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Editor's note: If you'd like to learn more about investing in Japanese real estate, you can also read Steve's essay, Six Reasons Why Japanese Real Estate Will Soar.
The Big Problem With Japanese
Real Estate
By Dr. Steve Sjuggerud
February 8, 2007
Lately in DailyWealth, I've been writing about how Japanese real estate is a 15-year, one-way bet.
Prices remain down by 75% from a decade and a half ago... but nearly all the charts show the turnaround is finally here – at least in Tokyo.
So how do we buy? We have a lot of options...
The first decision is whether we want to buy actual real estate in Japan or do we want to buy it through a stock that holds Japanese real estate? For today, I'll assume that you don't want to go through the hassle of flying to Tokyo and scouting out properties to buy... I'll assume that you want to buy Japanese real estate through a stock.
From here, the two big choices are either real estate holding companies or portfolios of properties (Japanese real estate investment trusts, or J-REITs). The big problem for us, in buying Japanese real estate through stocks, is PRICE.
Unfortunately, the real estate conglomerates are generally way overpriced. The three giants below have soared by hundreds of percent in the last few years and now trade at astronomical valuations...
Real estate giant |
Price-to-book value |
Dividend Yield |
Mitsubishi Estate |
4.4 |
0.3% |
Mitsui Fudosan |
3.3 |
0.3% |
Sumitomo Real. & Dev. |
5.7 |
0.3% |
So it's time to look at J-REITs instead, which hold portfolios of properties and pay out the rent to shareholders. Unfortunately, the picture doesn't get a whole lot better when we size up the possibilities in office REITs...
The major J-REITs currently trade for about twice what you could sell their buildings for. Here's how I get to that... These major J-REITs have been around an average of less than five years. And over five years, real estate prices haven't moved too much in Tokyo – first down a bit, and now up a bit. So the book values of these companies are a rough gauge of the value of the buildings they hold. As you can see, these stocks are not a good deal now:
Office J-REIT Giant |
Price-to-book value |
Dividend Yield |
Nippon Building Fund Inc. |
2.5 |
2.1% |
Japan Real Estate Inv. Corp. |
2.3 |
2.4% |
Nomura R.E. Office Fund |
2.3 |
2.3% |
Would you buy a building for 100% more than its market value? Then you wouldn't buy these J-REITs, either.
I feel that the residential J-REITs (owners of apartments and condo buildings) offer the best values trading locally in Japan. Nippon Residential is the big player here... and it's only at a 20% premium over book value and pays a 4.1% dividend.
Stepping back, the "big idea" of Japanese real estate is right. But the right vehicle is hard to find. The core problem is, there are simply not enough ways to put money into Japanese real estate through the stock market. With too many dollars chasing too few investment options, the share prices are bound to go up.
It took a lot of looking, but I discovered the best ways to own Japanese real estate through stocks, without over paying. In the latest issue of Sjuggerud Confidential – which came out Wednesday – I shared with my readers three ways to buy into Japanese real estate and earn 7% dividends. I think we have triple-digit percentage upside potential in all of these plays.
P.S. Every month, I tell subscribers to my True Wealth advisory about investment ideas like Japanese real estate, ideas they won't hear about anywhere else. My investment philosophy is simple: Buy assets of great value when no one else wants them, and sell them when others will pay any price. Click here to read about my favorite investment idea right now.
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