Company Overview

Saizen REIT is a Singapore-based REIT. Its mandate is to invest in a diversified portfolio of income-producing real estate which is primarily used for residential and/or residential-related purposes in Japan

• On a property tour to visit six residences in Fukuoka, Kumamoto and Hiroshima, Japan
• Residential property is good property asset class in Japan with stable and resilient cash flow
• Japan residential property prices are firming up
• No rating on the stock

What is the news?

We visited six residences under the portfolio of Saizen REIT in Fukuoka, Kumamoto and Hiroshima, Japan in December. These properties are conveniently situated in major commercial and entertainment areas, or towns near transportation networks connecting to major business and commercial centres or close to educational institutions. The building age of these residences range from 6-month to 23- year old and thus provided us a good sense of the condition of the newer and older buildings.

How do we view this?

The condition of the properties from the interior to exterior of the building was well-maintained and some of the rental unit is fully-furnished and equipped with electrical appliances and other fittings which can command a premium. Having said that, we believe the rental units will be highly sought after among tenants given the tip-top condition and easily accessible to places for work, play and learn.

Investment Actions?

Japan residential property seemed to hit the rock-bottom with limited downside. Cap rate is tightening marginally for some cities. This is evidenced by the modest increase of 0.8% for the valuation of 130 portfolio properties in FY12. We opine the worse could be over for Japan residential market. Saizen REIT’s borrowing cost and loan tenure are improving over time since global financial crisis. The management will continue to deepen the relationship with existing lenders and forging new ones to achieve lower interest cost and establish new loans for future acquisitions. Furthermore, the warrant proceeds can be used to perform share buyback which is DPU accretive. For investors who want to have exposure in Japan residential market, they can consider Saizen REIT over Japan Rental Housing Investments Incorporation (listed on TSE) on the thesis of yield compression. Weakening Japanese yen may not be favorable to Saizen REIT but Forex lines could be employed to hedge the depreciation.

Source: PhillipCapital Research - 15 Jan 2013