MSREF: Opportunities will emerge from J-REIT consolidation

As Morgan Stanley Real Estate Investing looks to invest its $4.7bn opportunity fund, the firm’s CEO of Japan, Yoshihiko Shigenari, says ‘speed and leverage’ are no longer the most critical elements of a deal. In China, MSREI’s head of Asia, Hoke Slaughter, says development deals ‘could make sense’.

After losing more than two-thirds of its value over the past two years, the Japanese REIT market will likely need to consolidate if it wants to preserve and restore valuations.

It’s certainly something global real estate investors are eyeing as they search the world for potential deals – not least Morgan Stanley Real Estate Investing.

After closing its $4.7 billion opportunity fund, Morgan Stanley Real Estate Fund VII Global (or G7 as it’s known internally), the firm said it expected to see increasing volumes of assets sold in the fallout from a “consolidation and merger” of J-REITs.


At its peak in May 2007, the Tokyo Stock Exchange REIT index reached more than 2,500 points. However, that fell to an all-time low of 711.3 last October. The index was around 875 points, at the time of press.

Yoshihiko Shigenari, MSREI chief executive officer Japan, recently told PERE the firm had seen deal activity “pick up in 2010”, but added: “We don’t get the sense that the floodgates have opened.”


Marcus Merner, MSREI chief operating officer Japan, continued that transaction volume was expected to rise through a consolidation and merging of the J-REIT industry. “A lot of J-REITs are offloading assets as they go into these mergers,” he said.

According to a Bloomberg report last October, the chief executive officer of Mitsubishi Corp. UBS Realty, Yuichi Hiromoto, urged Japanese regulators to create rules to spur mergers of J-REITs to help them survive. If REITs could consolidate, they might create the sort of scale needed to borrow money, allowing them to finance acquisitions. Currently there is no framework that lays out ground rules for REIT mergers, the report said.

Shigenari warned though that real estate investors needed to return to fundamentals when closing deals. “When we start deploying capital we will be careful about it,” he said.

“It’s not about speed or leverage,” Shigenari said. “We are currently in a competitive market and there is a lot of capital around, so it’s understandable people might rush into the market. We have to go back to basics and look at everything deal by deal with an eye to the discipline.”


Shigenari – speaking in the June issue of PERE magazine – was joined by MSREI head of Asia Hoke Slaughter, who said credit-driven situations were a large focus for many firms in Japan.

In relation to Asia, Slaughter, said G7 would look at entity-level opportunities emerging from China as well as possible development deals. “Hard assets are difficult to access there purely from a valuation standpoint,” he said. “But the market is beginning to become more capital constrained and we're starting to see some development opportunities that could make sense.”

Slaughter added Australia was also presenting some potential deals, “including opportunities coming out to the fund management and listed property trust sector”.

Click here to read the full interview with the MSREI team.