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A Hedged Strategy
Any investment comes with some degree of risk, and J-REITs are no exception. However, the investment strategy of Premier Investment Corporation (PIC) has an inherent means to reduce risks. In other words, PIC is committed to a hedged strategy ― a strategy to achieve stable operations and revenues against economic cycles, both in terms of asset types and geographical areas for investment.
PIC focuses on a balanced portfolio combining investment in office and residential properties, two major asset types with different responses to economic cycles, as well as investment in the Tokyo Economic Bloc, the dynamic economic center of Japan and one of the key global economic poles. This strategy helps PIC neutralize the impact of economic fluctuations on rental income and ensure stable revenues, as well as take advantage of upward turns in the cycle.
1. Hedged by the Balanced Portfolio
Office and residential properties tend to exhibit different patterns in their responses to the challenges of economic cycles. Office properties are more prone to economic fluctuations as tenant demand and rent levels are effected by them. This is an advantage for PIC when the economy is recovering but a disadvantage in downturns. On the other hand, residential properties are more resistant to economic fluctuations in terms of tenant demand and rent levels. This characteristic works favorably for PIC when the economy is struggling. The combination of office and residential properties thus works to minimize the negative impact of economic downturns.
Surveys shows that rents for condominiums in the 23 wards of Tokyo have been relatively stable compared with rents for offices in the central three wards of Tokyo. This indicates that rents for condominiums may not rise as rapidly as those for offices even during economic booms, yet they may not drop significantly during business downturns either, and thus are likely to produce stable revenues.
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2. Hedged by Investment Area
PIC focuses its investment geographically on the Tokyo Economic Bloc, which consists of Tokyo Prefecture and the surrounding prefectures of Kanagawa Prefecture (Yokohama City, Kawasaki City and other cities), Saitama Prefecture and Chiba Prefecture.
The agglomeration of Tokyo is the world's largest urban economy, with the largest gross metropolitan product at purchasing power parity (PPP) in the world in 2005 according to a study by PricewaterhouseCoopers. Tokyo is the commercial center of Japan, with numerous headquarters of large, world-famous companies and financial institutions, as well as an infinite number of offices for small and medium-sized firms.
Along with a concentration of industry and established economic and social infrastructures throughout the area, the Bloc is enjoying a population increase, with a net inflow of people and an increase in households. These factors, in combination, enable PIC to anticipate stable demand for office spaces and residences in the area, and to avoid risks inherent in other areas, such as a net outflow of people and a rapid drop in land prices.
Even in an economic slump, the area is expected to undergo less damage than other areas in Japan, and it is likely to recover quickest when the economy makes an upward turn. This characteristic should serve as a stabilizer for PIC’s operations and revenues, as PIC may be less impacted during economic downturns while enjoying larger advantages during recoveries in comparison with other areas.
3. Hedged against Natural Disasters, etc.
Being in Japan, which is a country prone to earthquakes, there is an unavoidable risk of PIC’s properties being lost, deteriorated or damaged due to earthquakes or other natural disasters, fire or accidents, leading to lower values.
PIC has covered all of its properties by insurance against fire. For properties to be acquired in the future, PIC will cover them by fire insurance and, if necessary, by earthquake insurance.
