Large overseas investors bask in Japan’s rising sun

Recovery draws foreign capital to Japan’s property market, writes Florence Chong

Some of the world’s largest institutional investors and sovereign wealth funds are flocking to Japan.

Megan Walters, JLL
Megan Walters

In the latest big deal, Chinese sovereign wealth fund China Investment Corporation (CIC) reportedly splashed out about ¥140bn ($1.18bn) on Tokyo’s Meguro Gajoen complex, bought from Mori Trust, in a joint venture with LaSalle Investment Management.

Foreign capital pumped ¥1trn ($8.4bn) into Japan’s property market in 2014 – 29% up on the year and the highest level since 2008, according to Real Capital Analytics.

Tokyo has been the main focus of global capital targeting Japan. Buyers included Singapore sovereign wealth fund GIC, which paid $1.7bn for Pacific Century Place in the Marunouchi district of central Tokyo, and Blackstone, which bought a portfolio of apartments in Tokyo from GE Capital for $1.61bn.

Chinese investors are the latest arrivals in Japan, says Megan Walters, JLL’s head of research, Asia Pacific capital markets.

Chinese appetite for investment

Until now, Chinese companies have been reticent about Japan because of historical baggage – a carry-over from wars with Japan and recent geopolitical tension over territorial claims in the East China Sea. But such reservations are slowly giving way to an appetite for investment opportunities.

CIC was an early entrant, teaming up with Global Logistics Properties to buy a $1.6bn logistics portfolio in 2011 (see below). Fosun, mainland China’s largest privately owned conglomerate, also paved the way, buying Japanese property business Idera Capital Management in 2014.

REC 03.15 - P 30Nor are foreign investors restricting themselves to Tokyo. Qatar Investment Authority (QIA) is reported to have bought a string of bowling alleys across Japan, while global logistics specialists are buying and developing regional sites.

Long-time Japan specialist Reid Mackay, CBRE’s executive director, Asia, says: “We are seeing a wide range of investors again, both core and opportunistic.” TIAA-Henderson, Union Investment, Abu Dhabi Investment Authority (ADIA) and QIA are “all focused again on Japan for large, single, well-located assets, or multi-city portfolios”, he adds.

Japan was 2015’s top destination for the 337 investors and fund managers polled by The Asian Association of Non-Listed Real Estate Vehicles for its annual survey of investment intentions: 45% of them expect to invest in Tokyo offices this year.

“Investors began focusing on Japan last year,” says ANREV director of research Amelee Delaunay. “Japan is the region’s biggest core/mature market; when off-shore investors want to diversify their Asia Pacific portfolio, they target Japan and Australia.”

Japan offers diversification

MacKay says some investors are either overweight in other countries or cautious because of their slowing economies and are looking to Japan again for diversification.

Foreign investors are looking to both the 2020 Tokyo Olympics and the promise of ‘Abenomics’ – Prime Minister Shinzo Abe’s attempt to steer his nation out of a decades-long economic slump with an aggressive stimulus programme.

The latter has resulted in prices, including for real estate, starting to rise, says Walters. According to JLL, Tokyo office capital values grew 19% in 2014, partly due to historically low interest rates generated by the Bank of Japan’s quantitative easing.

MacKay says some investors that entered Japan earlier are taking the opportunity to sell, although many are gearing up again. “Most sellers divesting in Japan have held for five to seven years and it is time to take advantage of the current cycle.”

Six months ago US investor Lone Star sold Meguro Gajoen to Mori Trust for $1.24bn; the Dallas-based private equity firm had gained control of most of the complex via a debt purchase in 2002 and acquired the remainder in 2014.

Other more recent entrants, such as AXA Real Estate, are also thinking of locking in early gains. One of its funds, a joint venture set up in 2012 with the property unit of Sumitomo Mitsui Trust Holdings, has $170m of mainly medium-sizeTokyo office assets.

“Japan is a discreet market where transactions are not widely announced, although we are working on over $1bn of core assets across all sectors,” says Mackay.

Hideyuki Sato, managing director of Livable Tokyu, a service company set up to facilitate foreign investment in Japan, says depreciation of the yen against the dollar and Japan’s monetary easing policy are the key factors influencing foreign buyers.

While there is still scepticism as to the success of Abenomics, Sato says foreign sentiment towards Japan is stronger than it was two or three years ago, with cash-rich foreign funds aggressively buying in Japan.

“The exchange rate is down from ¥110 yen to a $1 before the last monetary easing in October to ¥120,” he says. “Institutional investors can justify the investment because of access to cheap, long-term financing at an all-in cost of 0.5% in Japan.”

Falling vacancy rates in key Tokyo and Osaka office submarkets have fuelled modest rent rises, in Tokyo’s case, for 11 consecutive quarters.

Tokyo rents edging up

In a move closely watched by the market, Japan’s largest landlord in the heart of Tokyo, Mitsubishi Estate, is rumoured to be lifting its rent from ¥40,000 per tsubo (3m2) per month to ¥60,000 in some premium buildings in the Marunouchi area when leases come up for renewal.

JLL’s Walters says data from the firm suggests grade A office rents in central Tokyo will rise by more than 20% over the next three years.

However, a shortage of labour in the construction sector is a big issue, says Sato, which is being compounded by the Japanese government’s tight immigration policy; while other labour-short Asian countries have been able to import labour, Japan cannot. Japan’s business sector is urging the government to relax its immigration policy, to offset a decline in Japan’s population.

All this means real estate replacement costs will continue to rise, while the supply of new buildings could be hamstrung.

Nevertheless, market sources believe many more large deals are poised to take place this year, as owners take advantage of the strong demand from investors, who are bullish about a revival in the Japanese commercial real estate market.

Foreign giants aim to fill sizeable gap in Japanese warehousing

Japan has a huge backlog of demand for good-quality, modern industrial buildings, says Yoshiyuki Chosa, Japan president of Singapore-listed Global Logistics Properties. According to Chosa, of the 470m m2 of industrial space in Japan, just 3% can be considered modern.

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Yoshiyuki Chosa

Japanese manufacturers tend to own and operate their warehouses, but are under pressure to upgrade them and reduce logistics costs. Global e-commerce players like Amazon seeking state-of-the-art distribution centres are also driving demand. This, in turn, puts pressure on Japanese retailers to improve their supply chain management, says Chosa.

GLP got in early on Japan’s logistics sector, buying the former Prologis’s Japanese and Chinese operations in 2008, during the Japanese recession. Today it owns around 100 Japanese logistics buildings, completed or being developed; its $7bn portfolio represents one-third of Japan’s modern industrial stock.

It has a $2.1bn development joint venture with the Canada Pension Plan Investment Board, of which $800m has been deployed, and a partnership with China Investment Corporation, which, in 2011, bought 15 assets from LaSalle IM for $1.6bn.

Australia’s Goodman Group has also found a fertile market in Japan. Paul McGarry, chief executive of Goodman Japan, says the group’s Goodman Japan Core Fund (GJCF) — set up in 2008 — will double its portfolio to $2.4bn-$2.5bn in the next five years, with a wave of properties under development.

Goodman also has a separate logistics development partnership with the Abu Dhabi Investment Council, with $1bn of committed equity in Japan. McGarry says this venture will offer GJCF first refusal on completed projects.

Having deployed $250m of equity last year, McGarry expects a new round of fund raising to be launched in July for further Japanese acquisitions, with a likely $300m target. Like the previous raisings, this is expected to be substantially oversubscribed from new and existing investors.

However, the salad days may be over in Japan’s logistics sector already. McGarry says development sites are getting expensive; land costs have risen up to 50% in keenly sought-
after areas and heightened competition for development sites is biting into profit margins. Coupled with escalating construction costs and a shortage of transport and logistics labor, the market dynamics are changing.

“Previously, the main consideration for new logistics centres was areas with good transport infrastructure,” says McGarry. “That is still important, but today the focus is providing affordable rents and locating centres in areas with a high residential catchment to provide a ready work force. Our billion-dollar Goodman Business Park Chiba, launched last year to be built in stages, meets these requirements.”