Through its asset management arm, The Goldman Sachs Group Inc. (GS) is strategizing to extend its private real estate investment trust (REIT) in Japan to approximately 60 billion yen ($583 million) by the end of March, Bloomberg reports. The expansion stems from increasing demand for investments in Japan’s real estate market.
The REIT, which was initiated in Aug 2012 with 30 billion yen ($0.4 billion), is expected to invest about 4 billion yen in Japanese properties by the end of June. Previously, the U.S. investment bank announced its plan to acquire 300 billion yen ($3.7 billion) of properties over the five years since the REIT’s inception.
Goldman Sachs Group Inc. (NYSE:GS)’s trust is planning to acquire two office buildings in Tokyo and Fukuoka with the anticipation of an upward movement in the Japanese property market. Notably, real estate in Tokyo accounts for 90% of the REIT, while the remaining is in Fukuoka.
Based on market conditions, the investment yield in Tokyo has declined. The bank expects to invest in other metropolitan cities if the yield goes too low in Tokyo.
Further, Goldman Sachs Group Inc. (NYSE:GS)’s investment is expected to be extended to residential and retail properties. Moreover, the main second-tier Japanese cities might come under the purview of investments in the later years.
Private REITs, which possess buildings, pay dividends to investors from the rental income. These trusts do not trade on exchanges, and therefore are similar to pension funds that yield stable income for investors.
Due to low yielding bonds and falling stocks, pensions in Japan are focused on diversifying investments to increase returns in the country instead of investing in assets such as bonds and equities. Therefore, Goldman Sachs Group Inc. (NYSE:GS) intends to target pension funds and domestic institutional investors for the REIT with an aim to earn 5% return on an annual basis. Notably, according to the source, property transactions in Japan are anticipated to rise about 30% to 5 trillion yen in 2014 from 4 trillion yen in 2013.
Goldman expects a turnaround in the Japanese real estate market; hence, it has decided to make such a huge investment in it. At the current level, investing in Japanese properties would yield higher returns over the long period once the Japanese economy stabilizes and government policies come into effect extensively.
Goldman currently carries a Zacks Rank #2 (Buy). Other banking stocks worth considering include Fifth Third Bancorp (FITB), The PNC Financial Services Group, Inc. (PNC) and Raymond James Financial, Inc. (RJF). All 3 carry a Zacks Rank #2.