Japan with a plan

Real estate GPs in Japan are finding that their LPs are demanding far less wriggle room in the investment mandate, writes Jonathan Brasse

Real estate fund investors are seeking more and more authority on investment decisions made by their GPs. Some of these LPs have drawn a corollary between the broad investment mandates of the boom-vintage funds, and steep losses.

Some GPs have responded by proposing a dilution of their own investment discretion through functions such as LP veto rights. Other GPs are keen to retain control but strike a middle ground by offering more focused investment criteria, as PERE learned on a recent trip to Japan.

PERE spoke with a Tokyo-based GP at work on a Japanese real estate fund aimed at acquiring assets across the city. The vehicle, which was to target $600 million, originally would have just as happily bought a condo than an office and would have spent in Osaka as easily as Tokyo. But in the two-plus years since that original plan the world changed dramatically. The GP now it thinks it better to ensure the LPs know exactly what style of assets they will have bought into long before a single yen is even spent.

The offering has now been reworked as a core-plus fund aimed at Tokyo offices that meet very specific criteria, such as being located only in certain of the 23 municipalities that make up Tokyo. It also may only invest in the B+/A- quality classification range. The seven-year fund, which cannot be named yet owing to reporting restrictions, is hoping for $300 million in commitments. Its manager says he aims to give potential investors “focus” and “transparency”. “When investors look at our pitch book, they know exactly what they are getting,” he says.

One could argue that this manager is creating a rod for his own back by launching a fund with such tight investment criteria. By restricting its activities to office buildings of a certain size and quality in just six wards, the fund will not compete for countless other opportunities bound to be spewed forth from Japan’s banks in the near future.

However, even if it misses out on some bargains, should it meet or beat the 10 percent to 12 percent return it is promoting, the manager will be vindicated and the LPs who felt comfortable enough with its strategy will not likely complain.

And in any case, even within the narrow parameters of this fund, the recession is creating new opportunities by the minute, giving this manager enviable wriggle room. The central Tokyo office vacancy rate rose to 6.8 percent last month, marking the 17th straight increase, according to figures by real estate broker Building Group Company. Smart LPs know that hunting in these narrow woods is bound to turn up some very interesting and attractive game.

Stay tuned for PERE magazine’s multi-issue focus on the most important firms, deals and investors in Japan’s enormous and mature real estate market. September: The trouble with J-REITs. October: Japan’s most influential LPs. November: Inside Tokyo’s powerful and controversial KK DaVinci