A $5 billion opportunity

Nikko Salomon head of equity capital markets, David Hatt says the J-REIT market could boom.
Are you positive, since in spite of all the turmoil globally, there have been quite a few IPOs in Japan this year?

That's a fair point, although volume has been much smaller than last year. Last year there were 204 deals. This year, so far, there have been 134. So we've been affected.

Relative to Asia or the US, at least the market has proven to be open for new deals.

There are deals getting done. There is money and liquidity around. But there has only been Y2.5 trillion ($20.78 billion) raised versus Y5 trillion last year.

Has the Koizumi effect been positive for Japan, in your view?

We had a period from March through May where the anticipation of Koizumi was discounted into the market. Since then we've drifted again. The Nikkei Index is down 25% this year; and Koizumi-san has obviously got his mind focused on structural reform.

Is there a sense, among professionals like yourself, that reforms may stall again?

There are concerns that Koizumi will have a hard time pushing things through.

There is quite a large pipeline of equity deals due to come out of Asia next year. Would Japanese investors be receptive to Asian equity stories?

It would have to depend on the story. For the smaller deals I don't think there would be much interest. Larger more liquid deals have great potential, but it very much depends. Risk aversion is pretty key these days.

What sectors have been hot in Japan - in terms of the deals that have been getting done?

"Relatively warm" is probably a better expression. The Pharmaceuticals sector has been reasonably good. We did a gaming deal earlier on in the year which went very well. But that sector has cooled off somewhat. Actually, there has been nothing that has gripped people and made them say, "I've got to be in that". There has been no significant trend for the year.

What are the standout deals?

We've done four deals which are worthy of note. One was NTT DoCoMo because of its size, approximately US$8.1 billion. One was a pharmaceutical deal we did for a company called Fujisawa (a US$390 million global follow-on offering in August). We also did a J-REIT (US$790 million offering of J-REA in August), and a deal we did last week for the Bank of Yokohama -- because it is nice to see that a bank in Japan can finance itself in the capital markets. Those are probably the deals I especially look back on this year and say, "They were pretty good".

The J-REIT [real estate investment trust] market has been a long time coming?

Yes, a long time coming. We raised Y80 billion for Japan Real Estate Asset Management, and Nomura did a deal where it raised Y50 billion. We priced at Y525,000 and it's now trading at Y545,000. Nomura priced at Y625,000 and it's now about Y580,000. But it's nice to see transparency in the real estate sector and finance going into that. Yields were about 4%-4.5%, which is more than that which you would get if you put the money in the bank, although obviously the yield is commensurate with the risk. And we expect to see more of these next year - probably a couple more.

Are these commercial properties?

Both of these were.

What is the potential? How big could the REIT market be?

Oh, it could be enormous. There are different views, but we could see $5 billion of issuance next year.

So REIT is the great growth hope?

Yes, REITs is one area of hope. We are also hopeful that the equity-linked market is going to turn around next year. There are also some regulatory changes to the commercial code, which may boost the buyback of shares and more active management of corporate balance sheets.

Why has the equity-linked sector been more disappointing than you thought?

It's a function of interest rates. They are just so low. The straight bond market has been the preferred alternative.

Do you see that trend continuing next year?

I hope not. Well, interest rates aren't going up in Japan any time soon. But it's difficult to know what will happen next year. There have been some cancelled deals this year and hopefully, they will get done. I am reasonably optimistic. We're talking to a number of issuers about some reasonable-sized deals that they seem to want to do.

How has Japanese sentiment been damaged by September 11th?

Corporate indecision is the most obvious effect. People are less keen to take decisions on whatever action they were considering - whether a financing, an M&A deal or even an overseas IR trip.

It's amazing the way the US has bounced back so quickly. Just a couple of weeks ago there was a seven-day period in which there was $7.5 billion of equity and equity-linked issuance in the US; whereas one would have imagined after September 11th, the doors would have closed. But it's good the US has come back as aggressively as ever. Japan will take a little bit longer.

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