Tough times not over, sorry.

Foreigners fleeing Japanese REIT market or just being kicked out?

It seems to me that  foreigners are kept out of the complex Japanese REIT market. Therefore to say situation is improving remains wishful thinking. Japan REIT financing is getting tougher. Prospect REIT (managed by Hawaii based Prospect Asset Management headed by Curtis Freeze) recently secured a Y5b financing from Aozora Bank but at a hefty price to say the least: 9th of October Prospect REIT was facing redemption of its Y5b corporate bond and urgently needed fresh capital. Aozora Bank supplied the credit line charging 5.3% interest, double the usual level, plus shares of the management company as collateral. Prospect REIT owner Curtis Freeze also had to give personal guarantee. Taking in account the cost of its refinancing Prospect REIT revised down earnings and slashed by 40% its dividend.

This is no isolated case; FC Residential REIT, which manages up to Y20b assets, suffered a threefold interest increase (1 to 3.8%) for its existing Aozora Bank term loan. Most Japanese REITS had forecasted 5% yield when acquiring buildings. Taking out 1% managing expenses and 4% funding cost means REIT are bleeding red ink. It seems there are many other Japanese listed REIT unable to rollover financing.

Normally REIT offers much more attractive balance sheet and shareholders equity ratio than any other industry but in the end harsh reality is REIT financing loans are just corporate loans based on credit worthiness of the management company. The logic behind this is to force the REIT sponsor to reorganize mortgaging growth potential and safety.

 

J REITS having successfully restructured are granted with more favorable terms. As an example Advance Residential REIT and Japan Residential REIT announced a merger and were awarded rollover finance at standard 1.8% rate.

 

This said regardless of whether REIT Management Company is domestic or foreign owned the same rule applies to everyone. Crescendo REIT Sponsor Company shifted to Heiwa Real estate, which resulted in Crescendo REIT unit price surging. Even if financial crisis is settling down Japanese banks are putting the screws on mid-size REIT management companies forcing them to restructure or give out.