Debt behind M&G’s $700m Japan deal highlights favorable market conditions

The firm’s Japan deals have much higher leverage than its core fund’s typical debt strategy, which includes leverage at 30 percent.

For real estate investors, M&G Real Estate’s $700 million Grade A office buy in Japan last month is a reflection of how the country’s economy stands apart from a world subject to interest rate hikes.

Jing Dong Lai, chief executive officer and chief investment officer at M&G Real Estate Asia, told PERE that the loan-to-value and interest rate data in the deal demonstrated a still strong credit spread in the country – even though both were low by global standards.

With capital from its $7.1 billion open-end core fund M&G Asia Property Fund, M&G is understood to have paid $280 million in equity for the $700 million Minato Mirai Center Building in Yokohama, according to Lai. This represents a 55 percent loan-to-value ratio.

Finance for the asset was arranged for seven years at less than 1 percent interest and the initial yield for the property was 3.5 percent.

The 21-story office block is now the largest asset under the management of the firm’s Asia core fund, according to a statement on the deal. It was previously held by Japanese developer Hulic, US investment banking group Goldman Sachs and Hong Kong-based Gaw Capital Partners respectively since 2017.

The low interest rate environment in Japan has continued to provide a low financing cost for institutional real estate buyers as opposed to elsewhere in the world.

Consequently, M&G’s Japan deals have much higher leverage than its core fund’s typical debt strategy, which includes leverage at 30 percent, according to Lai. But he noted the fund’s overall loan-to-value ratio is offset by a much lower debt level being taken out in other markets in the region.

Lai pointed out that Japan was the only country across Asia still offering a positive spread over government bonds – important for institutional investors when making allocation decisions. Currently, the Japan 10-year government bond has a 0.240 percent yield. Meanwhile, the 10-year government bond yields in Australia, South Korea and Singapore are 4.010 percent, 4.180 percent and 3.519 percent respectively.

A managing director source at an Asia-headquartered multi-asset manager told PERE he was “super positive” about inbound investment in Japan’s real estate market given its low interest rate environment and, most recently, the weakening of Japanese yen against the dollar. The dollar touched a three-week high against the yen of 147.67 today, a 27.8 percent hike from six months ago.

On a currency basis, it is understood that M&G does not hedge for its fund.

“The exchange rate between the dollar and yen will add over 200 basis points of return for US dollar investors in Japan,” the source explained. “Same for UK, Canadian and South Korea investors into the country.” Together with the low rate environment, this would lead to a “significant return boost” for Japan inbound investors.

These favorable market conditions are not lost on international managers. ARA Asset Management, for instance, hired its first investment executive in the country to lead an expansion.