With an unemployment rate falling to 3.7% and the consumer price index showing positive figures after many years of deflation the Japanese property market provides definite opportunities for Australian investors. Fortunately there are two specialist Japanese property plays listed on the ASX.
Astro Japan Property Group (ASX: AJA) is a stapled security (trust + management company) which received a significant setback with the onset of the GFC. Since then this security has restructured and stabilised its capital base. With major exposure to the greater Tokyo area, AJA is well placed to derive further benefit from the improving economy. The property portfolio encompasses retail, office and residential. Overall occupancy is 97% with retail 98.2%, office 89.2% and residential 100%.
Retail comprises the major portion of the portfolio, followed by office and a small residential component. Being a periodic visitor to Japan I can only say that bricks-and-mortar retail is thriving at present (possibly due to the incoming sales tax lift). Although the bulk of the office buildings are B Grade, all are very well situated close to public transport links and this is a very important factor in Tokyo.
A likely risk is the loss of a major retail tenant (4.9% of current property income) following the move to another location. It is unlikely this property will be re-leased on the same terms.
Astro Japan Property Group ($3.85) stacks up ok on standard metrics – less than 10 times underlying earnings and a yield in excess of 5%. However I prefer to judge property entities on the discount to independent valuation; and its worth noting Astro Japan sells at a 32% discount. So far, all four properties sold in the recent rationalisation achieved prices well above valuation. Although the portfolio appears highly geared at 55% overall borrowing costs are extremely low.
Galileo Japan Trust (ASX: GJT) is similarly positioned to Astro and has also undergone significant restructuring in recent years. Galileo (23 buildings) is of smaller scale than Astro (34 buildings). Although the portfolio is tilted toward Tokyo, properties are also located in Osaka, Kobe and other cities giving some diversification. Gearing is 57% and Galileo Japan ($1.56) sells at a discount of 27% to asset backing ($2.15). In 2014, earnings per unit are estimated at 17c and the distribution 14c – placing Galileo on a prospective yield of 9%.
There is increasing evidence Japanese commercial real estate is decisively breaking free of a long-term downtrend. Both Astro Japan and Galileo Japan offer low risk exposure to a market where rents are rising and capitalisation rates are falling. In addition they offer attractive yields and can be bought at significant discounts to current valuations. By way of comparison most offshore Japanese property trusts / vehicles sell at a premium to asset backing and have negligible yields. In my view Astro Japan and Galileo Japan are solid value income buys at present prices.
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Motley Fool contributor Peter Andersen has interests in Astro Japan Property Group and Galileo Japan Trust