As interest rates rise, interest in investing in Real Estate Investment Trusts (REITs) is growing. Since the beginning of the year, domestic investors have been selling Japanese REIT Exchange-Traded Funds (ETFs) and buying domestic REIT ETFs. Despite Japanese REITs offering high dividends, it is interpreted that investors are turning their attention to domestic REITs due to the increasing possibility of a rate hike in Japan.
According to the Korea Exchange on the 5th, from January 2nd to February 4th this year, individual investors sold a net total of 314 million won worth of KODEX Japan REITs (H). Last December, individuals purchased 260 million won, showing a buying trend, but the situation reversed in just one month. Domestic investors had net bought a total of 10 billion won worth of Japanese REIT ETFs last year.
Among the 12 listed REIT ETFs in Korea, Japanese REIT products recorded the highest dividend yield last year at 8.65% annually. Nevertheless, it is interpreted that the reason investors are pulling funds from Japanese REIT ETFs is due to the potential rise in interest rates in Japan. The Bank of Japan (BOJ) raised its policy rate to 0.5% on the 24th of last month as the depreciation of the yen continued. Consequently, Japanese interest rates reached their highest level in 17 years, with the possibility of the BOJ implementing additional rate hikes in the second half of this year.
In contrast, South Korea and the United States are continuing a trend of lower interest rates. When interest rates rise, it is unfavorable for REIT investors who receive rental income as dividends, as the cost of borrowing and other financing costs increase. Since REITs investing in real estate inherently have high liability ratios, rising interest rates mean higher interest expenses must be paid.
Additionally, the only Japanese REIT ETF listed in Korea, KODEX Japan REITs (H), is a currency hedge type, which makes it difficult to gain currency translation profits from the rise of the yen that started last year's second half. The exchange rate per 100 yen hit a low of 856.19 won in July of last year and has risen about 10% to 936.59 won as of the 4th of this month.
Investors appear to be focusing on domestic REITs, which could benefit from interest rate cuts, unlike Japanese REITs. There are three ETFs focused on U.S. REITs listed domestically, but all are currency-hedged, making it difficult to expect currency translation gains in a weak won situation. Additionally, there is a burden of hedge expenses such as currency settlement costs.
Individuals have purchased five types of domestic REIT ETFs, including KODEX Korean Real Estate REIT Infrastructure, totaling 20.1 billion won this year.
The Bank of Korea will hold a Monetary Policy Committee meeting this month to determine the base rate. Experts forecast a potential rate cut. Lee Chang-yong, Governor of the Bank of Korea, noted on the 16th of last month that "all six Monetary Policy Committee members expressed a high possibility of lowering rates within three months," hinting at a rate cut in February. Lim Jae-kyun, a researcher at Samsung Securities, said, "The Bank of Korea is likely to reduce the base rate in February to align with market expectations."
If interest rates decrease, the cost of obtaining funds for purchases such as buildings will also reduce, potentially increasing REIT dividends. Lee Kyung-ja, a researcher at Samsung Securities, stated, "At the beginning of the year, the most important financing rate for REITs' profits and dividends is on a downward trend," adding that, "The drop in the certificate of deposit (CD) rate, which has become almost equal to the benchmark rate, will reflect an immediate drop in expenses for REIT products."