Japan’s biggest whale makes its first splash

For the world’s largest pension fund – with total assets under management of ¥158.6 trillion ($1.4 trillion; €1.2 trillion) as of June 30 – any move made in real estate is bound to make waves.

In late September, Japan’s Government Pension Investment Fund appointed multimanager CBRE Global Investment Partners as the first investment manager for its global real estate strategy. The indirect real estate investment business of Los Angeles-based CBRE Global Investors will carry out fund of funds investments for the Japanese pension fund through a separate account.

Given GPIF’s scale and previous absence in global private real estate, the mandate has been among the most eagerly anticipated by institutional investors in recent history. Besides appointing CBRE GIP, GPIF also named Tokyo-based asset manager Asset Management One as gatekeeper, due to the company’s status as a Japan-licensed asset manager, for the multi-manager mandate.

According to sources familiar with the process, it took around 10 months from the start of due diligence for GPIF and CBRE GIP to close the deal. A convincing track record and willingness to dedicate its most capable team exclusively to GPIF were key factors behind its securing the mandate.

“We are still on the way to selecting further subsequent managers in accordance with different mandates with a likewise global scope,” Hideto Yamada, GPIF’s head of global real estate, said onstage at the PERE Tokyo conference a week after the CBRE GIP announcement. He explained the pension plan’s strategy targets core assets with stabilized cashflow yields in developed markets.

Pushing for partnerships

Fund of funds investments is a logical starting point for GPIF’s global investment strategy, says one Tokyo-based head of Japanese investor relations at a global asset manager.

Simultaneously, the source elaborates, the relatively big tickets needed for the largest whale in pension fund waters will lead to the largest possible global footprint. This will create a solid foundation on which GPIF can become gradually more strategic and direct in its global real estate strategy.

Yamada makes it clear that the fund of funds mandates will be an underlying, ongoing investment plan. At PERE Tokyo, he revealed the next steps of GPIF’s global real estate strategy will entail making direct investments.

According to sources familiar with the process, the aim is to launch that stage in 2019 or 2020. Rather than commingled funds, the aim will be investing through club vehicles, separate accounts or joint ventures, according to Yamada.

“We aim to establish co-investment platforms with limited partnerships together with a limited number of like-minded investors and engage in joint ventures. It could be done with a fund investment manager, property company or a REIT as a local operator,” he said onstage.

According to Shai Greenberg, vice-president, international business at Tokyo-based asset manager GENKAI Capital Management, GPIF’s ambitions draw comparisons to the real estate strategy of Toronto-based Canada Pension Plan Investment Board. The Canadian public pension fund invests around the world through partnerships with aligned operational managers with specific knowledge of the market and the property type in question.

“I think there are fun times ahead of us,” says Greenberg, elaborating: “When we look a couple of years ahead, we will see Japanese pension funds invest in individual deals where they sponsor specialist operators directly, like CPPIB.”

According to Yamada, the advantage of forming joint ventures with aligned operational partners, and possibly like-minded institutional partners, is the ability to deploy a larger scale of capital for selected opportunities. He also highlights GPIF’s pursuit of direct real estate strategies will involve lower management fees and expenses than more costly multi-manager mandates.

“The joint venture concept enables long-term holding through multiple market cycles, which is also essential for us, with like-minded, long-term nature capital,” Yamada said onstage. “We expect, from our viewpoint, those partners to have market knowledge and network about the market and alignment with our ESG values, where GPIF is now emerging as one of the global leaders.”

GPIF is prohibited from owning real estate outright. Instead, the pension fund will invest through platforms of which GPIF cannot own more than a 50 percent stake.

Limited pool of talent

While investing in funds of funds provides GPIF with broad diversification from the get-go, the pension fund will also need to recruit to build its global real estate roster.

“Needless to say, for this stage two, we must reinforce our internal resources. So we need more people,” Yamada said at PERE Tokyo.

One Japanese real estate professional working for a global investment firm tells PERE that building an alternative asset management career as a young professional at GPIF will open doors. Besides the possibility to reach a senior position over time in the world’s largest pension fund, the network and knowhow gained from GPIF’s coming global outreach could pave the way for other opportunities after just five years of experience in the alternative assets team.

“If I was younger, in my early 30s, I would definitely find it attractive to join GPIF,” he says, but notes that his current compensation, seniority and age rule out the opportunity for him.

Indeed, his profile – a Japanese speaker with international asset manager experience – hits the bullseye for GPIF’s desired new professionals. However, that supply is limited, according to Martin Eastgate, director at Chicago-based recruitment firm Ferguson Partners’ Japan branch with a focus on recruitment for investment banking and investment management.

Eastgate explains his international and Japanese clients within alternative investment managers have lately sought to expand their investor relations, client services and business development teams to access capital from Japanese pension funds. Typically, international firms have been able to offer higher salaries as they are not restricted by some of the caps that public pension funds have traditionally had to adhere to. Eastgate underlines that compensation is not always a primary motivator for those joining such investors.

“The Japanese institutional investors are competing with international firms for talent as they look to build out their internal alternative investment teams. Japan has always had a scarcity of professionals with the right skillsets due to a limited focus on global alternative investments,” says Eastgate.

PERE understands that GPIF will seek to recruit non-Japanese people for its global alternative investment team to assuage the issue, as the business gradually grows.

The choice to enter global real estate comes from the need for both diversification and relatively higher, yet low-risk returns. GPIF is one of the largest investors in Japanese government bonds, which are “yielding close to nothing or minus,” according to one Japan-focused industry source.

The continuous low interest rate in Japan has led the pension fund and other Japanese institutional investors to increase their allocations to alternative assets. A report by global broker CBRE estimates indirect investment by Japanese institutional investors in overseas real estate will amount to approximately $14 billion over the next three years alone.

According to data from Real Capital Analytics, Japanese outbound real estate investments, including development sites, amounted to just above $5 billion in 2017. The average yearly amount for outbound investments from 2013 through 2017 was $4.17 billion. 2018 is on the trajectory to exceed that amount, with the first half of 2018 amounting to $2.31 billion.

GPIF has an alternative asset allocation cap of 5 percent of its total investment portfolio, which according to Yamada could be equivalent to $70 billion of investments over the coming years. However, the public pension fund had 0.17 percent of its portfolio invested in alternative assets by June 2018, so there is plenty of potential to grow.

The biggest whale in the ocean has made its first breach into the waters of global real estate. Where it dives in next will be closely watched by the private real estate industry.

Plenty of fish in the sea

Other than being the world’s largest pension fund, the magnitude of GPIF’s entry into global real estate also stems from its role as first-mover and guiding light for Japan’s other institutional investors.

Dubbed “whales” due to their size, GPIF, Japan Post Insurance with ¥74.96 trillion of total assets, and the ¥21.35 trillion Pension Fund Association for Local Government Officials, known as Chikyoren, will be among the Japanese institutional investors that are expected to make a big splash in the coming years.

Behind these whales are smaller pension funds. Combined, they represent potential for a solid capital infusion into global real estate markets, should they follow GPIF’s example.

“We are talking hundreds of pension funds of various sizes, so they might not have the volume to move into joint ventures and partnerships too. Instead, they will stick to commingled funds,” says Shai Greenberg, vice-president, international business at Tokyo-based asset manager GENKAI Capital Management.

In response to the anticipated activity from Japanese investors, managers have opened offices in the country in the last two years, recruiting professionals with experience in investor relations and fundraising.

“Just because you do not win a mandate in the first round, there will be plenty to go around in second or third. Especially when you think of the smaller pension funds also coming to the global real estate market,” says one Japan head at an international asset manager.