Impact Of Japan’s Potential Consumption Tax Hike Is Seen Limited, Says J-REITs
A potential rise in Japan’s consumption tax to 10% from 8% may put some pressure on REITs’ distributions and will cause near-term volatility in retail sales, but any impact will be softer compared with the 2014 tax hike.
Japan looks set to go ahead with a controversial rise in consumption tax in October after its economy unexpectedly grew by an annualised 2.1% in the first quarter of 2019. Although speculation remains that Prime Minister Shinzo Abe could postpone the hike, which is aimed at reducing the national debt, for a third time, as economic conditions deteriorate due to the U.S.-China trade war. The Japanese central bank will release the quarterly business confidence survey on July 1. The report, among other indicators, will shed light on market conditions, which will help the central bank decide if it should go ahead with the hike.
A potential rise in consumption tax may impact REIT’s return as costs rise. “Landowners of rental housing will have to defray additional expenses associated with maintenance costs and property management fees which are taxable. Therefore, residential REIT’s DPU (distribution per unit) could be affected by additional costs,” says UOB-Sumitomo Mitsui Asset Management’s fund manager Junnosuke Shinkawa.
“However, the impact on the DPU is expected to be limited to around 1-1.5%. I believe that this impact can be offset by organic and inorganic growth,” he says.
Abe’s government has planned for a series of measures to mitigate the economic impact, such as keeping the tax rate for food and non-alcoholic drinks unchanged at 8%. “The GDP impact from the tax change is expected to be minimal,” projects Shinkawa, adding that the retail sector will likely see some “downside risks” from dampened consumer sentiment from the tax hike.
Tourist inflows to help counter impact at Fukuoka REIT
“Based on the experience from the last consumption tax hike from 5% to 8% in 2014, there was definitely a last-minute demand rush prior to the increase; sales will drop-off immediately after the hike before stabilising,” says Hideya Kanno, General Manager of Property Management at Fukuoka REIT.
However, the REIT also expects to be able to weather the increase. “Where our retail assets are located, we are seeing population growth and strong inflows of inbound tourists. Our large-size retail assets present new experiences to capture demand, and we are confident that they will be able to offset any negative impacts from the consumption tax hike and achieve even stronger sales,” says Kanno.
Rising employment and income levels
However, AEON REIT Investment Corporation, whose portfolio consists mainly of shopping centres in major cities and suburban Japan, is confident that the impact will be minimal. “We believe overall retail sales will remain little-changed because of two reasons: firstly, the rate of the consumption tax increase this time is less than 2014’s; secondly, we have seen improvements in the employment rate and the income level,” says Akifumi Togawa, Director and General Manager of the Finance and Planning Department at the asset manager of AEON REIT.
“We expect profitability and the rent burden to be stable on an annual basis, although monthly retail sales will fluctuate because of last-minute demand and a reactionary drop-off in consumption before and after the tax increase,” he says.
Even if sales were to decrease due to the tax, AEON REIT’s fixed-rent master lease agreements with its tenants would ensure that dividends and rental income will not be impacted adversely, Togawa explains.
