With more than $1.5 billion in equity raised this past year purely for opportunistic real estate strategies in Japan (according to PERE’s Capital Watch), you’d be forgiven for believing the land of the rising sun currently is offering institutional investors meaningful growth or, at the very least, adequate distressed situations upon which managers can capitalize. The reality for the private real estate investment market in Japan, however, is a little different.
Indeed, Secured Capital, the real estate investment management arm of Hong Kong’s PAG, was behind the vast bulk of the capital raised, with just a sprinkling of other, much smaller closes for high-yielding strategies. Takuya Yamada, managing director of Invesco Real Estate Japan, predicts that 2014 will further demonstrate how the market is more for lower-risk/lower-return players.
“There will be few opportunistic funds looking for high yields of 20 percent-plus because, these days, that is very hard to achieve,” said Yamada. Forecasting a continuation of improving sentiment thanks to Abenomics, however, he does foresee stronger economic output leading to stronger occupational appetite and, subsequently, improving rents and capital rates.
As such, Yamada sees more investing activity in the accessible parts of Tokyo’s five central wards, particularly in the office sector, and capital raised against strategies. “I predict more core-plus to value-added funds being active,” he said. “If you buy Class A offices in Tokyo now, you have to pay a 4 percent to a 4.25 percent cap rate flat. I think, depending on location and quality, we will see compression by 10 to 20 basis points and even larger compression for lesser quality assets because the gap between Class A and Class B is too great at the moment.”
Still, Yamada sounded a note of caution for investors piling into funds focused on secondary real estate. While the Japanese economy is improving and that will have a positive ramification for occupier appetite, it might take longer for that sentiment to touch non-prime real estate and patience will be a necessary virtue for those that invest in that part of the market.
Yamada also warned that the competition for such assets is growing increasingly fierce, with a well-capitalized J-REIT sector leading the challenge. The J-REIT index hit a five-year high of 1,700 earlier this year and, while it did retrench a little, the general consensus was that was a short-term response to a rapid price surge. With an average dividend yield that grew 60 basis points to 3.87 percent now reflecting a more than 300 basis point spread over 10-year government bond yields, J-REITs are proving increasingly popular with retail investors. That in turn is provoking favorable asset-level financing from Japanese lenders. And the bonds issued by J-REITs are being offered on increasingly favorable terms as well. These factors combined have transformed the sector into a formidable buyer of real estate, and Yamada reckoned it only will get stronger in 2014.
Nonetheless, Yamada said that, for those investors seeking moderate growth and slight dislocation, Japan still will be a worthwhile market to include in the private real estate investor’s 2014 strategy, despite the growing competition. Placing emphasis on incoming policy that is supportive of the economy, he added: “I’m sure [prime minister] Abe will introduce more aggressive financial policy right before or after the new consumption tax is introduced in April, and this will incentivize the economy. That will be a positive for occupier appetite.”