Amid renewed concerns over global economic growth, potential Brexit from the European Union and a roller-coaster ride in oil prices, investors have been showering their love for Japanese REITs. This is evident from the 4.9% year-to-date gain in the Tokyo Stock Exchange REIT index, which is in stark contrast to the 19.3% fall in the broader index over the same period.
One of the primary reasons for Japanese REITs outperforming the broader sector is buying by the Bank of Japan (BOJ). As per S&P Global Market Intelligence estimates, buying by BOJ has increased premiums on Japanese REITs by approximately 62% as of June 8, 2016. The central bank's buying often triggers price increases as investors generally match the BOJ's steps because of lower downside risk. BOJ Governor Haruhiko Kuroda has stated that there is no limit to efforts for easing monetary policy. The central bank may further expand asset purchases if required.
Meanwhile, the introduction of negative interest rates policy has also helped the Japanese REITs to surge. In January, BOJ's move to impose a negative interest rate for the first time in its history took the markets by surprise.
As per Bloomberg, Japanese REITs, which have an average dividend yield of 3.1%, look appealing in the current scenario as 10-year Japanese government bonds had a negative yield of about 0.2%. Global bond yields have also plunged to record lows.
Interest rates have a significant effect on credit availability and cost of real estate mortgages. A low interest rate environment improves an individual's ability to purchase properties by reducing the cost of mortgage capital, thereby boosting demand. A favorable consumer spending scenario and strong recovery plan could play important roles in boosting the housing market.
ETF in Focus
Given this, investors may take advantage by investing in real estate ETFs based in Japan such as the WisdomTree Japan Hedged Real Estate ETF (NYSEARCA:DXJR).
This fund seeks to provide exposure to the Japanese real estate sector while at the same time offers hedge against any fall in the yen relative to the U.S. dollar. This is easily done by tracking the WisdomTree Japan Hedged Real Estate Index. In total, the fund holds 93 stocks with each holding less than 8% share. Expense ratio came in at 0.48%. The product has accumulated $153.8 million in its asset base and trades in a moderate volume of 73,000 shares a day on average. DXJR is down 7.7% in the year-to-date time frame and has a Zacks ETF Rank of 2 or 'Buy' rating with a Medium risk outlook, suggesting that it will outperform the broad market funds in the coming months.