TH Real Estate has launched a Tokyo-focused real estate fund that will be invested in multifamily assets across the city. In May, the firm reached a $200 million first close for the ERES APAC III towards a $450 million capital raising target. The Dutch real estate investor Bouwinvest is the cornerstone investor in the fund with a $90 million commitment, marking its debut investment in the asset class within Asia-Pacific. The remaining equity comes from financial services organization TIAA, the parent company of TH Real Estate, and an undisclosed investor.

PERE spoke to Tjarko Edzes, director Asia-Pacific for Bouwinvest Real Estate Investors, and Shu Watanabe, director of capital transactions, Asia at TH Real Estate to know the drivers behind investing in a specialized asset class like multifamily.

  1. Good late-cycle investment

With this vehicle, TH Real Estate and Bouwinvest are betting on the defensive attributes of the multifamily sector and the growing institutionalization of the asset class on the back of Japan’s growing population and an ever-increasing number of people migrating to Tokyo.

According to Edzes, this is a good late-cycle investment to make, since the cash flow is very resilient and [multifamily] is less volatile than other asset classes.

“Given where we are in the cycle, we are focusing more on income resilience so that we are in a defensive position in case of any correction of yields,” he said, explaining Bouwinvest’s investment strategy. “There should be a good income return from these investments, and with an open-ended investment structure enough flexibility to be able to ride through any turmoil in the markets. But we also make higher risk investments where we see strong long-term fundamentals or a pricing/value arbitrage in the shorter term.”

Despite the relatively strong fundamentals, Watanabe says the multifamily residential sector is being overlooked by investors, especially because of the challenges in accessing deals.

“Multifamily is a big market but the institutional-grade properties are less than 10 percent of the market,” he said. “Multifamily assets in Tokyo also tend to be small and you won’t find assets over $10 million. The key is to source off-market deals and build to core.”

  1. Better investment returns

ERES APAC III was seeded with a portfolio of six assets, comprising over 500 multifamily units across Tokyo, for a purchase price of $180 million. The Japanese real estate asset manager Kenedix will be the local asset manager for the seed portfolio.

Watanabe told PERE that four of the six assets are brand new buildings forward committed and all six assets were secured off-market. As a result, the firm could purchase some of the assets at 7-10 percent below the market price.

In addition, the relatively stable rental and occupancy metrics of a multifamily asset, targeting the middle and high-income tenants, help to produce higher yields than other asset classes. According to Watanabe, multifamily assets in Japan generate around a 50-basis point premium over office and retail assets.

Bouwinvest is targeting to achieve risk-adjusted returns of 9 percent with this investment.

  1. Country or sector-specific investment approach

Bouwinvest’s commitment to a niche investment strategy like Tokyo multifamily is in line with its broader investment approach in Asia. Bouwinvest has so far not invested in any pan-Asia commingled fund. PERE understands that it mainly invests in country and/or sector-specific strategies and its investment structures include club deals, joint ventures and co-investments.

In 2016, for instance, Bouwinvest joined APG to invest a combined A$150 million ($114 million; 97 million)  in Scape Australia, a student accommodation joint venture partnership established in 2015.

By contrast, Bouwinvest has invested in a pan-European vehicle, according to PERE data. It made a $100 million commitment to the Hines open-ended core fund that was launched in 2016.

  1. Further Asia-Pacific expansion on the radar

As of year-end 2017, Bouwinvest had €9.4 billion in total assets under management. According to its latest annual report, the investor logged €785 million in total transactions in the Netherlands and international markets last year.

PERE understands that roughly 25 percent of Bouwinvest’s total portfolio is allocated to Asia-Pacific real estate, with a medium-term target of raising that to 30 percent.

As such, the investor is planning to increase its APAC investment exposure to more than $1.2 billion in the next 2-3 years, Edzes said.