Friday, May 29, 2015

My Analysis of J-REITs vs. Saizen REIT (Updated May 2015)

A blog reader, Shimamoto, recently asked me about updates on my old post regarding J-REITs and Saizen REIT (Singapore listed J-REIT). Saizen REIT is actually the 2nd biggest position that I have in my humble portfolio, so it is also in my own interests to re-look at this space and see what is going on.

I went to Bloomberg, checked on my old list of residential J-REITs (I will just refer to all of them as J-REITs, but I am actually only referring to the Residential ones, and not any other sectors) and came up with this new data:

In all honesty, the only that has actually changed with J-REITs are that they are now a heck of a lot more expensive.

From quick eyeballing of a few of the charts (my internet is so slow today, so I am too lazy to check all the charts), it looks like the J-REITs have appreciated in price by about 20% since my post in October! That has been more than half a year ago, so at least a dividend payment should have been paid out by then (2% which is half of the 4% yield then).

That means since October 2014 until now, investing in J-REITs would've made you about 20-25% returns! Not too bad!

This is of course corroborated by the fact that the average J-REIT's P/B has moved up from 1.42 to 1.60 and yields have compressed from 4.09% to 3.41%.

But, remember, the returns are in JPY, which has of course deteriorated from 85.76 to almost 92 against $1 Singapore Dollar.

Everything else between J-REITs and Saizen then and now are still the same. Saizen has almost double the yield, because it has half the P/B price. There isn't any rocket science here. Buy something at half the price, you get double the yield.

One column that I did not put here this time was the D/E ratio, which I forgot. But don't worry, not much has changed either. The average J-REIT is still about twice as leveraged as Saizen. For D/E, the price has nothing to do with it. It just means that objectively, Saizen is the least leveraged REIT in the Japanese residential real estate subsector.

So, why is there such a gross mispricing in Saizen REIT? Let me quote myself:

Personally, I think that Singaporean investors, especially those in the REIT arena are very yield-conscious. If they yield is too low, they will not consider it. Many also shun overseas investments because they just feel "less tangible". These are valid reasons no doubt, but I think that a good analysis should be approached from many different angles, and if many agree, it is probably a good conclusion.

Looking at this very specific investment in a niche asset class, I would say that Saizen REIT suffers from only one thing, which is being listed on SGX. If Saizen REIT was listen in Japan, I am certain that it's yield would be bid down to at the very least, a 5% handle, if not, in the high 4+% range. Even if P/NAV is priced at the lowest end of the range, of just 1.0, there is plenty of upside from this current position. On top of the cheaper valuations based on yield and P/NAV, Saizen REIT also has a better balance sheet with much less debt relative to equity. It is a good thing to be better capitalized.

My personal conclusion? Saizen REIT is a gem in the S-REIT environment. While looking at it purely based on yield compared to other REITs available on the SGX, it may seem more risky and unattractive, but comparing it within it's own niche segment of J-REITs, Saizen REIT is actually extremely attractively priced. Singapore REIT investors may not know how lucky they are, but the REITs listed on the SGX are by far one of the highest in the world when it comes to REIT yields spreads.

This is not a potshot to say that SGX investors are humji and only look at yield. It could be just as true that our Japanese counterparts are totally miscalculating the risks involved in such an asset class investment. Are Singaporean investors undervaluing Saizen REIT, or are Japanese investors overvaluing J-REITs? I think, a bit of both, which is why I am happy owning Saizen REIT.

I am still invested in Saizen REIT. Since October until now, I have actually been taking small nibbles on dips. Yes, I know my portfolio is tiny and the nibbles are nigh insignificant, but I like to imagine that my portfolio is not $13,000, but $13 million instead.

If you think Japanese residential REITs are a good asset class to invest in, it makes absolutely no sense to get exposure to that niche subsector through the J-REITs listed in Japan. Saizen REIT offers the exact same asset class exposure, but it is less leveraged and is literally half the price. Sure, it is "small" compared to the giants listed in Japan, but I still think the same fundamental factors affect all of them as a whole together pretty much the same way.

The "natural" P/B premium of residential real estate is supposed to be about -5%, but generally ranging between -15% to +5%. Saizen REIT on this scale is actually priced rather attractively, which is why they are pumping out 7% yields for being in such a stable real estate sector (albeit lower yielding, hence the low natural P/B premium of the sector). Residiential J-REITs are priced insanely, being valued as if they were on the extreme upper end of the HEALTHCARE subsector.

I'm not a professional, but you don't need to be one to witness an accident happening in slow motion.

I was just reading an article on ZH about Paul Singer, which has a lot to do about monetary manipulation. I have talked about the dangers of bonds as long term investments, and why this is especially so in the case of Japan. You don't need to be a genius to see what Japan is trying to do. They have run out of options and their only option left is debasement (or default, but debasement is much more likely).

The risks involved in the Japanese residential real estate subsector are manifold. There are unsystematic risks unique to each REIT. There are systematic risks to the real estate market as a whole. Followed by risks to the entire Japanese economy. Demographics are also not very supportive of the asset class as a long term investment. And finally, you also have (massive) currency risks, which I think is very underestimated. So, should J-REITs offer a risk premium? I think so. Hence, the higher than "normal" yield that Saizen REIT is valued at on the SGX.

I don't necessarily think that Saizen REIT is extremely cheap compared to what is available in Singapore, but I think that it is a very attractively priced given the risks that I am taking, especially relative to other investors that are investing in this niche area. Maybe I am being biased, but I think that SGX investors are pricing Saizen REIT a lot more accurately than our Japanese friends. Anyway, isn't it better to make conservative assumptions so that you are investing with a margin of safety?

There is no way in hell that this sort of NAV premium currently in the residential J-REIT arena can persist in the long run. Even when First REIT (healthcare) was trading at a premium of 70+% in early 2013, it took only a year for prices to correct and for it to be trading at 8% premium to NAV. That was represented by a 30% decrease in unit price. Don't confuse the price and valuation of a company with it's business and fundamentals. Prices =/= Fundamentals.

So, unless you can justify strongly why a certain REIT deserves to command a premium over it's NAV, it is probably a safer bet to buy REITs below their NAV. 

Zooming in on only the Japanese residential real estate market and comparing between Saizen REIT and J-REITs? It is a no brainer choice which to pick, gun to your head. However, Saizen REIT as an investment in the entire universe of investments? Well, you need to think about that yourself.


  1. Replies
    1. Hi Jimmy,

      I like Saizen :D

      But of course, it comes with quite a few risks. What is the catalyst that will prompt you to buy?

  2. Thanks for taking the time to relook at these! 謝謝 ^^、

    Could the descrepancy be due to the undervalued yen? Which could (and tends to) bounce back in value at a really fast rate. Was lucky to invest in J-REIT in yen in November, thinking of selling now, but dont want to cut my gains if they will run..

    1. Hi Shiamamoto,

      No problem :)

      I think the weak yen is actually one of the reasons for the depressed pricing on Saizen on the SGX. Local investors see the yen as a risk and therefore price Japanese assets more risky, and rightly so since it has moved from 65 to 92 in a short span of 4 years!

      Should the yen actually strengthen, I think that unitholders of Saizen would benefit substantially, since the current NAV of Saizen is calculated in JPY and converted to SGD.

      Congrats on your gains! How much further do you think it can go? What is your current exit strategy? J-REITs very richly valued to me!


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