The Impact of Stock Price and Interest Rate on the REIT Market in Japan

I. INTRODUCTION The first two REITs (Real Estate Investment Trust) were listed on the TSE (Tokyo Stock Exchange) in Japan on September 10, 2001 (1). Since its launch at the end of March 2003, the TSE REIT Index increased over several years before the sub-prime loan crisis in the US. The announcement by HSBC Holdings on February 7, 2007 that its 2006 charges for bad debts from US housing loans would be more than $10.5 billion was a surprise, being 20 % higher than financial analysts had anticipated. The suspicion that subprime loan might be a big problem was disseminated in the financial markets the same day. Figure 1 shows the movement of the TSE REIT Index from March 31, 2003 to January 10, 2013. It can be seen that the Index peaked at 2612.98 on May 31, 2007. After the end of May, it began to decline, reducing further after subsidiaries of BNP Paribas announced on August 9, 2007 that they were suspending liquidations due to the difficulty of obtaining fair values for ABS (Asset Backed Securities) related assets under market pressure. [FIGURE 1 OMITTED] After the collapse of Lehman Brothers on September 15, 2008, the REIT Index tumbled amid concerns as for the tightening of fund procurement. It declined to a record low of 704.46 on October 28, 2008. On October 9, 2008 the New City Residence Investment Corporation had filed a petition for protection with the Tokyo District Court under the Corporate Rehabilitation Law because it became difficult to procure funds. This was the first bankruptcy of a REIT listed on the TSE. Pacific Holding, owner of two REIT investment corporations (the Japan Commercial and Japan Residential Investment Corporations), also filed a petition for protection with the Tokyo District Court under the Corporate Rehabilitation Law on March 10, 2009 because of difficulty procuring funds (2). The Joint Corporation, owner of the Joint REIT Corporation, filed a similar petition on May 29, 2009. After this case, the REIT market began to recover gradually because concerns over the procurement of funds were progressively alleviated. The Great East Japan Earthquake on March 11, 2011 cast a shadow over the REIT market, but the gradual recovery continued. After newly elected Prime Minister Sinzo Abe announced anti-deflationary measures in December 2012, the REIT market began to demonstrate an upward trend. The TSE REIT Index increased to 1,110.13 on December 21, 2012, thereby surpassing its closing price of 1,092.29 on March 10, 2011, the day before the Great East Japan Earthquake. This was partially due to market speculation that the BOJ (Bank of Japan) was about to introduce an inflation targeting policy to bring the Japanese economy out of deflation (3). The BOJ therefore decided to introduce a price stability target under the framework for the conduct of monetary policy on January 22, 2013. This target was set at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) (4). According to the ARES (Association for Real Estate Securitization) (2012), in November 2012, the portfolio asset size of the REIT market in Japan, which represents the total acquisition price of REIT-owned properties, reached [yen] 9 trillion. It had taken 1.4 years for the REIT industry to add [yen] 1 trillion properties to the portfolio since its size had reached the [yen] 8 trillion in June 2011. That compares to the 3.3 years it took to increase from [yen] 7 to [yen] 8 trillion, indicating an accelerating period of growth. The number of listed investment corporations by the end of 2012 was 37. According to ARES (2013), at the end of 2012, the equity market capitalization of J-REIT stood at [yen] 4.51 trillion, a rise of 53.4 percent from the previous year end figure of [yen] 2.94 trillion. This paper focuses on the impact of stock prices and interest rates on the REIT market in Japan. It examines two important issues. Firstly, it looks at the relationship between the REIT market and stock prices. …