A panel at the PERE Summit: Asia told delegates there is a rare window open for new private equity real estate businesses to launch in Japan. The panel, made up of representatives from CLSA Capital Partners, Fortress Investment Group, AXA REIM, RREEF Real Estate and Secured Capital, said a mixture of reduced market competition, a wide spectrum of investment opportunities and cheaper borrowing costs have led to “one of the best opportunities to set up a team”.
John Pattar, managing director at CLSA, explained how 1,500 real estate companies in the country, including 25 listed companies, had gone bankrupt. Added to that, he said many of the foreign banks had seen “massive restructuring” and the debt market for foreign lenders had all but disappeared, leaving a gaping hole to be filled.
“You have one of the best opportunities to set up a team if you’ve got a commitment towards Japan. You’ve got high quality resources for the first time at quite sensible prices,” he said, “I’d seriously look at now as a chance to get some high quality people and a team on the ground.”
Pattar said that, despite sales happening under the radar, Japan’s banks were starting to offload assets. “If you look at the spectrum of opportunities created by the downturn they’re just not that apparent because a lot of people are offshore- but they are on the ground.” In his experience, sales were happening in the $25 million to $50 million size range.
He highlighted that loans bundled up into CMBS structures were starting to trade but not via the primary lender, hence the lower profile of the transactions. Instead, many are being resolved by groups responsible for mezzanine portions.
While agreeing with the notion there was a rare window for new entrants to the market, Thomas Pulley, chief investment officer at Fortress, said Japan’s CMBS market would not offer a deluge of deals immediately. According to property services firm Savills, Y711 billion (E7.26 billion; $9.25 billion) of CMBS debt should mature in 2012 and a further Y1.2 trillion in 2013 but Pulley said: “It’s a characteristic of Japan that deluges don’t happen.” Nonetheless, he acknowledged that CMBS maturities were “piling up” and a “fairly steady drip” was possible.
Hidetoshi Ono, head of AXA REIM’s core fund, added that many Japanese banks were still adopting an “extend and pretend” mantra but that it was worth getting close to the lending community to ensure a good position when debt books are offloaded at scale. “We must remember the power has shifted from the equity guys to the lenders,” he said.
Delegates also heard how there was consolidation happening in the J-REIT market which was “quiet” in general, lending to market conditions suitable for private equity real estate firms to invest opportunistically into the core space. Indeed, as markets bottom out in Japan, certain firms have expanded their investment vehicle offerings to take in core assets.
But Pattar warned that while J-REITs were quiet now – some are trading at discounts to nearly 20 percent – that could change next year as the FSA introduces new rules permitting measures like share buy-backs and rights issues. “Those factors alone will revitalise the J-REIT market and today’s core story will become very difficult next year.”
The panel also agreed cheaper borrowing costs were proving alluring for real estate firms at the moment. Indeed earlier in the conference, Morgan Laughlin of Grosvenor Fund Management said his firm had completed five refinancings in Japan costing an average of 150 basis points, including associated costs, down from peaks of up to 350 basis points “a couple of years ago”.
“As a foreign borrower the costs are higher but I’ve heard of examples of less than 100 basis points”, he said.