The Major Investors in the Japanese CRE Market as at December 2013
Over the past year, we have seen clear signs of a recovery in the global real estate investment market. Global investment in commercial real estate exceeded $100 billion in 4Q of 2010, and jumped to $147 billion in 4Q of 2012.
Over the past year, we have seen clear signs of a recovery in the global real estate investment market. Global investment in commercial real estate exceeded $100 billion in 4Q of 2010, and jumped to $147 billion in 4Q of 2012.
This increased activity in global property significantly
affects the Japan domestic real estate market. At this time, we would
like to elaborate on the main players who support the Japan real estate
market.
Booming real estate market, fuelled in part by lack of supply
Before expanding on the main players in the Japanese real estate market, lets see briefly the real estate market in the Tokyo metropolitan area.
First of all, there is limited supply. The reason is simple. Many new development projects were frozen after the global financial crisis of 2008. After most of these projects were completed in 2012, the pipeline of new projects has shrunk significantly.
In addition, even though it has been more than 20 years since the collapse of the Japanese asset bubble, property prices then were so high that if a property purchased in 1989 were to be sold today, it would still likely crystallise a significant loss.
Moreover, because banks are not always keen to finance real estate investments, investors will typically sell and cash out quickly when they can make just a small profit. As a result, blue-chip suburbs in the Tokyo metropolitan area have been owned by major real estate companies and their related REITs for a very long time.
Before expanding on the main players in the Japanese real estate market, lets see briefly the real estate market in the Tokyo metropolitan area.
First of all, there is limited supply. The reason is simple. Many new development projects were frozen after the global financial crisis of 2008. After most of these projects were completed in 2012, the pipeline of new projects has shrunk significantly.
In addition, even though it has been more than 20 years since the collapse of the Japanese asset bubble, property prices then were so high that if a property purchased in 1989 were to be sold today, it would still likely crystallise a significant loss.
Moreover, because banks are not always keen to finance real estate investments, investors will typically sell and cash out quickly when they can make just a small profit. As a result, blue-chip suburbs in the Tokyo metropolitan area have been owned by major real estate companies and their related REITs for a very long time.
Main player #1 who support the growing interest in Tokyo real estate: foreign-affiliated funds and banks
When the mini-bubble economy burst in 2008, foreign funds bought many landmark properties in the Tokyo area, investing JPY ¥100B (USD$1B). Although foreign fund managers are still keen to invest further, the supply is limited.
As a result, some foreign fund managers are now looking to invest in condominiums, hotels and industrial facilities in other major Japanese regional cities such as Osaka and Fukuoka.
Although foreign-affiliated funds and banks are not able to invest as much as they would have hoped to so far in Japanese real estate, foreign interest in the Japanese real estate market is not a recent phenomenon . For example, Goldman Sachs has started reinvesting in Japanese real estate since May 2012, to the tune of JPY ¥400B (USD$4B) in the past 3-4 years. Moreover, in June 2012, American fund manager Fortress Investment Group LLC announced that they would increase their investment in Japanese real estate to JPY ¥80 billion (USD$800M) in 2012.
Foreign-affiliated funds and banks are keen to increase exposure to Japanese real estate because many Japanese companies moved offices between 2011 to 2012. Since the Great East Japan Earthquake of 2011, demand for office space that are newer, sturdier, and more able to withstand earthquakes has grown – and is projected to continue to grow.
On the other hand, since the supply of new office space is projected to be very limited from 2013 onwards, it appears likely that rental yields for Japanese office space should increase in the near future, especially in the Tokyo metropolitan area.
When the mini-bubble economy burst in 2008, foreign funds bought many landmark properties in the Tokyo area, investing JPY ¥100B (USD$1B). Although foreign fund managers are still keen to invest further, the supply is limited.
As a result, some foreign fund managers are now looking to invest in condominiums, hotels and industrial facilities in other major Japanese regional cities such as Osaka and Fukuoka.
Although foreign-affiliated funds and banks are not able to invest as much as they would have hoped to so far in Japanese real estate, foreign interest in the Japanese real estate market is not a recent phenomenon . For example, Goldman Sachs has started reinvesting in Japanese real estate since May 2012, to the tune of JPY ¥400B (USD$4B) in the past 3-4 years. Moreover, in June 2012, American fund manager Fortress Investment Group LLC announced that they would increase their investment in Japanese real estate to JPY ¥80 billion (USD$800M) in 2012.
Foreign-affiliated funds and banks are keen to increase exposure to Japanese real estate because many Japanese companies moved offices between 2011 to 2012. Since the Great East Japan Earthquake of 2011, demand for office space that are newer, sturdier, and more able to withstand earthquakes has grown – and is projected to continue to grow.
On the other hand, since the supply of new office space is projected to be very limited from 2013 onwards, it appears likely that rental yields for Japanese office space should increase in the near future, especially in the Tokyo metropolitan area.
Main player #2 who support the growing interest in
Japanese real estate: J-REIT ( ‘REIT’ is the acronym for “Real Estate
Investment Trust” and ‘J-REITs” invest only in Japanese real estate)
REITs are publicly listed Investment Trusts which invest only in Real Estate. Several years ago, the major buyers in Japan domestic real estate market were corporations-developers and foreign-affiliated funds. But now the domestic REIT is the biggest player in the real estate space. Some foreign investors participate in Japanese real estate through J-REITs.
In the past, major backers of J-REITs were mainly domestic high-net worth private investors and foreign investors. But now local banks and Shinkin bank are the major investors in J-REITs.
REITs are publicly listed Investment Trusts which invest only in Real Estate. Several years ago, the major buyers in Japan domestic real estate market were corporations-developers and foreign-affiliated funds. But now the domestic REIT is the biggest player in the real estate space. Some foreign investors participate in Japanese real estate through J-REITs.
In the past, major backers of J-REITs were mainly domestic high-net worth private investors and foreign investors. But now local banks and Shinkin bank are the major investors in J-REITs.
Main player #3 who support the growing interest in
Japanese real estate: The local banks and Shinkin bank The local banks
and Shinkin bank entered the REIT market before the 2008
Lehman collapse, and unfortunately suffered major losses at that time. But now they have again re-entered the real estate market as tremendous excess liquidity in the Japanese banking system again searches for higher returns.
Also, it appears that they are positive not only on REIT but also for financing related to real estate. It appears that new loans for real estate investment is now declining, so many investors are now considering refinancing their loans to reduce their borrowing costs.
Lehman collapse, and unfortunately suffered major losses at that time. But now they have again re-entered the real estate market as tremendous excess liquidity in the Japanese banking system again searches for higher returns.
Also, it appears that they are positive not only on REIT but also for financing related to real estate. It appears that new loans for real estate investment is now declining, so many investors are now considering refinancing their loans to reduce their borrowing costs.
Main player #4 who support the growing interest in Japanese real estate: Wealthy individual Asian investors
Currently, the high-grade condominium sector in the Tokyo metropolitan area is finding strong interest with some individual Asian high net-worth investors. Japanese monetary easing (“Abenomics”)and the depreciating Japanese Yen has made Japanese real estate much more attractive to wealthy Asian investors.
In the past, condominiums in the Tokyo metropolitan area were out of reach of most foreign investors and were labelled “the most expensive in the world.” However, since the Heisei bubble economy burst (around 1991), prices have fallen very significantly, but have remained stable and appeared to have bottomed out over the past several years.
On the other hand, other major Asian cities have experienced boom times since the beginning of 2000. Real estate prices in Hong Kong and Singapore have more than doubled since 2000, and in some locations have exceeded the median price of Tokyo.
Wealthy Asian investors, especially those from China, typically prefer to invest in “real” assets such as gold or real estate. With real estate prices in Shanghai and Hong Kong soaring each year, Tokyo now look increasingly attractive.
Yen depreciation and the continued appreciation in the Chinese Yuan also makes Japanese real estate even more attractive. It appears that assets priced between JPY 50 to 70 million (USD$ 500,000-700,000) are most popular with wealthy Asian investors.
Currently, the high-grade condominium sector in the Tokyo metropolitan area is finding strong interest with some individual Asian high net-worth investors. Japanese monetary easing (“Abenomics”)and the depreciating Japanese Yen has made Japanese real estate much more attractive to wealthy Asian investors.
In the past, condominiums in the Tokyo metropolitan area were out of reach of most foreign investors and were labelled “the most expensive in the world.” However, since the Heisei bubble economy burst (around 1991), prices have fallen very significantly, but have remained stable and appeared to have bottomed out over the past several years.
On the other hand, other major Asian cities have experienced boom times since the beginning of 2000. Real estate prices in Hong Kong and Singapore have more than doubled since 2000, and in some locations have exceeded the median price of Tokyo.
Wealthy Asian investors, especially those from China, typically prefer to invest in “real” assets such as gold or real estate. With real estate prices in Shanghai and Hong Kong soaring each year, Tokyo now look increasingly attractive.
Yen depreciation and the continued appreciation in the Chinese Yuan also makes Japanese real estate even more attractive. It appears that assets priced between JPY 50 to 70 million (USD$ 500,000-700,000) are most popular with wealthy Asian investors.
Main player #5 who support the growing interest in Japanese real estate: The corporate pension fund and SWFs
The corporate pension fund and SWF (foreign governments’ Sovereign Wealth Fund) who have at least JPY ¥100M class investment resources are now proliferating. Many foreign countries’ SWFs are now allocating a bigger chunk of their investment portfolio to investments in Japan.
The corporate pension fund can be a major player, especially corporate pension funds from developed nations have expanded rapidly into the Japanese real estate sector since 2012. For example, a Canadian pension scheme, with assets of C$16 billion, has increased its portfolio weighting in Japanese real estate investment from 4.9% in 2007 to 10.9% in 2012. In the US, a California corporate pension fund, with assets in excess of $22 billion, has significantly increased its portfolio emphasis on real estate investment from 3.5% in 2009 to 10.5% in 2012.
Many pension funds, be they corporate or SWFs, are increasingly targeting real estate investments outside of their own country. Japan in general, and Tokyo in particular, is seen as a prime target for consideration on many investors’ radar. Foreign fund managers expect current positive sentiment in the Japanese real estate market to continue into 2014.
The corporate pension fund and SWF (foreign governments’ Sovereign Wealth Fund) who have at least JPY ¥100M class investment resources are now proliferating. Many foreign countries’ SWFs are now allocating a bigger chunk of their investment portfolio to investments in Japan.
The corporate pension fund can be a major player, especially corporate pension funds from developed nations have expanded rapidly into the Japanese real estate sector since 2012. For example, a Canadian pension scheme, with assets of C$16 billion, has increased its portfolio weighting in Japanese real estate investment from 4.9% in 2007 to 10.9% in 2012. In the US, a California corporate pension fund, with assets in excess of $22 billion, has significantly increased its portfolio emphasis on real estate investment from 3.5% in 2009 to 10.5% in 2012.
Many pension funds, be they corporate or SWFs, are increasingly targeting real estate investments outside of their own country. Japan in general, and Tokyo in particular, is seen as a prime target for consideration on many investors’ radar. Foreign fund managers expect current positive sentiment in the Japanese real estate market to continue into 2014.
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