*Translated by DeepL, automatically.
Expectations for Normalization
J-REITs were forced to perform poorly in 2020. Most market participants were inclined to assess the extent to which the economic downturn caused by the new corona disaster and changes in corporate and individual behavioral patterns would affect the real estate rental market. Contrary to this, the J-REIT market is expected to experience a somewhat flat period in 2021 after a rebounding development. This will be followed by a full-fledged recovery in demand, and the market is expected to rise further in the second half of the year.
In general, individual J-REITs are maintaining their management discipline. Valuations in the sector are currently undervalued relative to the past, and there is a sense of lagging behind the Japanese stock market.
It is expected that the earnings forecasts of companies in the main subsector, office REITs, will bring a sense of security to market participants, and the J-REIT market is expected to rise.
In January-February 2021, the financial markets are expected to show a clear risk-on trend and tilt toward sector cycles due to the progress of vaccination against the new coronas overseas, and the J-REIT market is expected to recover from its lag behind the Japanese stock market. The index has surpassed 1850 points, the target for the TSE REIT Index in early 2021 (roughly at the end of January), and has reached over 2000 points as of March 2021. The index has been in a slight adjustment phase since the latter half of February, perhaps due to the impact of the rapid rise.
Investment Priorities by Subsector
1. Logistics facilities
3. Mixed-use and general-purpose
4. Small- and medium-scale offices
5. Retail facilities
6. Large office
In looking at the future fundamentals of each of these subsectors, a key point to consider is the impact of changes in the behavioral patterns of companies and individuals in the wake of the spread of the new corona infection. Based on the premise that the vaccine for the new coronas will spread, it will be necessary to take into account that society will normalize to some extent and that the economy and corporate performance will recover to a considerable extent. However, there is still uncertainty in Japan about how quickly the vaccine will spread.
Logistics REITs have so far been largely unaffected by the new Corona, and in fact, the increase in demand for e-commerce-related leases due to the expansion of nest egg consumption has had a positive impact. In addition, the ability to grow dividends through capital increases leveraged by high valuations in the stock market has been attractive. On the other hand, valuations have been relatively high and have recently reached a ceiling. However, if the development of a new corona vaccine causes financial markets to turn risk-on, logistics REITs, which are defensive and have relatively high valuations, may underperform.
Residential REITs have seen a gradual decline in occupancy rates due to a decline in the number of new tenants and a contraction in the rate of rent increases. However, given the demographic trends and new supply of rental housing, the recent modulation in the rental housing market is unlikely to be structural. If people's sense of caution eases with the development of the new Corona vaccine, and if the current situation of excessive reluctance to move changes, residential REITs that own a large number of high-quality properties in good locations in Tokyo and other major cities should be able to regain good business conditions. In addition, we hear from the real estate community that there is demand from families to move to larger homes as telework becomes the norm. However, residential REITs are also relatively defensive in nature and have high valuations, and may underperform if financial markets enter a risk-on phase.
Office REITs are concerned about a decline in demand for office space due to the deterioration in corporate earnings caused by the new corona disaster and the spread of telework. In particular, the real estate industry is expected to see a contraction in the number of luxury offices used by high-end intellectual worker firms in areas such as Marunouchi. On the other hand, the impact of the new Corona on business performance will naturally vary from company to company, and it is also possible that many companies will not move to continuous telework due to the remote access environment, productivity and communication issues. The situation is somewhat complicated. If the development of the new Corona vaccine progresses, it is certain that many companies will return to a normal work style. In the short term, the vacancy rate in the office market will first settle to a flat trend, and views of office REITs will turn favorable. In addition, valuations of office REITs are generally undervalued, and if financial markets turn risk-on in the future, they are expected to outperform, and office REITs, the main subsector of REITs, are expected to play a leading role in raising the overall J-REIT index.
Commercial REITs have been greatly affected by the new Corona disaster, depending on the type of tenant. So far, however, most of the rent exemptions granted by commercial REITs to tenants appear to have been temporary measures to cover the period of closure under the emergency declaration, and there have been few new requests for rent exemptions since the emergency declaration was lifted. Suburban commercial facilities have largely returned to customer traffic, and the valuation of commercial REITs may recover quickly. This could have a significant positive impact on commercial REITs, which are generally sensitive to the economy and whose valuations are currently generally low.
Hotel REITs have been struggling to cope with the sharp drop in demand for accommodation due to the new corona disaster. However, the situation has improved since the emergency declaration was lifted, as people are less wary of the new corona and domestic leisure travel demand has increased, partly due to policy support. At present, the business conditions of many hotel operators are still severe, and hotel REITs are not yet able to expect a significant recovery in their dividend levels. However, if the development of a vaccine for new coronas leads to a recovery in inbound demand in addition to domestic demand, the valuation of hotel REITs may increase remarkably. Hotel REITs are expected to experience a divergence between rising stock prices on the back of favorable conditions and the actual uncomfortable business conditions.