Sankei Real Estate has acquired the Grids Premium Hotel Osaka Namba in Japan’s third most populated city.
Sankei Real Estate is selling office assets in Tokyo and Osaka for JPY 34 billion ($232 million) and putting half of the proceeds into the purchase of three hotels across the island nation, as the TSE-listed REIT adapts to the country’s post-pandemic real estate reality.
“The environment of the office building has changed such as the entrenchment of telecommuting and other new forms of work, driven by the outbreak of COVID-19, and structural changes in office demand are foreseen,” the trust’s manager said in an investor disclosure last week.
Sankei Real Estate is trading the assets with its sponsor, Sankei Building, as part of a “Revival Plan”, introduced in October, which aims to rebalance the trust’s portfolio away from office properties, “to reduce and eliminate apparent risks in our internal environment and transform our portfolio to one that is more in line with changes in the external environment.”
The move by the REIT, which has a portfolio valued at JPY 102.8 billion, comes as investors rush into Japanese hotel opportunities, with JPY 522.2 billion in hospitality properties changing hands in the country during the first nine months of 2023 – an increase of 44 percent from the equivalent period a year earlier, according to data from MSCI Real Assets.
Hot for Hotels
The priciest asset in Sankei Real Estate’s set of hostelry buys is the Grids Premium Hotel Osaka Namba which it is picking up for JPY 7.8 billion. The 142-unit hotel in Japan’s third most populous city is within a 10-minute drive of Osaka castle and 22 minutes from Universal Studios Japan.
The 11-storey building generated an annual net operating income of JPY 323 million according to an appraisal report at the start of the year, putting the acquisition’s NOI yield at 4.1.
Kazunobu Iijima, president and chief executive at Sankei Building
The remaining two hotels are operated by Hotel Intergate in Kyoto and Ishikawa prefectures and will add another 319 rooms to the trust’s portfolio.
Sankei Real Estate announced its set of hospitality investments less than two months after TSE-listed REIT, Nomura Real Estate Master Fund, purchased a Tokyo hotel for JPY 2.4 billion, with MSCI data showing that, during the first nine months of 2023, investment in Japanese hospitality assets grew at the fastest pace of any real estate asset class in the country apart from industrial.
In December, a REIT sponsored by Singapore’s SC Capital Partners acquired a Yokohama hotel for JPY 4 billion, and in September, Nippon Accommodations Fund acquired three Japanese hotels for JPY 3.1 billion.
Sankei Real Estate’s multi-headed deal comes after the REIT’s net income from March through August last year declined by nearly a quarter to 1.1 billion, from JPY 1.5 billion during the same period in 2022. The REIT’s manager announced its recovery plan in October, with this set of transactions being the first since the new strategy was introduced.
“Specifically, we have changed our investment policy so that the investment ratio in office buildings, our primary asset type, will be reduced from 80 percent to a range between 50 percent and 70 percent, and the ratio in sub assets, which was previously set at around 20 percent, will be increased to a range between 30 percent and 50 percent, making it a core asset group,” Sankei Real Estate president Yuichi Ota said in a financial update. “‘Hotels,’ ‘logistics facilities’ and ‘residential facilities’ have been included in the core asset group.”
A portion of the proceeds from the sale of its office assets in this set of deals will be used to make early repayment of a JPY 6.4 billion bond set to mature at the end of March, according to an investor presentation released by the REIT’s manager on the day of the announcement.
Once the transactions are completed by the start of February, Sankei Real Estate will have lowered its office exposure from 82.3 percent of its JPY 102.8 billion portfolio, based on acquisition price, to 59.3 percent.
Out of Office Response
In its shift away from office Sankei Real Estate is selling a set of strata units in the Shinagawa Seaside TS Tower in Tokyo for JPY 16.1 billion, with that sale making up nearly half of the revenue from the deal announced last week.
Sankei Real Estate’s ownership in the 2003-vintage complex building had been equivalent to around 26,489 square metres (285,125 square feet), and had a book value of JPY 21.1 billion in August last year.
The trust said that the 52,978 square-metre complex was over 90 percent vacant at the start of this year, after a major tenant moved out, with local media reports indicating that an internet services subsidiary of Sony had walked away from its lease of 21 office floors in the 25-storey commercial tower.
The REIT has also sold strata space in the Breezé Tower, an 82,718 square metre commercial building in Osaka’s Kita ward.
The trust’s manager sold its units in the asset for JPY 18 billion, or JPY 5.4 billion over their book value, as it says it expects maintenance costs for the 37-storey skyscraper to increase.
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