Growing up in the ‘Shaky Isles’ meant having a strong resilience to the earthquake threat. At school we had drills requiring us to take cover under our desks. This personal safety measure being a more common occurrence for those ducking our teacher’s chalk duster! I visit Christchurch often and see the physical and emotional scars that remain from one of mother nature’s most violent acts.
Now you are probably thinking that earthquakes aren’t a risk that you consider when building your portfolio. Well at APN it’s a risk we think about a lot when making investments for our Asian REIT Fund because we’re paid to think about the risks that you don’t.
The Ring of Fire is a horseshoe shaped zone around the Pacific-ocean (refer map below) that experiences 90%1 of the world’s earthquakes. Over November the ring has been very active. On November 14th our Kiwi cousins experienced a magnitude 7.8 earthquake, this followed the devastating earthquakes that hit Christchurch in 2010 and 2011.
Across the Pacific, Argentina experienced a 6.4 magnitude quake on November 21st which was followed by a 6.9 quake in Japan on November 22nd. The latest Japanese quake occurred east of Fukushima which had seen the loss of nearly 16,000 people due to a magnitude 9.0 earthquake in 2011.
On TV we have seen that shaking ground and solid real estate can be a hazardous mix, yet APN’s Asian REIT Fund owns high quality real estate in Japan and New Zealand, countries located right on the Ring of Fire.
The APN Asian REIT Fund currently invests in New Zealand through the Goodman Property Trust (GMT) which owns industrial/logistics assets. GMT owns no assets in Wellington which was impacted by the most recent earthquake and has only 3% of the portfolio in Christchurch. APN monitors other New Zealand real estate trusts which own office assets in Wellington however price/yield and value, not earthquake risk, has been the key investment impediment to date.
The Fund has a larger exposure to Japan where it holds 13 separate Japanese Real Estate Investment Trusts (JREITs) – we don’t want all our eggs in one basket! Japan has some of the highest building standards in the world due to its location. I am reassured of the robustness of these properties having inspected several with protection measures for earthquake risk.
In addition to this, commercial buildings in Japan are assessed by structural engineers for Probable Maximum Loss (PML) which is defined as the value or the largest loss that could occur from a disaster. JREITs publish the PML for each asset enabling our analysts to compare the level of earthquake risk that exists within each portfolio.
As discussed in previous articles we have a preference for Tokyo which has some of the most technologically advanced buildings in the world. However we remain underweight Japan for a number of reasons, with earthquake risk being one of the many things that are taken into account when making investments.
While the Ring of Fire has certainly woken up in November, the impact on the APN’s Asian Fund’s investments in New Zealand and Japan has been negligible.