Credit Risk Assessment in Real Estate Investment Trusts: A Perspective on Blockholding and Lending Networks

Abstract

This study assesses the credit risk of Japan's real estate investment trusts (J-REITs) in two related markets during the fiscal years 2008--2017. The first J-REIT market involves blockholders, while the second is a lending market of institutions (i.e., banks and insurers). Unlike investment trusts, a J-REIT is an investment security issued by an investment corporation and thus has corporate credit risk. Consequently, a J-REIT's sponsor, as well as its financial variables, has a substantial effect on the investment corporation's credit risk. A sponsor's probability of default is a leading indicator of its investment corporation's default and double default probability acts as a coincident indicator of default. Network analysis indicates that some network centralities are proxies for funding liquidity via blockholding and lending networks. Rather than increases in other types of degrees, an increase in the degree of an investment corporation's lending in the lending network explains a decrease in a J-REIT's credit risk.

Keywords: REIT; investment corporation; credit risk; double default; centrality measure

JEL Classification: G32; G10; D85; L14