MIZUHO SECURITIES | GLOBAL EQUITY RESEARCH
Key Points
REITs have had a great run globally but can the party go on? Is this a bubble in the making? In this firstever cross-border collaboration among Mizuho group analysts, we try to answer this very question by diving into the fundamentals of the REITs sector in four major global markets – the US, Japan, Hong Kong (China) and Singapore.
The answer depends on whether the underlying property sector is healthy…The news is generally good for the US and Japan. US real estate fundamentals remain favorable with moderating, yet still above-average organic growth rates driven by full occupancies, favorable demand (propped by a slowly improving economy, supportive demographics and cheap access to debt) and generally low levels of new supply. Cap rates are low, but the math relative to interest rates remains defensible. In Japan, although cap rates are also at historical low post-NIRP, rising rents have yet to break out of their long-term decline and so we don’t fear a bubble. On the other hand, we think the physical property markets of China, Hong Kong and Singapore are increasingly disconnected from slowing economic growth, with some China markets clearly in bubble territory.
… And on the specific dynamics of REITs as an asset class. With demand-supply fundamentals supportive of REIT valuations, we should expect interest rates and yield spread considerations to be the marginal drivers of REIT performance going forward. Barring any policy shock, we find that the rates/yield environment remains supportive to REITs over the foreseeable future. Counter-intuitively – but because the REITs sector is much less developed in Asia ex-Japan – we find that despite bubbling property prices, the REITs market still offers value amid a scarcity of decent yield plays.
But ultimately it depends on what kind of investor you are… For the risk-averse global investor, we recommend cherry-picking in the US and Japan, with the US most preferred overall given that it is the largest and most established REIT market from a global perspective, with growing trading liquidity and conservative balance sheets that may be better equipped to deal with higher rates should they happen. For the more adventurous investor, there’s a lot of value in Asia but Japan is safer thanks to a stronger property market while AEJ REITs could actually appreciate significantly from here if the property market stabilizes. This report includes a full list of our coverage recommendations and highlights the ten best Buy ideas from the team.
Timing is everything… This report is timed nearly coincident with the formation of the 11th Global Industry Classification Standard (GICS) sector for Real Estate, which broke free from the Financial sector on September 1, 2016. Hence, a larger audience of generalist investors is now being prompted to take a closer look at REITs on the global stage. Our effort should help those newer to the space to compare and contrast REIT markets across the world.
View the full research report for important disclosure and analyst certification information. Ratings and/or Price Targets may change. Refer to the US Equity Research Portal library for the most recent company research.
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