There has been tremendous growth in Japan for mutual funds that invest primarily in REITs, but a recent regulatory rebuke from the country’s Financial Services Agency for such investments could spell trouble for Japanese REITs ahead.

According to a report published by Mizuho Securities dated 14 July, the US REIT market is now also at risk of weakness arising from this development, given that Japanese mutual funds hold between 5% and 10% of the US REIT float, which is valued at approximately USD53 billion.

Data from the Japanese Investment Trusts Association suggest that the market for mutual funds that invest in foreign and domestic REITs totalled just over JPY3 trillion (USD26 billion) as of end-March 2010, but this has grown by roughly JPY9 trillion (USD79 billion), to around JPY12 trillion (USD106 billion) as of end-May 2017.

“Over that span, the aggregate assets of funds that invest specifically in [Japanese REITs] has grown 12 times, from just over JPY320 billion (USD3 billion) as of end-March 2010 to roughly JPY3.8 trillion (USD33 billion) as of end-May 2017.

Similarly impressive growth numbers are seen for mutual funds that invest in REITs outside the Japanese market, such as US REITs, said Mizuho Securities in its report.

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By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.