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Source: Reuters

INTERVIEW-Challenger Kenedix eyes more Japan malls

Published: 16 Jan 2009 01:48:48 PST

SYDNEY, Jan 16 - Sydney-listed property trust Challenger Kenedix <CKT.AX> is looking to buy more Japanese shopping malls, believing its portfolio will weather the country's recession well, according to an executive.

The trust, which listed in 2007 and owns 20 malls managed by its Japanese partner Kenedix Inc <4321.T>, last month slashed its forecast for fiscal 2009 distributions because of dwindling gains from currency hedging on a strong yen.

Its unit price has dropped nearly 60 percent over a year and weak consumer sentiment is a worry. But Brett McCarthy, who manages the trust, told Reuters its assets are performing well.

"Supermarket-anchored neighbourhood shopping centres are a defensive asset. The market is taking a very general approach...that all retail has a major problem. It's not necessarily the case," McCarthy said.

"If you do your investigation thoroughly, there are a lot of good opportunities in retail."

Financing any acquisitions could be tough because of the trust's depressed share price, and McCarthy said any capital raising would have to wait until the unit price recovers. But he said selling assets to buy better value ones may be an option.

"A possibility is to do asset sales and rollover them into other types of retail property that have good value opportunities," he said.

McCarthy said some landlords in Japan may find it difficult to refinance debts at their March book closing, forcing them to sell assets at a discount. And new investors may sell after finding that falling rents do not justify the high prices they paid for assets in the last couple of years.

In recent years, many struggling Japanese retailers have sold property to investors to free up cash, and analysts believe the current economic downturn will accelerate the trend.

Hit by the global financial crisis, consumer sentiment is weakening in Japan, with retail sales falling 0.9 percent in November from a year earlier and overall household spending dropping 0.5 percent for the ninth consecutive month.

In a sign of the difficulties, Aeon Co <8267.T>, the nation's second-largest retailer, said in December that it would tie up with Mitsubishi Corp <8058.T> to cut procurement costs.

But McCarthy said his portfolio of smaller neighbourhood shopping centres, mostly selling necessities, would stay strong.

"The trend you are seeing now is people have stopped eating at restaurants and they are buying at supermarkets and they are eating at home," said McCarthy, who lived in Japan for nine years.

Challenger Kenedix is one of four trusts that listed Japanese assets on the Australian bourse -- using currency hedging to artificially boost low yields from Japanese property.

Taking advantage of interest rate differences between Japan and Australia, the so-called "capital hedge" has contributed about 20 percent of earnings.

But the global financial crisis raised concerns about refinancing by property trusts, and the rapid fall in the Australian dollar and rise in yen has disrupted hedging strategies.

Allco Finance Group <AFG.AX>, the ultimate parent company of the asset manager for Rubicon Japan Trust <RJT.AX>, is going through restructuring. Share trading of Babcock & Brown <BNB.AX>, parent firm of Babcock Brown Japan Trust <BJT.AX>, has been suspended as the company negotiates with lenders. Galileo JapanTrust <GJT.AX> cut distributions and announced asset sales.

Challenger Kenedix also cut its distribution forecast for the 2009 fiscal year to 6.5 cents from 17.2 cents as recent yen strength reduced the headroom under its capital hedge.

But its borrowing facility does not expire until April 2012, and 10 of its properties that were revalued last month saw only an average 3 percent drop in values from 12 months earlier.

However, analysts say investors now prefer simple structures for Australian property trusts -- pure rental streams, rather than trusts with complex capital and currency hedges.

"They're really going to be looking for a vanilla plain product where there is certainty how to operate and what sort of factor is going to impact on the vehicle," said Dugald Higgins, associate director at Property Investment Research.

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