Friday Letter Dealing with the aftershock

A week after Japan’s ‘big one’ finally arrived, the human catastrophe is as yet unmeasured. Still, in the long term, international investors should not turn their backs on the country. 

As long ago as 1996 – just one year after the Kobe quake – the Japanese would welcome newly-settled gaijin (foreigners) by telling them the country was still due a “big one”. When tremors came (as they did almost every month), it was often only westerners that would dash outside their homes as per the safety drill, while the Japanese went about their domestic chores without too much concern.

Now, the big one has finally arrived, and the full extent of the awful human tragedy is still unknown. Yet, both foreigners and the Japanese alike are facing the consequences with as much stoicism as humanly possible.

The immediate disruption in Japan, of course, has been clear: those firms operating in alternative investing, such as The Blackstone Group, have closed their Tokyo office this week and will deliberate over the weekend whether to re-open on Monday. In the meantime, Blackstone has offered to move its 25 employees and their families to alternative destinations on a temporary basis.

Swiss alternatives firm Partners Group said staff who prefer to stay in Japan are relocating to other provinces, while others will be temporarily relocated to the firm’s Singapore and Zug offices to work.

Joshua Isenberg, a real estate lawyer at Paul Hastings, told PERE how one of the firm’s partners had lost his childhood home. International schools are cancelled in the run-up to the spring break, so a lot of expats are leaving, he added. With so many killed, those with a choice to leave are the lucky ones.

One can find examples of the impact everywhere. It will take a week for Secured Capital Japan’s Tokyo-based professionals to be able to assess its asset in Sendai, said J-P Toppino, president and chief investment officer.

The international ripple effect has been there to see as well. In Munich, Union Investment Real Estate suspended the trading of units in a global fund because a significant percentage of its assets were in Japan and staff couldn’t provide an immediate valuation.

To many people’s minds, there is no doubt that the earthquake has come at a difficult time. Some say that the real estate market was about to turn the corner. The fiscal year-end comes in a few days’ time, when traditionally firms try to drive deals over the line. Some of those will be harder to complete now. Yet, longer term, there is stoicism and data to show Japan’s real estate market will remain solid.

Christian Mancini, chief executive of Savills Japan, said Japan still “works” and that there was nothing to deter one from investing. “We had entered 2011 in mid-stride on a fistful of transactions which, for us, meant the return of the Europeans,” he said. “I think that might be postponed, but it’s not dead. I suspect, in spite of the earthquake, transaction volumes this year compared to last year will be in dramatic excess still.”

JPMorgan said, in comparison with the earthquake in Kobe in January 1995 – which measured 7.2 magnitude rather than 9.0, reconstruction and other public works ultimately valued at more than the damage cost and GDP growth of three percent per subsequent quarter ensued. “In all, we provisionally revised down Q1 and Q2 GDP from 2.2 percent to 1.7 percent and from 2.2 percent to 0.5 percent, respectively. However, we revised up Q3 and Q4 GDP from 2.5 percent to 4 percent and from 2 percent to 2.5 percent,” the bank said.

In other words, history should repeat itself, and international investors should continue to invest in all things Japan.

In the meantime, our thoughts and prayers are with those most affected.