Japan Residential: Improving Investment And Portfolio Environment

Japan Residential Investment Company (JRIC) listed on AIM in October 2006 with an initial seven-year life and has a continuation vote scheduled for 19 July. The vote coincides with a possible cyclical upturn in real estate values, underpinned by growing investor demand for quality residential assets. This is partly as government efforts to revive GDP have focused attention on possible inflation hedges, but is also due to ready availability of bank finance at low interest rates. JRIC’s skills as a property manager are reflected in portfolio occupancy maintained at 95% for the past 24 months. Its modern, high quality portfolio of Japanese residential property outperformed its IPD benchmark by 1.2% pa over the five years to end-October 2012 (c 10% return vs 4% for the benchmark). We see potential for further underlying growth in asset values, revenues and margins as it disposes of smaller, possibly ex-growth assets and reinvests in higher yielding properties, although JRIC’s yen exposure is unhedged.

Improving investment and portfolio environment
The market recovery for JRIC’s asset class is reflected in recent value growth – a 2.6% increase for JRIC’s portfolio on a like-for-like basis in the 12 months to end-November 2012. Recent reports from Savills Japan confirm increasing interest from both domestic and overseas investors in residential property. JRIC aims to capitalise upon market liquidity to make selected disposals (and has sold two properties this year at prices c 20% above independent valuations) and the ready availability of low cost finance at 1-2% pa (for up to 70% LTV) to reinvest at initial yields, which immediately enhance EPS and NAV/share.

Valuation: 5.9% prospective yield
Areas under JRIC’s control – portfolio occupancy and asset rotation – are driving underlying returns. The functional currency is JPY as all operations are based in Japan, but sterling EPS and NAV/share will be affected by a fall in JPY/GBP (so far this year, from 132.0 to 150.6). We have adjusted forecasts for asset sales and exchange rates; NAV fell from 64.5p to 61.4p (assumes year-end FY13 ¥/£150.0 compared to 143.5) and PBT/EPS from £7.3m/3.7p to £7.2m/3.6p (projected average ¥/£141.0 compared to 137.8). Revised EPS (3.6p) still covers a flat dividend and is comfortably ahead at 4.1p including profit on asset sales, but currency weakness might constrain future distributions. JRIC is due to report interims shortly and we will comprehensively update our forecasts then.

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