Japan offers a stable investment environment at a time of global political uncertainty and slowing growth, agreed speakers on Wednesday at the inaugural PERE Forum: Japan this week.
Delegates heard how capitalisation rates at a cyclical high and rental and interest rates at a cyclical low have combined to make Japan an attractive investment destination. “Now is a good time to invest”, said Scott Kelley, managing director, founder and chief executive officer at New York-based private equity real estate firm Aetos Capital, “not because of a great growth story, but because of stability.”
Japan has shown resilience and a strong recovery following the Tohoku disaster last year, even if the country’s demographic crisis and the risk of slowing exports remain a concern.
Meanwhile, positive trends have emerged for private equity real estate: “Tokyo’s population is growing, with the number of households increasing along with higher divorce rates and young people moving out of the parental home,” said Tom Silecchia, managing partner at Merchant Capital. This is good news for the residential sector it was argued.
Also, Japan’s shift from a manufacturing to a service economy is supportive of the capital’s office market, Silecchia said. Tenant requests for lower rents, which came in thick and thin over several years, have now ceased, with investors anticipating flat rates for the next 24 months – indicators of bottoming out of rental levels. 
Now is a good time to invest not because of a great growth story, but because of stability
Scott Kelley, Aetos Capital
Several other sectors are looking promising on the back of other macroeconomic indicators, according to Ken Chan, country head and representative director at GIC Real Estate International Japan.
Replacement demand for property is supporting growth in the consumer sector, and tourism has picked up due to a relaxation of visa requirements. For example, Japan recorded 200,000 mainland China visitors in July, the most ever recorded, said Chan.
And while Japan’s aging population has long been an issue for the country’s economics prospects, it was argued on stage that because the country's ageing population has money this would provide strong domestic demand for both the hospitality and retail sectors.
In terms of returns, one development of the last few years is that investors can raise money with the promise of a 10-12 percent internal rate of return, said John Salyards, senior manager at property consulting firm Savills Japan. “This can be done in Japan for a five-year hold”.
Opportunistic returns of more than 20 percent are challenging given the difficulty in exiting assets, however. “Foreign funds from the US and Europe own a lot of Japanese real estate,” Salyards said. “They have found good debt, bought good property, managed it well, but then have been unable to exit their assets and meet their returns.” Hence, return requirements need to be lower, he concluded.
But for those with the relevant expertise, oversized returns are there for the taking. “We are very constructive on the Tokyo office market,” argued Kelley. “Given the stable operating environment, there are ways to make big opportunistic returns if you buy into complex situations.”
“These should be easily auctionable, and can include buying a piece of subordinated [finance] that has a limited control period, or working with a senior bank in the restructuring of an over-levered borrower.”
He added that Japan’s debt markets are extremely liquid, with an enormous amount of financing available at very attractive rates. His firm completed a purchase on a building a couple of weeks ago, with 70 percent loan to value financing costing just 1.5 percent.
“Our investors are very interested in cash-on-cash return, and you get better levered cash on cash return in Japan than anywhere else in the world,” he said.
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