Saizen REIT

[momoeagle]

I'm less worried about purchase cost for Saizen because technically, Saizen can hold on to their freehold properties forever.

This is unlike other REITs that owns properties with leaseholds.

[Zelphon]

Let's wait for upcoming results in 10 Nov..

It should gives a more clearer picture on the DPU..
Hopefully that will be the catalyst

[sgd]

I'm quite vested in this counter also.

With a falling US$ means Yen will rise, the onus is for US recovery for that other countries currencies must rise against US$ giving the american exports a chance to recover.

Also all reits are affected by bank interest rates and Japanese central bank will maintain interest rates close to zero and 5 trillion yen stimulus package to further encourage growth.

All of saizen's loans and earnings are denominated in Japanese Yen, so maybe there's a good chance to refinance at lower rate as Japan is now again swimming in cheap loans and when Yen rises against USD and after conversion to S$ there could be some unexpected bonuses in store.

[d.o.g.]

All of saizen's loans and earnings are denominated in Japanese Yen, so maybe there's a good chance to refinance at lower rate as Japan is now again swimming in cheap loans and when Yen rises against USD and after conversion to S$ there could be some unexpected bonuses in store.

Long-term owners should consider the economic tailwinds [edit: I meant headwinds] facing Japan. Demographics is a big problem since the shrinking and ageing population is unlikely to result in increased demand for housing, with a consequent depressing effect on rents. Saizen's properties are in the local hub cities, so they'll be hit less slowly, but they are still in the eventual path of the demographic train. Tokyo will be the last to fall, but Saizen doesn't have many properties in Tokyo.

The other effect of a declining Japanese economy is the exchange rate. The yen is probably overvalued given the poor state of the economy and the high level of government debt. Plus, export dependence means that companies will lobby for a weak yen. Since the government can fix its own fiscal issues and please exporters at the same time by printing yen, it is likely to do so sooner rather than later. The government is already running out of domestic buyers for its bonds, so D-Day is approaching. It could be years away, but it could also be months.

As usual, YMMV.

[sgd]

Long-term owners should consider the economic tailwinds facing Japan. Demographics is a big problem since the shrinking and ageing population is unlikely to result in increased demand for housing, with a consequent depressing effect on rents. Saizen's properties are in the local hub cities, so they'll be hit less slowly, but they are still in the eventual path of the demographic train. Tokyo will be the last to fall, but Saizen doesn't have many properties in Tokyo.

The other effect of a declining Japanese economy is the exchange rate. The yen is probably overvalued given the poor state of the economy and the high level of government debt. Plus, export dependence means that companies will lobby for a weak yen. Since the government can fix its own fiscal issues and please exporters at the same time by printing yen, it is likely to do so sooner rather than later. The government is already running out of domestic buyers for its bonds, so D-Day is approaching. It could be years away, but it could also be months.

As usual, YMMV.

Thank you for that most insightful post.

I do agree a strong Yen is not good for the Japanese economy as a whole but good for saizen shareholders in the meanwhile. Printing money to devalue will only stoke inflation. Real estate properties are good hedge against inflation.

If you look at the singapore context, we too have a shrinking and aging problem with our population like the Japanese. Yet today our house prices are among the very high. Are our high prices really justified because of real demand or speculation hot money from quantative easing.

If you turn your attention to this it becomes a little less hazy, as shown almost every country real estate market is an overvalued hot potato except Japan which is deeply undervalued. Again is it real demand driving the skyhigh property prices in these countries or really hot money and speculation at work here? I see more bubbles in this than in my own washing machine

Economist House Prices - July

[kazukirai]

If you look at the singapore context, we too have a shrinking and aging problem with our population like the Japanese. Yet today our house prices are among the very high. Are our high prices really justified because of real demand or speculation hot money from quantative easing.

If you turn your attention to this it becomes a little less hazy, as shown almost every country real estate market is an overvalued hot potato except Japan which is deeply undervalued. Again is it real demand driving the skyhigh property prices in these countries or really hot money and speculation at work here? I see more bubbles in this than in my own washing machine

Hey sgd, I beg to differ on some points. In the Singapore context, our general population is not shrinking. Singaporeans getting lesser, yes, but with our lax immigration and work policies, the population on this island is only growing. In fact, you'll note that the population in SG hit a record high recently.

Japan, however, has a long-standing history of being very closed to immigration. Here, you'll note that their population density has peaked in 2006 (link here, see Table 2.2)

I dare not say if Japan's property market is undervalued or not, but one must realise that declining real demand is a very real thing in Japan. Of course, all it takes is a reversal in policy for Japan to allow more foreigners in and for Japan to this to be overturned, it's probably not a question of 'if' but 'when' but the question is that by the time there are such policy reversals, would it be too late? After all, they don't have politicians whose paypackages and bonuses are tied to GDP growth. =)

[d.o.g.]

WARNING: LONG POST

I do agree a strong Yen is not good for the Japanese economy as a whole but good for saizen shareholders in the meanwhile. Printing money to devalue will only stoke inflation. Real estate properties are good hedge against inflation.

Printing money should cause the yen price of Japanese assets to increase. It is not clear that the actual price in SGD would change. In theory, the currency should depreciate at the rate that it is being printed. In practice, the 2 rates may not be the same, and either effect could dominate for some time.

If Japan prints money slowly enough it could pay off its debts without too much currency depreciation. But this would not please the big companies. If Japan prints quickly enough to depreciate the yen significantly, other countries could follow suit, in which case all the exchange rates revert to their previous levels since all the currencies depreciate roughly the same amount.

Also, if Japan prints money too quickly it could set off hyperinflation, where the currency depreciates faster than it is being printed. This would bring about the collapse of the economy (see: Zimbabwe). Japan is still a rich country with lots of credibility among foreign investors, so this is admittedly an unlikely scenario.

So far, Japan has chosen the safe route of a slow death via deflation.

Deflation in the Japanese real estate market has meant that property values have declined for 19 years in a row. Land values are now about half of 1980s peak values. While it is true that property prices are nearer "bottom" than in the past 36 years, it is not clear just where that "bottom" is.

For the property market to bottom out and start going up, Japan must quickly return to "normal" growth rates of perhaps 2-3% per year. Given the poor demographics, this is an uphill challenge. In the short term, anything can happen. But there do not seem to be any long term catalysts for a Japanese recovery.

Japan retains a technology edge in its exports. But the Japanese giants with this technology are investing in China. Sooner or later, their technology will be transferred, sold, licensed, duplicated or simply stolen. Then what?

A lot of technology was transferred in the past to Singapore. But Singapore was too small to ever pose a threat, and the government also played nice in protecting intellectual property rights. China's manufacturing capacity far surpasses Japan's, and the Chinese government has shown little interest in protecting foreigners' intellectual property.

If you look at the singapore context, we too have a shrinking and aging problem with our population like the Japanese. Yet today our house prices are among the very high. Are our high prices really justified because of real demand or speculation hot money from quantative easing.

Just because Singapore's housing market is apparently in a bubble, doesn't make Japan's an automatic bargain.

almost every country real estate market is an overvalued hot potato except Japan which is deeply undervalued.

The Economist table referenced measures over/undervaluation with respect to "long-run average of price-to-rents ratio". A more recent table is here:

http://www.economist.com/node/17311841?s...d=17311841

According to the Economist, as of 21 Oct 2010, Japan is 35% undervalued. But the Economist's measure fundamentally assumes that the long-run average of price-to-rent ratio is rational. We know that Japanese real estate was overvalued in the 1980s. That means the price-to-rent ratio was very high i.e. not rational. For the last 19 years, property prices have been declining. Assuming rents were stable, the price-to-rent ratio has been declining. That would make Japanese property undervalued - if you assume the inflated price-to-rent ratios of the last 19 years were in fact rational.

The reality is that rents in Japan have been falling. Property prices have fallen even faster. However, Global Property Guide claims that as of Apr 2010, gross apartment rental yields in Tokyo were 5.1-6.2%. This doesn't look like a deeply undervalued market to me. Rather, it indicates how bad the bubble was, that after 19 years the yields are still not all that great.

Given the poor economy, I think rents are more likely to fall than rise. A property where the rent is falling is inherently worth less than the current yield implies, since future rents are lower before you even factor in the time value of money. So Japanese property may not really be undervalued. It could be a value trap: you buy cheap, and it gets cheaper, because returns (rents) keep going lower.

As usual, YMMV.

---

Current and potential Saizen REIT unitholders might find the following document interesting:

http://www.reinet.or.jp/docs/outline/toh_20100401.pdf

It is the Japan Real Estate Institute's survey of real estate investors. It is done every April and October. The April issue shows the latest cap rates and expected rent changes for various types of properties in different cities. Some things stand out:

1. Office rent expectations are basically flat or declining. The only areas expected to see rent growth are a couple of wards in Tokyo, and even then the most aggressive expectation is for rents to go up 3% in 5 years and 5% in 10 years(!).

2. Residential units in Tokyo are valued at a cap rate of about 6%. Outside Tokyo it's 7-8%.

The picture is basically one of stagnation. No meaningful economic growth expected for the next 10 years, as measured by office rents. And residential units yielding 7-8% are no bargain - this is the market rate.

Since Saizen specializes in residential units in secondary cities, on a 100% cash pass-through basis it should yield at least 7-8% if all its properties are generating free cash. Saizen's last distribution was 0.26cts, for 2 months' cashflow. Annualized, this is 1.56cts, but adjusted for warrant dilution it is 1.04cts. Against the current price of 16cts, the yield is about 6.5%.

The YK Shintoku portfolio generates no cash, but only accounts for 9% of NAV. Assuming it gets refinanced, it might add 10% to distributions. That gets us to about 1.15cts, or a yield of about 7.2% on a diluted basis. This is what a normal, undefaulted portfolio of residential properties outside Tokyo should yield.

In other words, the price of Saizen REIT already assumes that the YK Shintoku portfolio will be refinanced i.e. there is no discount for risk. We also know that recent lease renewals have been at lower levels, 4.3% less. So future distributions from Saizen will be lower.

At the current price, unitholders are getting a current yield of 6.5-7.2% on a diluted basis, and this yield will decline in the future. There does not seem to be any margin of safety.

[momoeagle]

thanks everyone for sharing! I learned quite a bit

[kazukirai]

I learned a lot too.

D.O.G-san, your ability to pull out relevant info from all sorts of places and combine them into a succint piece never ceases to amaze me.

[intellect]

Thanks d.o.g. for sharing your insight as I was totally lost on how to evaluate this REIT previously.
I have really learned more on REITs evaluation from this thread