandra appreciate your insight on Japan. I have been poking around the yen and japanese shares (renting not owning as of yet) for a couple of months. I don't really know what i am doing so appreciate thoughts of someone who actually knows something.
Richard's question on demographics is a good one and bothers me some. Some thoughts: it is at this point one of the best known facts about Japan and must to some extent be priced in, despite all the bad news i read stories about Korean tourists visiting at ever higher rates, I read about the environment problems all over asia and wonder if parts of Japan might not attract a lot of visitors with their infrastructure,beauty, lack of crowding etc., Jim Rogers claims that large numbers have chinese are learning Japanese and love Japanese cinema (wtf! I once mentioned Miyazaki's spirited away to a chinese girl and she freaked lecturing me about what the Japanese did to the chinese); I read the various online japanese newspapers and all kinds of stories always jump out of me as not necessarily bearish. It seems that throughout asia there is a lot of demand for Japanese engineers who are leaving for hong kong and taiwan (bearish) but earning good money (bullish as they may repatriate earnings or spend in Japan).
Also is their any chance the demographic nightmare may have some bizarre outcome. Chinese surrogate mothers bearing children for reluctant japanese couples or some other response that would be hard for non asians to contemplate.
Anyhow i just have questions no answers really.

"Cassandra" said...

I don't know really what to say. I am not a sociologist, only a humble would-be seer and sooth-sayer. I do think Japan is the Asian-equivalent too Switzerland in many regards: dwindling population of "natives", xenophobic, protected agricultures, limited habitable space relative to landmass, unnaturally-low interest rates, proximity to growth without actually experiencing it themselves, cleanliness fetish, good engineering sensibility, limited sense of humour large export sector & MNC remittances, restritive immigration, and so on.

YET, property increases in value, due, in part to - as you point out - strategic geographic locale - cows, pretty mountains, the fact that it's NOT the Ruhr, etc.

On the surface, there would seem to be a link between population growth and property values, but this needn't be see, and one could, with little effort, imagine numerous scenarios under which real estate acts as a fine store of value providing positive real rates of return, just as one can imagine numerous ones under which the opposite is true, independent of demographics.

My flirtation currently is with Japanese real estate as a store of value, both for its intrinsic value relative to returns to cash or bonds against which its measured, and for its potential tp appreciate due (as you suggest) to exogenous factors like immigration, or simply as I imagine, a desire for Lebensraum. There was a time when a house in Kensington yielded more if divided up into five flats. Currently, the inverse is true as the house is worth more undivided, than it is parceled (and that's not just the effect of Russians). At some point, I have no doubt it will swing back and provide sub-division opps, but a there is little reasons why a Japanese family of 3 living in 85 sq mt might not eventually find 125 sq mt far more comfortable and accomodating, (and willing to pay for the privilege) such that the population could decline by 40% with - other things being the same - no real negative impact upon property prices.

The thing that keeps me awake is simply that as a nation the Japanese lose what makes them different, and converge upon the US by getting (forgive me) fat, stupid, selfish, and short-sighted. When that happens in earnest, I too will join you on the short side.

Manc Trader said...

Good points Cassandra. If your comment about the short side was referring to me. I am dabbling albeit tentatively from the long side not short.

Charles Butler said...

Sorry for taking so long to bite. I spent the weekend in the hometown of one Francisco Pizarro, the man whose sacking of the Incan empire introduced monetary inflation to Europe. Back on track, the difference between Spain and Japan is that the former's coastline is almost entirely (as you might have noticed on your trip back from the Rif, having perhaps stopped for the scissors hand signal and filled up a spare tire or two) beach - eminently suitable for the landing of overloaded small craft.

Two further points. Some intimates manage to get away with 'Chuck'. None with 'Charley'. And you still haven't answered my question about Harold Ballard.

Daniel said...

Any thoughts on Daibiru Corporation, Whitman (with Third Avenue) has been buying this one in size (along with Mitsubishi Estate, Mitsui Fudosan and Sapporo Holdings).

"Cassandra" said...

Hi DAniel,
You've got the concentrated risky-asset sensitive portfolio!!

The thing about Daibiru is that while its cheap, it's a consolidated sub of 9104 and there is no chance that Mitsui OSK will ever let go of it IMHO. In this way the indepedndent really cheap REITs especially 3229, or the listed co's 8818 is the biz. Further erosion and they could eaten. This is no disrespect to 3rd Ave's work, 8806's portfolio or development acument, but merely a preference that says: someone (a motivated buyer) can and probably will move the price of 3229 and /or 8818 more than they will 8806. Many large investors HATE being a minority s/h where it is dubious whether the majority s/h will consider your interests as perhaps he should or one would like or expect.

Daniel said...

Thanks for your thoughts.

I agree that 8806 is an unlikely candidate to be taken-over--but I wouldn't feel comfortable relying on this for downside support in any case (least of all in Japan).

Both have roughly the same upside to get back to their highs, though Daibiru seems like the better bet the farther out one looks (given the quality and diversification of its assets).

Closer to now, you're right that a motivated buyer can move the price of 3229 a lot easier than Daibiru. I guess that's part of the reason why the former is up almost 10% today--and 8806 up just a little more than 2 last time I checked.

Anyway, found your blog through Macro Man's. Should be stopping by more often...

Rakuten said...

First of all, one the comparison of Switzerland and Spain vs Japan: In both countries buying from foreigners is a force not to be underestimated. Switzerland has traditionally been a place where wealthy foreigners from all over the place like to take up residence due to favourable tax treatment as well as a quite international flair (at least in places like Montreux). On top of this there is now a flood of German professionals moving into the north of Switzerland due to a strong labour market . Out of Zurich's population of 400,000 there are now roughly 30,000 Germans.
Spain also has attracted substatial buying both from UK as well as Germany.

London too is driven by foreign money, because foreigners what to live there. Not only for 2-3 years, they actually want to stay there because apart from their job the place provides what they consider decent education, health care, entertainment, ease of use of local language .... in a word: quality of life for a family.

The problem with Japan/Tokyo is that non of these factors apply, and therefore apart from some desperate Chinese very very few foreigners want to settle down here, and I dont blame them.. While demographics may be similer to other countries with strong real estate markets, the kep factor of foreigers moving in is not present at all and this is unlikely to change.

Is Japanese real estate cheap? While I agree that real estate in the countryside here is increadibly cheap, I am having a hard time finding the pricing in Tokyo attractive. Prices have moved in Tokyo over the last two years, and in these days a good appartment in downtown (Minato-ku) will cost between 1.5 and 2mn Yen/sqm, while prime property (Mori) goes as high as 3mn/sqm. That is not very far from levels in London which we all agree is probably overdone. The only reason these prices are sustainable is the level of interest rates which makes mortage payments lower than paying rent for the same place.

If Japanese will really want to move into larger appartments in the future remains to be seen. One would think so but the natiional obsession with gaman, gambaru und sho ga nai and the overall very masochistic mindset of people may reduce this desire substantially.

There is a trend for older people to move from the outskirts into the center (better hospitals etc) which will support Minato-ku pricing, but I still think that the demographics combined with no long term immigration (not to mention the earthquake risk that cannot be insured) is a problem for the real estate market here medium term.

Decent long term growth in real estate prices only comes if you get immigration of some sort. This can be found in Japan if you pick the right region. Five years ago you could buy farmland in Niseko(Hokkaido) for next to nothing. In these days Chinese and Australian skiers not only fly there in huge numbers for some of the best skiiing in Asia, they also buy condos in the area and land prices have gone up eight fold.

I am more interested in finding the next Niseko in Japan rahter than jumping on the Tokyo bandwagon at this point.

carl said...

Dear Sir/Madam,
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I would like to invite you to use, review or link to any of the resources you see on our site when composing future blog submissions.


Carl Milton