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JAPAN REITS GET GREEN LIGHT TO INVEST OVERSEAS

By Dees Stribling

The Japanese government says it will allow Japanese REITs to invest overseas later this spring. Since their creation in 2000, these J-REITs have been allowed to invest only domestically, but now the thinking is that they will be more competitive if they are able to participate in the growing transnational real estate investment market.

J-REITs, of which there are now about 40, have done well in their brief history, amassing sizable portfolios. According to the Association of Real Estate Securitization, J-REITs were capitalized to the tune of about $56 billion as of mid-2007. The ranks of J-REITs include a few notable retail property specialists, such as Japan Retail Fund Investment Corp. and Frontier Real Estate Investment Corp.

The question is whether J-REITs will use their new freedom to shop for retail properties in the U.S. and elsewhere abroad. “It’s hard to say exactly how things will unfold, but J-REITs are definitely interested in overseas retail properties,” said Steve Carroll, the managing director of CB Richard Ellis Global Real Estate Securities. “It will be part of a larger pattern in which J-REITs raise relatively inexpensive capital in Japan and then look for higher yields overseas.”

Carroll says it is too soon to speculate exactly where J-REITs will go hunting. But perhaps there is precedent, for better or worse, in the way the REITs or REIT-like structures of other countries, such as Australia-listed property trusts, have handled their overseas investments. Investing overseas would allow for geographical and asset diversification but could also precipitate problems of overextension, such as those that plagued Melbourne, Australia–based Centro Properties Group in its debt-heavy bid to become a major U.S. retail landlord. “Japanese investors will also remember the overreach of the late 1980s, so J-REITs probably will do their homework before jumping into property markets with both feet,” said Carroll. “But in the long run, they'll seek out investment opportunities worldwide.”

Winston Sammut, the managing director of Sydney, Australia–based Maxim Asset Management, concurs. “J-REITs probably will be a little cautious initially,” Sammut said. “But if only because of their relatively large size, they're certain to become major investment players before too long.”