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MARKETS HEARD ON THE STREET
What Happens When a Central Bank Buys Property Stocks
BOJ buying is boosting J-REITs, but home builders’ performance may be more reflective of Japan’s property market
By JACKY WONG
Updated Aug. 30, 2016 1:36 a.m. ET
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The Bank of Japan’s bazooka was meant to light a fire under property stocks. Like everything in real estate, it depends on the location.
Shares of Japan’s real-estate investment trusts, or J-REITs, have risen 9% since the central bank surprised markets with negative interest rates in January. Shares of home builders, however, have dropped 8% over the same period. In fact, the performance gap between the two extends further back. Shares of Japanese developers have lost a quarter of their value since the last time Mr. Kuroda truly pleased markets by stepping up asset purchases massively in 2014. J-REITS meanwhile have gone up 7%.
So why the discrepancy between these two asset classes which are both theoretically linked to property prices? A primary reason is the direct buying from the BOJ. The central bank has spent ￥332 billion (3.3 billion dollars) since 2010 to buy J-REITs. Nearly half of those purchases came since last year.
The BOJ has indirectly bought shares in developers too through purchases of exchange-traded funds, but given their relatively low weightings in major indexes, the impact is less significant. The J-REITs market is also relatively small, so the purchases have a big impact. The central bank now owns around 5% stakes in more than a dozen J-REITs. Negative bond yields are another reason. Dividend yields on J-REITs, around 3%, now look super attractive compared with yields on long-term JGBs.
The lackluster performance of Japanese home builders could be more telling about the underlying health of the property market. In essence, investors believe in the BOJ’s ability to buy J-REITs, but not in the central bank’s ability to fix the underlying economy.
The low-interest-rate regime has indeed driven money into the real-estate sector in the past few years. Combined with Tokyo hosting the 2020 Summer Olympics, there is a flurry of demolish-and-rebuild activities around the Japanese capital. This had temporarily held down supply, which buoyed the property market. But supply will likely jump this year as fresh units hit the market. New office supply in Tokyo will be up 65% this year from last, according to Deutsche Bank. And without much rise in demand, prices could take a hit.
The chase for yield and BOJ buying may continue to float J-REITs for a while. But increased property supply will eventually ding rental income and hence yields. J-REIT shares trade for around a 30% premium to their net asset values, compared with a 30% discount for developers. Nippon Building Fund, the biggest J-REIT, trades at 1.7 times its book value after going up 20% over the past year. Conversely, home builder Sumitomo Realty & Development has fallen 34% from a year ago.
Sometimes good neighborhoods turn bad.
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