Our Market Opportunity --- Retail Properties in Japan
We believe that a number of market characteristics offer us opportunities to generate attractive investment returns from the acquisition and operation of retail properties in Japan:
- Restructuring of Japan's Retail Sector
Japan's retail sector is undergoing restructuring, including an increasing prominence of large-scale shopping centers with strong key tenants, specialty superstores and well-located urban ''high street'' stores. We believe that these properties are increasingly attracting customers away from more traditional retail venues, such as small-sized shops in local shopping areas. We believe that, by continuing to select properties with attractive locations and quality tenants, our portfolio can benefit from this restructuring. In addition, amendments were made to the City Planning Law and the Building Standards Law, which came into effect in 2007 and were intended to decelerate large-scale commercial development in suburban areas and preserve and promote the efficient use of urban infrastructure. However, we believe that, given the recent preferences of Japanese consumers, sales at large-scale shopping centers, including existing suburban shopping centers, will continue to increase both in the aggregate and as a percentage of total retail sales. In particular, we believe we may be able to negotiate more favorable leasing terms from our tenants that find themselves competing over a limited amount of suburban retail space. Furthermore, as competition from the development of new properties may be reduced, the value of our suburban properties may increase.
- High Level of Retail Property Sales
We believe that many retailers and other property owners are seeking to sell their retail properties, driven in part by an increased focus among Japanese companies to improve their return on assets and, to that end, divest assets that are not part of their core business or that are not being effectively utilized. We believe the recent introduction of new Japanese accounting standards for impairment of long-lived assets may also lead to increased sales of properties. We believe that these trends will help generate opportunities for us to continue to acquire attractive retail properties.
- Stable Revenues from Long-term Leases
Retail tenant leases in Japan, and particularly key tenant leases, tend to have relatively long terms and provide relatively stable rental revenues. We believe that these features of retail tenant leases in Japan will provide opportunities to continue developing a property portfolio that generates relatively stable rental revenues over the long term.
- Attractive Assumed Tenant Deposits
Tenants of certain types of retail properties in Japan have customarily been required to make large, long-term tenant leasehold and security deposits, which are assumed by the purchasers of the properties. Although the trend for newly developed properties has been to reduce or eliminate these deposits, assumption of these tenant leasehold and security deposits upon acquisitions of properties generally has the effect of enhancing our liquidity and lowering our overall cost of financing.
- Distinctive Competitive Advantages in Sourcing Retail Property Acquisitions
In terms of the Asset Manager's distinctive strengths in sourcing acquisitions, we believe we hold a number of competitive advantages. First, we believe we were pre-emptive in spending several years prior to the launch of the Fund's initial public offering in March 2002 positioning the Fund as the first J-REIT player to focus exclusively on the retail property class. Second, we believe we will continue to benefit from the domestic retail property sourcing capabilities of Mitsubishi Corporation, one of our Fund's sponsors and a leading global trading company with a deep set of business relationships both within and outside Japan, in addition to the growing set of relationships our Asset Manager has developed with numerous retail property owners, financial institutions and other potential sources of property acquisitions. Moreover, our Fund will continue to seek the most favorable terms under which it will undertake each acquisition transaction over time, on a negotiated basis wherever possible, before such properties are broadly marketed.
- Favorable Retail Property Sector Supply/Demand Dynamics
In a macro sense, we are very pleased with the favorable supply/demand dynamics of the retail property sector.
- Retail Properties Integral to our Tenants
Moreover, retail properties, similar to those we own, are generally integral to the operations of our tenants.
While the Asset Manager has investigated the viability and investor return potential of investment in other property classes, the Asset Manager has deemed the retail property sector, with its favorable supply/demand fundamentals and attractive risk/reward attributes, as the one of the most attractive and appropriate property type for inclusion in the Fund at this time.
Concerning the entry into Japan of foreign retailers as a potential competitive threat us, we actually welcome foreign retailers into Japan, for they may assist in the ongoing restructuring and rationalization of Japan's retail industry. Moreover, if certain of these entrants realize, after attempting to expand in our marketplace, that they cannot reach a desired critical mass or for other reasons decide to depart from Japan, we may very well have an opportunity to acquire certain of their strategic locations. On the other hand, if such foreign entrants decide to expand given their initial successes, we may have the opportunity to work in partnership with such retailers as strategic sale/leaseback partners over time.
