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Executive summary
Initiating coverage
We initiate coverage on six J-REITs, including three trusts that specialize in office-building
assets, two major trusts specializing in retail assets, and one major trust specializing in
residential properties.
Subsectors in transitional phase: Investment opinion and
individual ratings
We have a Sell stance on J-REITs that specialize in office-building assets. In this subsector,
we initiate coverage on Nippon Building Fund (8951; ¥1,530,000; Sell), Japan Real Estate
Investment (8952; ¥1,390,000; Hold), and Nomura Real Estate Office Fund (8959;
¥1,160,000; Sell). We have a Hold stance on the trusts specializing in retail assets.
Individually, we initiate coverage on Japan Retail Fund Investment (8953; ¥1,160,000; Hold)
and Frontier Real Estate Investment (8964; ¥1,300,000; Buy). We have a Buy stance on trusts
that specialize in residential properties, and we initiate coverage on Nippon Accommodation
Fund (3226; ¥810,000; Hold).
Criteria for investment opinions
For each subsector, we consider a number of factors for valuations. We base our investment
opinions on the strengths and weaknesses of fundamentals; the degree of penetration by
market participants; the extent that these factors are incorporated into unit investment prices;
and other differences.
Expecting some adjustments in unit investment prices between
subsectors
In our opinion, sound fundamentals for the office J-REITs are now widely recognized by
market participants and unit investment prices of these trusts have overshot expectations.
For the retail trusts, unit investment prices are not fully in sync with consumption and wage
indexes, and we expect to see some surprises. For the residential trusts, we think rising
rents in Tokyo's five central wards will fuel growth but that market understanding of this
trend is still limited, which suggests to us that unit investment prices still have some room to
rise. In light of these factors, we look for differences among the subsectors (in unit
investment prices, dividend yields, etc) to spur some adjustments in their unit investment
prices and reflect cash flow anticipated from rental income in the future.
Forecasts, valuations, and target prices
For our forecasts, we analyze internal and external growth strategies of the J-REITs and the
repercussions of their growth strategies; portfolio characteristics, special financial
considerations, and other factors by subsector; and individual factors for each trust and their
detailed disclosure, all based on the directions of their fundamentals. For valuations, we
assign target prices based on unit investment price to FFO ratios. However, we use US
REITs as a reference because there is no common consensus for the correct unit price-FFO
ratio in Japan. In particular, we consider directions for unit price-FFO ratios after yield gaps
are inverted. Also, we calculate implied cap rates and dividend yields converted from target
price levels for verifying our ratios in setting target prices.
Table of Contents
Executive summary ........................................................................... 4
Initiating coverage.....................................................................................................................4
Subsectors in transitional phase: Investment opinion and individual ratings ............................4
Criteria for investment opinions ................................................................................................4
Expecting some adjustments in unit investment prices between subsectors ..........................4
Forecasts, valuations, and target prices....................................................................................4
1. J-REIT sector overview ................................................................. 5
I. The environment for commercial income property................................................................5
1. The office market: Current and forecast................................................................................5
2. Residential ..........................................................................................................................17
3. Retail commerce.................................................................................................................23
II. Overview of J-REIT market as seen through major indices.................................................28
2. Investment strategy .................................................................... 33
I. Factors shaping investment strategy ...................................................................................33
3. J-REIT structure and growth model .......................................... 36
I. J-REIT profit structure ..........................................................................................................36
II. Comparing REITs in Japan, the US, and Australia ...............................................................37
III. J-REIT management strategy overall..................................................................................38
4. Comparison of distinguishing characteristics of J-REIT
(strengths/weaknesses) .................................................................. 41
5. Earnings estimates & valuation.................................................. 42
I. Salient points regarding earnings forecasts .........................................................................42
II. Estimates methodology: We use sum-of-the-parts to capture differences.........................44
III. Valuation............................................................................................................................45
IV. Investment strategies ........................................................................................................56
V. Risk factor ...........................................................................................................................57
Companies
Nippon Accommodations Fund ..............................................................................................59
Nippon Building Fund..............................................................................................................69
Japan RE Investment ..............................................................................................................79
Japan Retail Fund....................................................................................................................90
Nomura RE Office Fund ........................................................................................................100
Frontier RE Investment .........................................................................................................110
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