Earnings of each J-REIT are solid. Daiwa Office Investment has raised its dividend per unit substantially due to property acquisitions, and Advance Resident Investment and Nippon Accommodations Fund have also revised up their guidance.

Occupancy rates are improving and rents are bottoming out in both the office leasing and rental housing markets. J-REITs have been actively raising funds and buying properties, boosting the likelihood that they could surpass records set in 2006. Real interest rates, which have an important effect on real estate prices, also remain negative. Although external conditions are a tailwind for JREITs, the sector has substantially underperformed TOPIX YTD in 2013. Distribution yields have also returned to close to 4% after dipping to 3% at one point, providing what we see as a favorable entry point for J-REIT investment.

The pace of capital raisings and property acquisitions by J-REITs in 2013 has been faster than we anticipated. Capital raising (¥730bn) and property acquisitions (¥1.58trn) announced by J-REITs up to 19 July already exceeded levels in 2007, prior to the Lehman Shock. In light of the high levels achieved in only seven months, it seems increasingly likely that all-time high levels recorded in 2006 (capital raising ¥848bn, property acquisition ¥1.95trn) will be renewed.

Eoin Treacy's view If Abenomics is to succeed in breaking Japan's long deflation, transforming consumer sentiment will be a priority. Changing the perception among consumers that if they delay purchases they will receive better value at a later date necessitates aggressively pursuing an inflationary bias. As with any other country, the perception of where property values are likely to trade is an important ingredient to how consumers view inflation. Rents bottoming and beginning to increase can be viewed as a positive outcome from this perspective.

The Topix REITs Index (P/E 25.38, DY3.68%) surged out of its base in December to hit a medium-term peak near 1700 by April. It has pulled back to test the region of the 200-day MA and some ranging in this region can be expected as the implications of Japan's commitment to reform are digested by investors.

The Topix Real Estate Index (P/E 37.09, DY 0.69%) bounced more impressively from the June lows but some additional consolidation looks likely before a sustained move to new highs can be supported.

In both cases a process of consolidation should allow some valuation contraction to occur which would make them more attractive over the medium-term.