Land of the rising debt

Japan Post Bank is the latest Japanese institutional investor seeking real estate debt and other credit funds that serve a conservative investment approach, writes Arshiya Khullar.

In its medium-term management plan released in May, Japan Post Bank said it would invest roughly ¥3 trillion (€23 billion) in real estate from a total allocation of ¥8.5 trillion to “strategic investment areas” over the next three years. Alongside real estate, private equity and hedge funds, the $1.9 trillion investor will be investing in direct lending funds, real estate debt funds and commercial mortgage backed securities.

Japan Post has a globally diversified liquid credit portfolio that includes investment grade, high-yield bonds and bank loans. But real estate debt is a relatively new foray for the banking unit of the Japanese postal giant. In doing so, it is following in the footsteps of other Japanese institutions – banks as well as insurance investors like Tokio Marine – in increasingly turning to overseas debt across different alternatives assets, including real estate and infrastructure.

For real estate debt deals, Japan Post will look for a diversified global exposure. The US and Europe are its target markets for direct lending.

At the core of this trend lies Japanese investors’ conservative approach to portfolio construction, industry experts told PERE. “The emphasis on debt comes from the institutional bias of this city.

Until very recently, Tokyo has been primarily a debt-focused product market and investors are comfortable and generally skilled in analyzing debt opportunities,” said Alexander Wellsteed, an independent consultant at Alternative Asset Investment Advisors.

“There is still an innate, conservative sense that debt is better than equity.” Wellsteed said he had heard of several real estate equity-focused managers that had struggled to get commitments for their strategies.

Equity buffer

“It makes a lot of sense at this point in the cycle to have a buffer of equity on top and have more visibility on returns,” said Shai Greenberg, vice-president, international business at GENKAI Capital Management, a Japanese real estate investment manager, of current motivations behind debt investing. Among the more meaningful Japanese debt investments in recent years have been Tokio Marine’s $2.8 billion investment with the New York-based commercial real estate finance company ACORE Capital in 2016.

Asia-Pacific deals of this magnitude are rarer. This is despite private real estate debt strategies increasingly gaining momentum in the region. According to the property consultancy JLL, 14 debt-focused funds were launched in Asia-Pacific in 2017, the highest on record since 2010.

According to Nicholas Wilson, director of capital markets research at JLL Asia-Pacific, a key issue is most of these funds target higher risk and return opportunistic lending, focusing on construction finance and mezzanine loans. That tends to be above the risk appetite of most Japanese institutional investors. But he added: “There is an opportunity for debt funds to establish new products looking to provide finance at the senior/ stretched senior level, which may be quite attractive to Japanese investors.” Until that happens, however, the wave of Japanese capital looking for an alternative to bonds investing, will continue to head westwards.

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