Nippon Building Fund: NBF aims for growth as rivalry hots up

  • 10 Dec 2004
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With growing competition for new property acquisitions, Nippon Building Fund hopes its relationship with one of Japan's leading property companies, Mitsui Fudosan, will keep it one step ahead of the game.

It was on September 10, 2001, when Nippon Building Fund became the joint winner of the accolade as Japan's first J-Reit to list publicly on the Tokyo Stock Exchange.

Three years on, the trust has evolved from its original size of 24 properties. By September this year, it had acquired a further 24 properties and sold four smaller buildings, giving it 44 sites worth ¥400bn.

NBF's core focus is office buildings in Tokyo's central business districts, as well as securities, beneficiary certificates and other assets backed by office properties.

The trust's stated primary investment objective is to focus on the office market in order to achieve sustainable growth in portfolio value and stable profits on a mid to long term basis.

Having enlarged its portfolio so rapidly in just three years since listing, NBF is one of the core holdings for investors tracking the J-Reit market.

EuroWeek visited NBF's asset management company, Nippon Building Fund Management Ltd, almost three years to the day from the landmark IPO, meeting Satoshi Hironaka, senior vice president and general manager of the financial team.

?When we set out,? says Hironaka, ?around one- third of our assets were originated from our two sponsors, with the other roughly two-thirds acquired from companies undergoing restructuring and from distressed sale situations.?

Founder Mitsui Fudosan, source of many of the trust's key properties, is one of the oldest and most prestigious of Japan's real estate companies. ?We are privileged to have such a wealth of expertise associated with our trust and to have such a deep pool of assets to draw upon for acquisitions,? says Hironaka.

As is evident from its rapid asset growth, NBF managed to find some ideal acquisition opportunities in the first two years after its IPO. ?But,? says Hironaka, ?the acquisition market is now much more challenging, with higher prices, lower returns and intense competition.?

Faced with this, NBF is clarifying and adapting its acquisition policies. ?We are wary of becoming embroiled in bidding wars for assets,? Hironaka explains, ?and we are therefore trying to locate some assets from among new development projects. We are not rewriting the rules, but adjusting our guidelines to a more accommodative position to reflect the current market realities.?

Any purchases of properties from new project developments would be limited to 10% of the total portfolio. ?We recognise that there is some enhanced risk over buying a fully tenanted building with a history, but that can be offset by obtaining a discount by guaranteeing the developer an exit point,? he says. ?Moreover, we can mitigate the project risk we take on by setting some minimum requirements on the developer.?

Despite the current short supply of tenanted buildings at reasonable prices, NBF is optimistic it will be able to grow its assets at a healthy pace in the years ahead.

?The corporate and financial sector restructuring in Japan in the past five years is a new precedent and proves that trading assets and repositioning balance sheets have become an acceptable part of the Japanese financial system,? Hironaka argues.

Remarkable progress
It is remarkable how far the listed J-Reit market has evolved in little over three years. Japan's first two publicly traded J-Reits galvanised enormous interest among small investors when they floated in 2001, despite grave concerns at that time that Japan's commercial property market had still not hit the bottom of its slump.

Precise numbers are difficult to gauge due to a lack of liquidity at the time, but the commercial property market hit its peak in the late 1980s and by the time NBF listed in 2001 real estate values were still only a shadow of their former levels.

?There was little or no liquidity in the Japanese commercial property market at that time,? Hironaka recalls, ?and there was such poor disclosure by Japanese companies and financial institutions of what they thought the current valuations should be. Also, J-Reits were a totally new category of financial product.?

There had been friendly competition for the honour of becoming the first J-Reit to list on the Tokyo Stock Exchange. Bookrunner Nomura Securities and NBF's founders and management priced the issue at ¥625,000 a unit.

The units traded down initially, a disappointment as the other trust that listed on the same day ? Mitsubishi Estate's Japan Real Estate Investment Corp ? climbed in the secondary market.

Some observers ascribed NBF's relatively weak debut to a pre-IPO placement at ¥500,000 a unit some months earlier. The argument was that funds were almost invited to take an easy profit during early trading.

By late October 2001, NBF's shares were trading at ¥580,000 and they slumped to an all-time low of ¥471,400 in January 2002. The stock was weak for much of 2002, as most property shares suffered, due to concerns about the so-called ?2003 problem' in which the available stock of grade ?A' buildings shot up by more than 20 % causing vacancy ratios to rise to over 10% and rents to fall.

But as more investors have since tuned in to the merits of the J-Reit sector, the units have vigorously outperformed the wider stock market and on October 27 this year were quoted at ¥890,000.

?Looked at with the perspective of time, NBF was during those early times significantly undervalued,? Hironaka says, ?and the IPO in fact had offered a sensible and fair value proposition to investors.?

He recalls that the sole comparable Japanese stock against which to price the IPO was Daibiru Corp, the property developer, whose main income is from letting buildings.

Daibiru was of about the same scale as NBF, although a traditional company, not a trust. Another reference point used was utility stocks.

Given the lack of direct comparables at home, Hironaka and his team looked to the US Reit market. ?But the US trusts were at that time valued in a wide range, at plus or minus 30% to net asset value (NAV),? he recollects. ?Moreover, there was not ? and there is still not today ? a defined standard for calculating NAV in Japan, giving ourselves and the appraisal companies a very difficult task to pinpoint precise values.?

Hironaka believes that in the end, the IPO was fairly and accurately priced. ?We tried to look at the trust as real estate and therefore tried to set a valuation against NAV,? he says, ?and also as a financial instrument in order to correctly price the yield, which at that time was roughly 3% above the 10 year government bond.?

Hironaka is enthused about NBF's progress and about prospects for the J-Reit market.

?Although we face a shortage of supply, compared with demand,? he concludes, ?we believe this is just the beginning of a wholesale restructuring across Japan and that this ongoing process will produce plenty of opportunities for NBF.? 

  • 10 Dec 2004

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