The significance of residential REITs in Japan as an institutionalised property sector

Abstract

PurposeResidential Real Estate Investment Trusts in Japan (residential J-REITs) have become an increasingly significant listed property sector recently. The purpose of this paper is to assess the effectiveness of residential J-REITs in a mixed-asset portfolio context in Japan by assessing the significance, risk-adjusted performance and portfolio diversification benefits of residential J-REITs over July 2006–August 2018. The ongoing property investment implications for residential J-REITs are also identified.Design/methodology/approachUsing monthly total returns, the risk-adjusted performance and portfolio diversification benefits for residential J-REITs over July 2006–August 2018 are assessed. An asset allocation diagram is employed to assess the role of residential J-REITs in a mixed-asset portfolio context in Japan.FindingsResidential J-REITs generally delivered superior risk-adjusted returns compared with the other sub-sector J-REITs, stocks and bonds in Japan over July 2006–August 2018, with desirable portfolio diversification benefits in the full mixed-asset portfolio context. Importantly,residential J-REITs are observed as strongly contributing to the mixed-asset portfolio context in Japan across the portfolio risk spectrum, particularly in a post-GFC context. This also reflects that residential J-REITs provide high portfolio returns and strong portfolio diversification benefits in a mixed-asset portfolio context in Japan.Practical implicationsResidential J-REITs are effective and liquid residential property investment exposure in Japan. The results highlight the strong risk-adjusted performance of residential J-REITs in Japan’s mixed-asset portfolio context. This suggests institutional investors, particularly Japan institutional investors, should consider including residential J-REITs in their mixed-asset portfolios, as residential J-REITs are seen as a compelling investment product co-existing alongside the other sub-sector REITs and major asset classes in institutional investor portfolios in the context of Japan. This also confirms the effectiveness of institutionalised residential J-REITs. Given the solid residential property market fundamentals in Japan, an increased level of the institutionalisation of residential J-REITs can be expected.Originality/valueThe study is the first study to assess the effectiveness of residential J-REITs, via assessing the significance, risk-adjusted performance and portfolio diversification benefits of residential J-REITs and their role in a mixed-asset portfolio context in Japan. This research enables more informed and practical property investment decision making regarding the value-added and strategic role of residential J-REITs as effective and liquid residential property investment exposure in Japan, as well as an increasingly institutionalised property sector going forward.