Japanese Real Estate Investment Market †Free Samples to Students

Question: Discuss about the Japanese Real Estate Investment Market. Answer: Introduction There are plenty of risks that could be associated with an overseas investment. These risks could be associated with a number of factors such as geographical distance, economic risks, the lack of expertise in dealing with Japanese firms and many others. However, the primary concerns with this investment are the market risks of investing in Tokyo. The property will be shared with HSG and the operational risks are expected to be low. The property will be low since the costs of operating the property can be as low as 3%. Additionally, tenants will pay a share in the maintenance of the property. The cost of acquiring new tenants may also be low since the brokerage is expected to be around 3%. The lease length is ten years which helps insure against the volatility of the market. However, primary risk assessment demonstrates that there are plenty of market risks that must be considered before an investment in the property is made. Investment in this property like all other properties of Delta Q would be based on a quantitative measurement of risks and expected growth. Since, market risks are the expected to play an important role in the success of this investment, it is necessary to assess the market risks from various aspects. Ideally, the investment in this property should have a similar or a greater cap rate to the current properties held by Delta Q, so that the opportunity costs of capital invested are lower. Market for Real Estate Space in Tokyo Tokyo is the largest metropolitan in the world, apart from being the capital of Japan. The population all over the country is on a decline but has been increasing the Tokyo Metropolitan area. It is expected that Tokyo will maintain its population.(Nomura Research Institute Ltd., 2013) Hence, the consumption of goods is expected to remain high. Additionally, Tokyo is strategically located as city surrounded by ports. Hence, the demand for logistical properties is expected to be high in Tokyo. This implies that the market for rentals in Tokyo will be high. The ability to lease out is a property is the biggest risk that could be faced throughout the expected holding period of 10 years. The ability to lease out the property would determine the cash flows for the partnership, significantly. The lack of sufficient cash flows would could affect the liquidity of the partnership and have a contagion effect on Delta Q. The vacancy rate of similar properties in Tokyo is low, currently, and had consistently remained low. The highest vacancy rate for similar properties , has been 20%. However, this rate was achieved during at the peak of the Global Financial Crisis. This occurred during the Global Financial Crisis of 2008-2009. Hence, the market for rental space in the near future for Tokyo was expected to be high. Similarly, the vacancy rate of similar properties i.e. logistics properties held in J-REIT portfolios has low, and looks positive in the current scenario. However, the volatility of the vacancy rates of these properties seems to be a cause of concern. A look at the previous trends has shown that the vacancy rates, once spurred by economic factors, tended to climb high in a very short period of time and showed a very vertical trend. This was seen during the Global Financial Crisis, in the quarter of May-August 2010, during the quarter of November 2011 - February 2012, and then again during the quarter of May 2012- August 2012. The sharp rise in vacancy rates could affect the ability to lease the property and presents the risk of frequent liquidity shocks. The graph for vacancy rates between August 2006 and December 2013 highlights a concern that Delta Quantitative Real Estate Capital would have to struggle to keep the property occupied throughout the year. On the supply side of the market, the supply of warehouses has been showing an increasing trend since 2009. The supply of the logistical space available for rentals was over 8000 square meters in 2003. In addition, there are over 17 logistics development projects in the pipeline, with at least six projects located close to the major ports. It is clear that the Tokyo market may experience a sudden rise in the supply of properties for logistical use, during the expected holding period. Tokyo has seen properties market rents that were close to the 1300 Yen per square meter per month. However, the market rate hovers around 1,150 Yen. It is important that the market rent might be high due to the very low vacancy rates in Tokyo currently and it is possible that the rents could drop in the future. Operating expenses are at 350 Yen/ Square metres per month currently. These expenses are not expected to go very high since the Japanese bank has a target inflation of 2%. As a developed country and a country with an ageing population, the inflation rates in Japan are not expected to be high like some developing countries like India or China. Hence, the expenses for operating and maintaining the property are expected to remain stable. Financial Market for Property Assets Bond Yields: Bond Yields in Japan are expected to hover around 2%, in line with the current monetary policy, according to earlier projections. Currently, interest rates in Japan are lower than most of the developed world. This could translate into cheap creditHowever, the Japanese government has suggested that the country will pursue an aggressive monetary policy that will help increase the inflation as well as higher interest rate payments for credit.(Ranasinghe, 2013) De-Regulation of the REIT Market: It is expected that there will be deregulation in the J-REIT market which will help Delta take control or provide credit into the partnership, should the need arise. (Nomura Research Institute Ltd., 2013) This should be seen as a positive for the partnership. In case of deregulatory reforms, it will be easier to invest and divest from the partnership. Gross Domestic Product: The GDP of Japan has hovered around the 2% per annum mark since the early 1990s and is expected to continue to grow within the range of 0% to 2% until 2018, at least. The stable GDP growth could be a double edged sword. Economic stability is expected and hence, can increase certainty. On the other hand, a stable GDP implies that there may not be higher demand for goods and the rental rates would not be expected to rise very high, at least for the next five years. This limits the cap. However, if the new economic reforms go as expected then the growth rate might increase. This could affect the availability of credit as well as the operating expenses. The US Dollar - Yen Exchange Rate: The Japanese Yen has depreciated as compared to the US Dollar since 2003. Japan, recently, posted its first trade deficit in over three decades. This implies that the Japanese Yen may not appreciate soon. This is a positive since this will increase the value of the cap. Decline of exports, on the other hands, may point towards a decline in the demand for logistic properties. Financial Analysis Cash Flows during the Period. All costs and revenues given below are accrued in Japanese Yen. Table 1 Assured Rental Receipts during the Holding Period Rental Revenue Year Nippon 7 eleven Japan Uniqlo Total 2014 310320000 139920000 209880000 660120000 2015 310320000 139920000 209880000 660120000 2016 310320000 139920000 209880000 660120000 2017 139920000 209880000 349800000 2018 139920000 209880000 349800000 2019 209880000 209880000 2020 209880000 209880000 2021 209880000 209880000 2022 0 2023 0 Table 2 Total Assured Operating Expenses Receivable Year Nippon 7 eleven Japan Uniqlo Total 42000000 21000000 31500000 94500000 2014 42840000 21420000 32130000 96390000 2015 43696800 21848400 32772600 98317800 2016 0 22285368 33428052 55713420 2017 0 22731075.36 34096613.04 56827688.4 2018 0 0 34778545.3008 34778545.3008 2019 0 0 35474116.206816 35474116.206816 2020 0 0 36183598.5309523 36183598.5309523 2021 0 0 0 0 2022 0 0 0 0 2023 0 Table 3 Total Assured Receivables Year Total Operating Revenue 2014 1643040000 2015 1643040000 2016 1643040000 2017 1022400000 2018 1022400000 2019 602640000 2020 602640000 2021 602640000 2022 0 2023 0 Table 4 Expected Building Management Expenses Property Management Expenses Year Nippon 7 eleven Japan Uniqlo 2014 10569600 4827600 6971400 2015 10594800 4840200 6990300 2016 10620504 4853052 7009578 2017 0 4866161.04 7029241.56 2018 0 4879532.2608 7049298.3912 2019 0 0 7069756.359024 2020 0 0 7090623.48620448 2021 0 0 7111907.95592856 2022 0 0 0 2023 0 0 0 Table 5 Expected Operating Expenses Year Operating Expenses Per Month Nippon 7 eleven Japan Uniqlo Total 2014 4200 84000000 42000000 63000000 189004200 2015 4284 85680000 42840000 64260000 192784284 2016 4369.68 87393600 43696800 65545200 196639969.68 2017 4457.0736 89141472 44570736 66856104 200572769.0736 2018 4546.2150 90924301.44 45462150.72 68193226.08 204584224.455072 2019 4637.13937 92742787.4688 46371393.7344 69557090.6016 208675908.944173 2020 4729.88216 94597643.218176 47298821.609088 70948232.413632 212849427.123057 2021 4824.4798 96489596.0825396 48244798.0412698 72367197.0619047 217106415.665518 2022 4920.969 98419388.0041904 49209694.0020952 73814541.0031428 221448543.978829 2023 5019.38878 100387775.7642 50193887.8821371 75290831.8232056 225877514.858405 Table 6 Total Expected Capital Investment in First Year Expenses Costs Total Purchase Expenses 5340862575 Total Brokerage Costs 166327200 Tenant Improvement costs 62500000 Recommendations There are plenty of macro Economic risks that could be experienced within this partnership. However, Tokyo is a safe for Delta Quantitative Real Estate Capital (Delta Q) to begin its journey into foreign investment due to the relative economic stability it offers. However, the experience of the contagion of th Global Financial Crisis also, suggests that the economy of Japan is greatly linked to the economy of USA. Hence, strategically, a recession in USA could be followed by a recession in Japan. That beats the primary purpose of diversification which is to provide respite in case the US economy experiences difficult times. There are positives for this investment on the economic front. If the expected aggressive monetary policies go through and the availability of consumer credit rises, then the demand for warehouses would also be affected. Deregulation of J-REIT could be another positive factor that would be an incentive to go ahead with this project. On the other hand, the Tokyo market is relatively saturated with properties for logistical purposes that are already available or in the pipeline. It is strongly recommended that Delta Q considers an investment in the project and adopts a policy of wait and watch for the next three months. If there is a strong push in reforms that would bring in greater deregulation and easier availability of credit, then this investment may be worthwhile. References Nomura Research Institute Ltd. (2013, April). Japanese Real Estate Investment Market 2013. Retrieved from Nomura Research Institute Ltd., consulting Division: https://www.nri.com/jp/opinion/r_report/pdf/japanreport2013_en_final.pdf Ranasinghe, D. (2013, Aoril 4). Bank of Japan Unveils Aggressive Monetary Policy. Retrieved from CNBC: https://www.cnbc.com/id/100614755