Jones Lang LaSalle, the property services firm, today reported that commercial real estate investment volumes in the Asia Pacific region had increased by around 10 percent year to date, thanks largely to a marked upsurge in Japanese assets changing hands.
Post-disaster rejuvenation and the growth figures it might bring in the land of the rising sun is not necessarily going to lead to an increase in opportunistic opportunities
According to the firm’s Q3 preliminary findings, Asia investment volumes in the quarter reached approximately $67 billion compared to $61 billion in the same quarter last year. Within the current total, Japan saw investment volumes tip $4.7 billion up from $1.5 billion in Q2. The firm says investor confidence is coming back following disastrous earthquake and resultant Tsunami in March, which devastated significant parts of Sendai and the Miyagi region to the country’s north.
Pointing to the Bank of Japan’s programme aimed at supporting the J-REIT market, which it highlighted has led to an increase in buying activities, the International Monetary Fund’s forecast of 2.3 percent growth as rebuilding post-earthquake kicks in, and the wider international economic malaise prompting a “flight to safety”, JLL said Japanese investment volumes should continue to grow. “The resumption of this market is likely to support renewed international investor interest in the biggest market in Asia Pacific,” the firm said.
Sounds good for private equity real estate surely? After all, more action from Japan’s 35 J-REITs means more exit options for opportunistic capital to work its magic.
However, when you consider what private equity real estate is actually doing in Japan, it actually does not appear that adventurous capital is optimistic of widespread opportunity, particularly at the bigger firms. Goldman Sachs’ Real Estate Principal Investment Area has already informed the investors of its $2.3 billion Whitehall Street International 2008 fund that “it is harder to achieve scale” in Japan than it used to be. Likewise Lone Star Funds, once one of Japan’s biggest predators, has scaled down its predicted allocation to Japan in its $5.5 billion Lone Star Real Estate Fund II from 33 percent in its previous fund to nearer 20 percent. One can only assume that these examples reflect how Japan is regarded by those currently considering opportunistic possibilities across the entire world.
In yet another example, take a look at Asia- and Europe- focused MGPA. Earlier this month the firm launched a €500 million Asia fund for German-speaking investors. MGPA already has approximately $500 million of its $3.9 billion MGPA Asia Fund III (the largest ever opportunistic pool of capital raised for Asia) remaining to invest with a plan to split that between Japan and China. But the firm recognises that capital with a 20 percent return expectation is, generally, not best served in Japan at this point. Its German investor fund, by contrast, is being raised with a core-plus return requirement of around 10 to 12 percent. It is also structured as an open-ended fund as opposed to a more time-constricted closed-ended private equity real estate fund. It’s safe and steady stuff, in other words, rather than opportunistically aggressive, and again indicative of how leading managers are viewing the market in Japan today. When speaking about where high-return capital should find its targets in Japan, the response of the EXPO panel was muted at best
Also, when considering the projected growth afforded by Japanese-post earthquake rebuilding efforts, it’s important to realise where these efforts are focused. According to participants at a Japan panel at the EXPO Real conference in Germany last week, of the real estate affected by the natural disaster, just 0.02 percent was to assets managed by J-REITs or private funds. So before getting excited about the government’s incoming ¥13 trillion (€124 billion; $169 billion) recovery fund and what it will mean for opportunistic exits, don’t lose sight of the fact that it is aimed more at individually-owned homes and not institutional investments.
When speaking about where high-return capital should find its targets in Japan, the response of the EXPO panel was muted at best. Indeed, one of the panelists, only half jokingly suggested left-field property sectors such as the notorious ‘love hotels’ were a surer bet with 20 percent plus returns on offer. “I’m not ashamed to say we’ve sold love hotels at 22 percent cap rates,” he semi-quipped.
None of this contradicts JLL’s findings. There is understandable method behind the firm’s numbers. It’s just that post-disaster rejuvenation and the growth figures it might bring in the land of the rising sun is not necessarily going to lead to an increase in opportunistic opportunities.
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