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Change in ‘winning group’ logistics REIT, Change of leading players, shift to hotel-related REIT

THE NIKKEI via scoutAsia

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June 2, 2022 5 min read
Change in ‘winning group’ logistics REIT, Change of leading players, shift to hotel-related REIT

In the real estate investment trust (REIT) market, the logistics sector, which has seen a continuous inflow of funds due to the expansion of e-commerce, is experiencing an anomaly. The deterioration in the supply-demand balance of properties and overvaluation in terms of indicators began to be noticed. With the reopening of the economy as a cue, funds are being attracted to hotel and other types of businesses, and the "winning team" of the COVID-19 pandemic is beginning to show signs of a change of "winner."

On 2nd, the Tokyo Stock Exchange REIT Index was up 3.8 points (0.2%) from the previous day to 2011.82. At the end of May, the number of units recovered to 2,000 for the first time in about two months. The percentage change from the end of 2021 is 3% lower than the Nikkei 225 (5% lower), which is more resilient.

In this context, the SAGGING nature of the logistics system is a concern. "We're pulling funds out of the logistics system." A representative of a domestic investment management firm reveals. "Tokyo Stock Exchange REIT Logistics Focus Index", which consists of REITs that invest in logistics facilities, has fallen 11% since the end of last year. Percentage change by property type is particularly depressed compared to office (flat) and residential (down 3%). GLP J-Reit and Nippon Prologis Reit, Inc. both with large market capitalizations are down 14%.

The logistics system was originally "a single winner" in 2020-2021, when the new coronavirus was spreading. The use of e-commerce has expanded and the demand for logistics hubs has skyrocketed. "With Corona" stocks, the investment unit price (equivalent to the stock market price) was rising at a rapid pace.

Currently, the situation is beginning to look unfavorable to its momentum. "There is a sense of overbuilding"(Daisuke Seki of Ivy Research Institute), and some are wary of excessive supply. According to Ichigo Real Estate Service, the vacancy rate for logistics facilities in the Tokyo area was 3% in April 2022, the fifth consecutive quarterly increase. In January 2021, the rate was 0.2%, rising to the 3% range for the first time in two years and nine months.

If vacancy rates increase, rent growth will cease, affecting dividends and other returns. Some people in the logistics industry are of the opinion that "Since the big holidays, we've seen a big drop in our cargo" is the way to go. Looking at Yamato Transport's small-lot cargo handling results, the growth rate has been slowing since the fall of 2021.

It is also strongly overvalued in terms of valuations (investment index). Looking at NAV multiples, which are equivalent to the price-book value ratio (P/B ratio) of stocks, many logistics-related companies line up at the top, such as Mitsubishi Estate Logistics REIT Investment Corporation at 1.5x and Nippon Prologis REIT at 1.4x. "We are wary of logistics companies with high valuations when the US longterm rate is rising"(Shinya Hirano of Okasan Asset Management).

At this point, the theme for Japanese REIT investors has shifted to economic resumption (reopening). Strong performances include Ichigo Hotel REIT Investment Corporation, up 20% since the end of last year, and Japan Hotel REIT Investment Corporation, up 18%. The national average occupancy rate for hotels in Japan, compiled by the US research firm STR, was 56% as of April, leaving much room for recovery, and the fact that foreign tourists will be allowed back into the market from June is also a tailwind.

Many in the market consider "The expectations for the Rio Open have been factored in half a year later than in the US and other countries" (Masumi Ishida of Sumitomo Mitsui Trust Asset Management). Major hotel REITs still have NAV multiples below 1x and are also undervalued. Some believe that inflation resistance can be expected because the average room rate can be raised or lowered in a flexible manner. Investors are beginning to look for "post-logistics" stocks.

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The English translations provided through this service are the result of automatic and mechanical translation of contents written in Japanese and created by Nikkei or licensed by a third party, by an automatic translation system provided by a third party after certain processing of the contents by Nikkei. Nikkei disclaims all warranties, express or implied, related to the English translations, including any warranty of accuracy, reliability, validity and fitness for a particular purpose. Users shall use this service with the full understanding that it employs an automatic translation system that automatically and mechanically recognizes and analyzes information and outputs the results.