Japan’s $130bn real estate investment trust market is primed for potentially major disruption in the coming days as investors await a ruling on the sector’s first ever hostile merger attempt.
Hostile moves have historically tended to fizzle in Japan, where instinctive distaste for the practice has given rise to government intervention or other blocking mechanisms.
In the latest tussle, Sakura Sogo Reit, has warned that if successful, the actions of its rival, Star Asia Investment, would create a “dangerous precedent” and threaten both the value of their unit-holders’ investments and the stability of the entire J-Reit sector.
The tussle exploits a “deemed approval” system where non-votes count as “yes” votes, which was introduced by the government to help J-Reit managements pass necessary resolutions at their AGMs despite the dependable apathy of their mostly elderly retail investors.
Investors in the sector representing global, long-only real estate funds said that while lack of detail meant they were still unable to weigh the financial merits of a merger, Star Asia’s move deserved a cautious welcome: both as a test of the rules underpinning the sector and of the Japanese authorities’ taste for hostile actions in the era of governance reform.
The first step of Star Asia’s merger plan, which emerged last month and is currently awaiting approval by the Kanto Local Finance Bureau (KLFB), will establish whether the “deemed approval” rule can theoretically grant a relatively small unit-holder potentially massive leverage over the destiny of any given Reit. The KLFB is expected to make its landmark decision over the next 10 days; Star Asia executives said it was unclear on what basis its actions could be ruled illegitimate.
The loophole has existed since Japan’s Reit market was established in 2001, but has never been tested. The sector has expanded to its current level of 63 J-Reits with a combined market capitalisation of Y14.3tn ($130bn). Star Asia’s Reit has around Y102bn assets under management against Sakura’s Y56bn and both fall within the bottom third of the J-Reit sector in terms of size.
The hostile move hinges on a 3.6 per cent stake in Sakura Sogo that was accumulated relatively recently and is held by Lion Partners, an affiliate of Star Asia Group.
As a holder of more than 3 per cent, Lion Partners was able on May 10 — the same day that Star Asia proposed a merger between its Reit and Sakura Sogo’s — to call for an extraordinary unit-holder’s meeting at Sakura.
If the meeting is allowed to go ahead, Lion plans to propose that Sakura’s existing executive director be supplanted by Lion’s representative director, Toru Sugihara, and its asset manager be replaced by Star Asia. Lion requires 50 per cent approval for its proposals to prevail and could hit that target because of the deemed approval system.
As Sakura noted in a rebuttal to Star Asia, the deemed approval system can create a situation in which a proposal could be passed even if more than half of actual voting unit-holders dissented.
Sakura accused Star Asia of bypassing fair merger protocols and warned that if it became the asset manager of both the Sakura and Star Asia Reits it would cause a substantial conflict of interest. It said the gambit reflected “malicious intention to disadvantage Sakura unit-holders”.
Star Asia, meanwhile, hopes that its move will be seen in the context of Japan’s recent push for improved governance and shareholder rights.