GPIF: The sleeping giant awakens

Japan’s Government Pension Investment Fund, the world’s largest retirement fund, has stormed into PERE’s GI 100 ranking for the first time.

Entering at a respectable 42nd place, the ¥186 trillion ($1.7 trillion; €1.4 trillion) institution has so far committed up to ¥1.134 trillion to real estate investments through gatekeepers and fund-of-fund managers, according to its latest annual report, released in July.
This marks the first time the investor has disclosed these figures in such detail.

GPIF’s private real estate portfolio by grew more than 43 percent in fiscal year 2020 from ¥380.8 billion to ¥544.7 billion as of 31 March. Today, the asset class accounts for 0.6 percent of its overall portfolio.

In February, the pension appointed CBRE Global Investment Partners to manage its first co-investment and joint venture mandate. This is the second global real estate investment mandate issued by GPIF, which also selected CBRE to manage a commingled fund mandate in 2018.

GPIF increased its overseas real estate exposure from 51 percent to 68 percent in fiscal year 2020. Office and logistics are the pension’s two largest sectoral exposures, which together make up more than 70 percent of the investor’s portfolio. Retail accounts for around 9 percent, a 7 percentage-point decline from the end of fiscal year 2019.

Making strides in property

GPIF has come a long way since it first signaled its intention to diversify its bonds-heavy portfolio in 2014. Progress was initially slow – it was only in 2017 that the pension announced its first real estate mandate, appointing Mitsubishi UFJ Trust and Banking Corporation as fund-of-funds manager for a Japan core real estate strategy.

“I think [GPIF’s] program announcements have been delayed,” says a senior executive at an international real estate firm that works directly with GPIF and who wished to remain nameless. “But I think they have been pushing real estate exposure hard so far – I believe GPIF will keep up the pace and come back to the original schedule eventually. It is still a work in progress.”

GPIF’s wish to do more real estate investments is due, in part, to the low interest rate environment in its domestic market. “The interest rate is now zero,” Ken Sakuramoto, head of the equity advisory group at JLL Japan, tells PERE. “I would say five years ago I was actually looking at negative rates, so the domestic bond market wasn’t earning money. You’ve got to replace it with something else that you have never done before and that’s when real estate and other alternatives really came into the picture.”

From a performance perspective, that move is working. The institution has achieved IRRs of 5.7 percent and 6.74 percent for domestic and overseas real estate investment respectively, according to its annual report. Compared with other alternative asset classes, real estate has also generated the highest rate of time-weighted investment return, at 7.95 percent. Infrastructure and private equity returned 5.71 percent and 4.44 percent respectively.

Showing the way on ESG

Like many of its sophisticated institutional capital peers, the Japanese investor is also becoming more vocal about ESG in its investments, having signed up to the Global ESG Benchmark for Real Assets as a real estate investor member in 2019. “GPIF is a leader for ESG among all the Japanese investors,” says Yukihiko Ito, managing director at capital advisory firm Asterisk. “It requires all fund managers to integrate ESG into their investments.”

“I would say GPIF has significant influence over the Japanese institutions, and especially the other domestic pensions,” says the senior executive. He believes GPIF will set an example for Japanese investors to mirror its real estate allocation and ESG strategy.

Though real estate still only makes up a fraction of GPIF’s total AUM, the institution’s sheer scale means even small movements will have big implications for the market. And with the pension aiming to allocate up to 5 percent of its overall portfolio to alternatives, expect to see it reach new heights in future PERE GI 100 rankings.