Since my last piece about how much better the Tokyo real estate market was starting to look (the deflation of the last 15 years appears to be all but over), the MoneyWeek offices have been besieged with requests for information about how to get in on the ground floor.
The answer, I’m sorry to say, is that it isn’t very easy to do so. You could, of course, hop on a plane and spend a week or two looking for your own building around Moto-Azabu (where prices are already rising), but I suspect most readers will be looking for a less proactive way in – via the equity markets.
The trouble is that while land prices are still yet officially to cross over into positive territory, that hasn’t stopped the stockmarket looking forward to when they will. Financial markets are notoriously efficient discounting mechanisms, and the Tokyo Stock Exchange, despite its historical reputation for putting flakey valuations on things, is no exception. In anticipation of the end of the credit crunch (ie, when the banks would once again lend out money relatively freely), and the sizeable upward revaluation in land prices that the end of this will facilitate, the listed real estate sector has already massively outperformed: it’s up 73% this year, having risen nearly 40% in 2004. In fact, the sector has been out-performing the Topix index for six years straight now, in the confident (although as yet unrealised) expectation that things will soon turn positive. That means that – for now at least – it is too late to buy into Japan’s real estate stocks and expect to make particularly good gains.
So what else gives exposure to the sector? The obvious answer seems to be Japanese real estate investment trusts (JReits). Mitsubishi Estate, Japan’s number one real estate company, has risen 75% since early June, but the number one JReit, Nippon Building Fund, has lost 6% over that same period. That makes the latter look good value, right? Sadly not. The problem with Reits (and the reason why everyone in the market has left them well alone, while piling into practically every other sector) is that no one is quite sure who actually owns the assets within the trusts that the Reits initially set up. Officially, investors own the “beneficiary interests in trust real estate assets”, which for a long time everyone assumed meant the land. However, it is now clear that in some cases it means nothing of the sort. Instead, investors own the buildings, but not the land they stand on. Little wonder investors have decided that this is not the time to play rising land prices – it isn’t.
So where do we look next? If real estate stocks are a good proxy for land prices, perhaps the answer is to look for a good proxy for the real estate sector. Historically, the railway sector (firms that hold lots of land) run hand-in-hand with the real estate stocks, but in the last couple of years, the railways have slipped behind, creating an attractive-looking opportunity.
However, if you want to play this old relationship, at the moment you’d do best to stick to the older listed companies, rather than buying into the (once publicly held) Japan Railway (JR) stocks. The biggest and best laggard to the three major Japanese real estate stocks, out of the non-JR railway stocks, appears to be Tokyu Corp (stock code: 9005). The stock has a history of following real estate stocks very closely. Only once in the past 33 years (at its low in December 1999) has Tokyu been at such a discount to the sector, and less than two years after that its stock price had more than trebled. The outlook this time, with the real estate stocks still flying, is just as exciting.