First State’s Nicholas overweights Japan after property price falls

Andrew Nicholas, manager of First State’s £60m Global Property Securities fund, has moved overweight Japan, following the earthquake and tsunami in March.

Nicholas has built up a 5.2% position in the view property prices, which have not recovered, will rebound as the country reassembles.

However, the manager is subdued on the prospects for J-REITS as he said prices have almost returned to their pre-earthquake levels.

“We are tapping into Japanese property which will benefit from the re-construction process and are favouring the better quality house and apartment developers, along with construction companies,” said Nicholas.

“Although J-REIT prices have almost returned to pre-earthquake levels, the prices of property companies have not recovered and we believe the prices have factored in a particularly conservative outlook.

Nicholas said he has holdings in Japanese property developers, shopping centres and homebuilder developers and is focusing on highly capitalised companies which are recovering from the disaster.

“It is clear the economy will take some time to recover from the disaster and strongly capitalised Japanese property companies are undervalued,” said Nicholas.
It is a different story in the J-REIT market, however.

Nicholas said: “J-REITS fell 15.3% less than three days after the disaster but are now 6.1% below pre-earthquake levels, so they are on the road to recovery.

“They have also resumed public offerings with revised capital raisings and acquisitions and we expect further IPO’s to come to the market as pricing stabilises.”

He believes despite retail sales recovering in office centres, demand for Japanese property remains weak and he is subsequently looking to profit from an uptick in demand.

“Office demand remains weak and the rebound in demand has been delayed,” he said.

“While overall, vacancy rates in Tokyo five wards remain high at 8.88% in May, they have fallen for the past two months.

“I think there would be an increase in demand from tenants looking to relocate from older to high grade buildings with strong earthquake resistance.”

The First State fund has produced stellar performance since launch and
has returned 24.4% over the last three years, beating the IMA Property sector average of -0.8%, according to Morningstar.

Over one year the fund has returned 14.8% compared to the 9.9% its peer group returned over the same period.