Academic journal article Journal of Real Estate Literature

Takeovers and the Market for Corporate Control in Japanese Reits

Academic journal article Journal of Real Estate Literature

Takeovers and the Market for Corporate Control in Japanese Reits

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Japanese real estate investment trusts (J-REITs) were introduced in 2001. As the first REIT market in Asia, Japan now has the largest amount of REITs, followed by Singapore and Hong Kong. The first two J-REITs were listed on September 10, 2001 with a total market capitalization of about $2.15 billion. As of June 2014, the market has grown to 46 listed J-REITs on the Tokyo Stock Exchange (TSE) with a total market capitalization of $83 billion, representing a 30-fold increase. Exhibit 1 shows the development of J-REITs over the 2002-2014 period.1 However, not all J-REITs survived over the entire period. Following the Global Financial Crisis (GFC), the market capitalization of J-REITs sharply declined to around $24.2 billion and since then nine J-REITs merged with other J-REITs.2 These mergers were seen as the optimal approach to overcome financial distress and seek new growth opportunities.

Mergers of J-REITs are of particular interest because of their unique characteristics. First, REIT mergers are not as common as mergers in ordinary corporations. There is a unique requirement that the five largest REIT unitholders are not allowed to own more than 50% of a company, resulting in a small number of takeovers involving REITs. This arrangement provides a type of protection from takeovers for poorly performing REITs that is not available for regular companies. Second, the transaction costs involved in REIT mergers may be higher than the costs incurred by regular corporations since REITs are required to hold at least 75% of their assets as real estate. These assets are heterogeneous, complex, and illiquid, which lead to the opaque value of their underlying real estate assets. Danielsen, Harrison, Van Ness, and Warr (2009) find that financial markets penalize financially opaque REITs with higher transaction costs. Harrison, Panasian, and Seiler (2011) also attribute opacity to the ''five or fewer rule'' (where five people cannot own more than 50% of REIT equity) that reduces the level of monitoring. Third, takeovers involving synergy across vertically organized businesses may not be as important in real estate since the primary assets all share the same characteristics.

Mergers are usually associated with the market for corporate control that disciplines poorly performing companies by instigating takeovers and improving efficiency through new management. All companies are arguably susceptible to this market, therefore poorly performing companies would be absorbed or taken over and subsequent performance would improve. Empirical research on takeovers has confirmed this phenomenon using U.S. REITs. To our knowledge, there is no work in this area investigating J-REITs. However, the takeover effects evident in U.S. REITs may not be as applicable to J-REITs due to their unique regulatory, management, and tax environments. Documenting similarities and differences in the J-REIT market are important since the unique J-REIT environment may render the market less effective if takeovers are restricted.

J-REITs have characteristics that are different from U.S. REITs and other Asian REITs. First, like the U.S. REITs, J-REITs are generally formed as corporations while most of the other Asian REITs are structured as trusts (e.g., Singapore and Hong Kong). Second, the asset management function in J-REITs must be outsourced to an asset manager. This external management structure is common in Asia but is rare in the U.S. Third, the REIT sponsor plays an important role in the Asian REIT market.

The sponsor is typically a participant in the real estate industry and the entity that sources the properties that are initially placed into the REIT at the time of listing. In addition to the external manager, the sponsor in Asian REITs is also very connected to the operations and cash flows of the REIT. This may lead to more potential conflicts of interest in Asian REITs.

The purpose of this paper is to extend the international REIT merger literature. …

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