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REIT, First up signal in 2 years indicated by individual net long position

THE NIKKEI via scoutAsia

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July 28, 2022 5 min read
REIT, First up signal in 2 years indicated by individual net long position

The Tokyo Stock Exchange REIT (Real Estate Investment Trust) Index easily recovered to the milestone level of 2,000, having gained about 120 points (6%) from the low hit in mid-June. In the background is the vigorous appetite to buy of individuals. In June, individuals were in a net long position for the first time in two years. There is also a trend of improving fundamentals in hotel and office properties, and individual buying could be a "buy signal" for the REIT as a whole.
"A rather rare event"――. REIT managers at domestic management companies were surprised to see that REIT trading by individuals was in a net long position in June. It has been two years since June 2020, but in fact there have only been six net long positions for individuals in the past 10 years.

Looking back in the past, the timing of when individuals put REITs in a NET LONG position was during the COVID-19 shock in the spring of 2020 and the Lehman Brothers collapse of 2008-2009. This coincides with the phase when the Tokyo Stock Exchange REIT Index plunged. Individuals picked up at the bottom and the REIT index has a history of recovery.

In June, REITs, which are risk assets, were shunned by foreign investors due to rising US interest rates and other factors, and "The timing of the Tokyo Stock Exchange REIT Index approaching 1900 may have raised awareness of undervaluation" (Morgan Stanley MUFG Securities, Analyst).

On 28th, the Tokyo Stock Exchange REIT Index was up 1.5 points (0.1%) from the previous day to 2002.68. After recovering the milestone of 2,000 on 25th for the first time in about 1.5 months, the market has been firm.

Why do REITs have so many individual NET SHORT positions? One is in the structure of REITs, which frequently increase their capital to raise funds to purchase properties. Individuals who are the main subscribers to the capital increase earn a profit margin by selling the acquired investment units (equivalent to shares) in the market. However, the purchase of investment units for the capital increase is not shown in the trading trends, and therefore, "If there is not a lot of buying in the market, you will be in a net short position" (Daisuke Seki, Representative of Ivy Research Institute).

The market adjustment that accompanied the rise in US interest rates has also provided an excellent opportunity for individuals to buy shares. Amid fears of a global recession, especially in the U.S., are there any concerns about Japanese REITs? Among these, individuals will focus on stocks that are likely to see a recovery in rental income. One of these is a hotel-based REIT that was severely damaged by the COVID-19 pandemic. Torune (handle), an individual investor in the person's sixties, says, "(hotel-affiliated) Invincible Investment Corp. (INV) was added to the list during the COVID-19 pandemic. We are waiting for travel and other economic activities to normalize and prices to rise."

The top ranking of listed REITs in terms of investment unit price appreciation (compared to the end of 2021) is almost exclusively dominated by hotel-related companies, including Japan Hotel REIT Investment Corporation, Ichigo Hotel REIT Investment Corporation, and INV. Even with the increase, the "NAV multiple," which is equivalent to the price-book value ratio (PBR) of stocks, is still less than 1x, making it difficult to overvalue the stock. UBS raised the investment ratings of Hotel REIT Investment and INV to "Buy" on 22nd.

Although the number of new cases of the new coronavirus is hovering at an all-time high, so far the Kishida administration has shown no signs of calling for restrictions on behavior. On July 25, Hotel REIT Investment announced that RevPAR (revenue per available room) for July is likely to be down a little under 40% from pre-COVID-19 2019. There is a widespread perception that "firmness despite the spread of infection" (Junro Takemura, Morgan Stanley MUFG).

On the other hand, Nachu, an individual investor, focuses on office-based products. It is considering buying more Japan Excellent, Inc. and Global One Real Estate Investment Corp. and speaks of "The NAV multiple is in the 0.7x range, making it extremely undervalued. There are many properties with unrealized gain, so dividend can be expected from the gain on sale."

According to Miki Shoji, the average rent for office buildings in the five central Tokyo wards in June 2022 narrowed for the 11th consecutive month of year-on-year decline. The upward trend in the vacancy rate has slowed since the second half of 2021, with three of the last six months showing improvement from the previous month.
Can each REIT achieve the recovery in rental income that individuals expect? The future of the REIT market, which has been signaling an upturn, will be determined.

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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.