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Infralogic Insights: Japan’s listed infra fund model stumbles

The shine has come off Japan’s listed infrastructure fund market after the sponsors of two of the country’s seven listed funds moved to purchase and delist the vehicles from the Tokyo Stock Exchange, raising questions about the financing model’s future. 

When the Tokyo bourse opened its doors to infrastructure funds in April 2015, expectations were high that they could entice private capital into the solar sector. The funds invest entirely in solar assets. 

But no new funds have filed for listings in two years — and sponsors of two listed vehicles have headed for the exits this year, citing power output controls in areas over-served by renewables, a lack of liquidity and the funds’ inability to secure solar assets amid spiraling prices. 

While market players expect the other five to maintain their listings — for now — the model’s future is further clouded by a lack of clarity about whether a tax break the funds receive on new asset purchases will be extended. 

Renewable Japan Energy Infrastructure Fund (RJIF) was delisted in August after it was purchased by its sponsor, clean energy developer Renewable Japan. And in late September, condominium developer Takara Leben launched a tender to purchase a fund it sponsors, Takara Leben Infrastructure Fund (TLIF), in conjunction with Sumitomo Mitsui Financial Group companies. The tender for TLIF, which was Japan’s first listed infra fund, expires on 11 November. If successful, the fund is expected to be delisted from the Tokyo bourse later this year. 

The funds’ departure would reduce the market capitalization of Japan’s listed infra fund market by about 30%, to around JPY 150bn (USD 1bn). 

“They felt it [was] meaningless to [remain] listed,” said a source familiar with the funds. “For those who desire [listed infra fund] market growth, this is a very serious situation. 

In comparison, the value of assets held by Japan’s overall infra fund market totaled JPY 1.9trn-JPY 2.5trn (USD 12.7bn-USD 16.8bn) in March, and grew in size by JPY 37.6bn from March 2021, according to Sumitomo Mitsui Trust Research Institute. Solar assets that sell electricity under Japan’s feed-in tariff program account for more than 80% of the assets held by those funds. 

Trading of the listed funds has been underwhelming, with only JPY 660m in daily trades, on average, in September. Over the same period, daily trades of listed Japanese real estate investment trusts, or J-REITs, totaled JPY 45.8bn.  

The seven listed infra funds owned 209 solar farms with a combined capacity of about 821 MW before the RJIF’s delisting on 22 August. The value of those assets in terms of their transaction prices reached JPY 333.9bn. 

The listed funds pay an annual dividend yield of 6%. But their market capitalization has traded sideways in a JPY 160bn-JPY 180bn (USD 1.1bn-1.2bn) range over the past year. 

Headwinds 

Renewable Japan and Takara Leben cited several reasons for pulling their listings, including an expansion of renewable power output controls in areas over-served by renewables energy; a lack of liquidity — as the listed funds are predominantly held by individuals rather than institutional investors; and the funds’ inability to buy additional solar power generating assets after a secondary market price spike. 

“They are not things that have emerged recently,” said a second source familiar. But these factors are among “a whole lot of things that infra funds need to contend with.” 

Both companies concluded that taking their listed funds’ assets in-house was preferable to leaving them in the publicly traded vehicles. If the sponsors had seen the assets as risky or undesirable, they would have sold them, the source said.  

In fact, RJIF’s delisting fits into Renewable Japan’s long-term plan to grow its renewables portfolio to 1 GW over the next 10 years from 305 MW now. And Takara Leben is positioning energy-related activities as another pillar of its business behind real estate. 

A taxing question 

“The surviving [five] infra funds will continue their listings,” said the second source. “But after seeing the two tender offer bids to date, [listed infra fund] industry officials are increasingly feeling the pinch,” and taking actions to help the funds retain and attract investors. 

For instance, listed infra fund managers and the Tokyo bourse are lobbying Japan’s national tax authority to extend or eliminate a 31 March deadline by which tax rules that are favourable to the funds will expire. New listed infra funds that fail to acquire renewables assets by 31 March will not receive a tax break. 

“The rule prevents new infra funds from listing,” said Keiichi Matsuzuka, chief executive of Enex Asset Management, the asset management firm that sponsors listed fund Enex Infrastructure Investment Corporation. 

The deadline has been pushed back twice in the past. 

In addition, listed infra fund managers are asking the central government to change another rule under which a “conduitability” tax break expires 20 years after a funds’ debut. The managers want to make the break permanent, similar to a tax break available to J-REITs. 

The conduitability tax break, which allows qualifying funds to deduct the distribution of profits from taxable income, has enabled listed infra funds to return relatively high yields. But some investors are shying away from the listed funds, as the tax benefit is available for an only limited time, the sources said. 

The loss of listed funds could hurt Japan’s ability to achieve its ambitious renewables goals. Last year, Japan upped those goals to 36%-38% of the nation’s total energy mix by March 2031, compared with 19.8% for the fiscal year ended March 2021. 

That translates into JPY 18trn-JPY 21trn of fresh funding needs, of which the listed infra fund market is expected to contribute at least JPY 2trn through March 2031 — after accounting for other forms of funding — according to Matsuzuka. 

“We have to boost our market size,” said Hiroshi Yanagisawa, chief executive of Canadian Solar Asset Management, the asset management firm of the Canadian Solar Infrastructure Fund (CSIF) — Japan’s largest listed infra vehicle. “I expect the [listed infra fund] market to grow further if we can sort out issues.”