Can Japanese LPs become Asia’s next big cornerstone investors?

With Japanese institutional investors estimated to deploy over $14 billion in overseas real estate in the next three years, according to property services firm CBRE’s findings, global managers are figuring out the optimal strategy and investment vehicles to attract this wave of capital.

Some of the initial mandates given by these investors, including the public pension giant GPIF’s appointment of CBRE Global Investment Partners last month, have been for indirect investments through a fund-of-funds model.

However, given the dramatic improvement in the level of sophistication of the Japanese investors, they could eventually also become large cornerstone investors, said Shusaku Watanabe, director of capital transactions for Asia at TH Real Estate, speaking at PERE’s annual real estate forum in Tokyo.

“It is still early stages but how fast they have moved in the last two years is remarkable,” he told delegates during a panel discussion. “Ticket sizes of some of the big [Japanese] firms are quite large. I can see them becoming cornerstone investors like NPS.”

Watanabe anecdotally spoke of how some of the biggest Japanese institutional investors, including Japan Post and GPIF, meet some of the top 100 global investment managers on a quarterly basis. For example, half of the $3.5 billion of Japanese capital that TH Real Estate has invested across its different funds, including core and debt strategies, was raised within this year.

Morgan Laughlin, managing director and head of Japan at PGIM Real Estate, agreed the Japanese market has been a “holy grail” as far as the quantum of money is concerned. He said the firm’s portfolio managers end up coming to Japan at least twice a year to develop relationships with the Japanese investors.

“We spend more time with the LPs here around quarterly reporting and updating on a face-to-face basis than we do with most global LPs,” he noted.

But given the comparatively longer time taken by Japanese investors to make investment decisions and the level of granular details required, Laughlin believes it is difficult for them to come in as a cornerstone investor in a typical commingled fund where the process moves quickly.

Indeed, cornerstone investors usually must come in within the first close of a fund, said Kallan Resnick, managing principal at Park Hill Group.

Talking about possible solutions, Laughlin said there were a couple of occasions in the past when PGIM held off a piece of intended capital raise for a value-add fund – that reopens for fundraising on a periodic basis for a limited period – specifically for Japanese investors. This was done to allow the Japanese investors some time to come in as LPs in the fund.

What could also work, in his view, is bringing in a Japanese investor as a seed investor for a specific strategy in a separate account vehicle: “You could then potentially extend it to [become] a multi-investor vehicle. In the near-term, that is how Japanese investors could come in as a cornerstone investor.”