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Monday, December 12, 2011

Asian real estate private equity funds have a new favorite, Japan.

Japan dominates Asian real estate funds' allocations

With the sovereign debt crisis at its peak in Europe and the USA and the volatility of capital markets persisting, Asian real estate markets have slightly been forgotten lately. Although the first signs of uncertainty have started to emerge on the Asian continent as well, with listed real estate companies trading at discounts, real estate fundamentals remain largely sound. From the macro-economic perspective, Asian giants, China and India, continue to enjoy GDP growth rates of 9.1% and 7.7% respectively in Q3 2011 while other significant markets such as Singapore and Hong Kong also witnessed GDP growth of 6.1% and 4.3% respectively in Q3 2011. Although economic growth has slightly slowed down in China and India compared to previous years, it remains clear that Asia’s economies have not been substantially affected by on the ongoing economic difficulties in Europe and the USA. Furthermore, the domestic demand in these markets has continuously grown and is significantly higher than it was during the Asian crisis in the 90’s contributing to the relative stability of the present growth.

Regardless of its strong economic indicators, China and India were not the main target markets within the industry in 2011. Asian real estate private equity funds have a new favorite, Japan. With USD 7.4 billion (€5.6bn) and a market share of 37% for the first 9 months in 2011, Japan tops the “shopping list” of fund managers for the first time in years. Compared to 2010 (Target equity: USD 2.7bn), the target equity for Japan has almost tripled with its market share increasing by 13 percentage points y-o-y. The question remains: what are fund managers seeking in a market that has been recording stagnating growth and real estate returns for years and in addition; a destination regularly plagued by natural catastrophes?



Many indicators are currently in favor of the Japanese real estate market. Firstly, after the USA, Japan is still the second largest market in the world in terms of commercial real estate and the largest and most liquid market in Asia. Following the events at Fukushima, the already significant price correction continued but has bottomed out in the meantime

Japan dominates Asian real estate funds' allocations

However, initial yields are still far from peak levels of 2007-2008. Rental levels have also significantly corrected and fell in major cities such as Tokyo by an average of 44% compared to the peak levels. Nevertheless, this price correction has proved somewhat beneficial in relation to vacancy rates, as tenants who could no longer afford CBD rents are returning to the business districts of Tokyo. Consequently, the vacancy rate for office space in Tokyo decreased from 7.0% in Q4 2009 to 4.6% in Q3 2011. It is therefore not surprising that 28% of the equity (USD 2.1bn or €1.5bn) targeted by private equity real estate funds in 2011, are earmarked for office investments. In addition, the current financing constraints allow for quality assets that are highly indebted to be acquired at attractive prices. The lack of competition on the buyers’ side was also created by the fact that most Japanese REITs were on the sellers’ side in 2011 as they had to struggle with financing issues and the equity market due to high discounts of their shares.













Similar to their European and USA peers, Japanese banks are increasingly feeling the pressure of liquidity constraints and new financing or re-financing of real estate transactions are only possible with higher levels of equity than was required before the financial crisis. This has created interesting opportunities from the perspective of fund managers who are increasingly launching debt funds which aim to bridge these financing gaps. For the first 9 months of 2011, USD 2.7bn of target equity was being raised for debt investments in Japan. This reflects a 37% market share and exceeds by far all other sectors. Japan is a vivid example of how real estate private equity funds immediately pick up on certain market inefficiencies and provide fund offerings which aim to capitalize on such opportunities - a model for anti-cyclical investment.

Monday, December 5, 2011

Leasons from Japans Real Estate Bubble II

Myth: Prices will keep rising forever.
Too many homebuyers, lured by sleek advertising and media-generated hoopla, buy properties that they can rationally ill-afford, given their financial background and potential. However, their eyes are usually centered in to a future where they expect to sell their newly-acquired properties at huge profits, while allowing rentals to pay for their EMIs. However, when prices drop, buyers get financially battered and in worse cases even completely wiped out.
Human beings have a congenitally designed to not learn from the past. During a bubble, people don't believe that prices will fall, even though it has been proven wrong so many times before.
Another indicator of a bubble is the unbridled bidding for worthless land.
At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.
Prices were highest here in 1989, with some fetching over $1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor. Such structures later become reminders of a different era, like the aftermath of a boisterous party.
Another indicator of a bubble is the acute scarcity of affordable housing. In Japan too, during the housing bubble, the focus was only on building commercial property and luxury apartments. In India too, currently, especially within the city limits of Mumbai, a standard 2-bed room apartments cost no less than Rs 1 crore.
By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

Leasons from Japans Real Estate Bubble



A housing bubble is in place when property rates start rising at double-digit rates, and people start taking loans to invest in property, with the idea that the loan can be paid back easily and the property sold at a profit.
Once the bubble is burst, the property is worth a fraction of its purchase price and people get left behind with a negative asset, where the EMI is higher than what the asset can earn in a month. In such a situation, the balance outstanding loan cannot be paid off even if the asset is sold.
Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:
  • The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
  • During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, supportability leveraging the prices of both higher and higher.
  • The biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
  • Japan suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.
Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough. In 2005, the land in Japan was worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.
Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.
By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.