Amid the pearls of wisdom that were shared by more than 50 speakers at the second PERE Forum: Asia in Hong Kong last month, there was one pearl that really stood out. It was Andrew Wood's definition of true opportunity, followed by his indication of where this rare beast is to be found today – in Japan.
Wood, MGPA's chief investment officer, argued that the meaning of “opportunity investing” had become distorted in recent years. Wood told the crowd, primarily made up of senior general partners, that over the last four to five years, the investment world at large approached opportunistic buying in terms of taking on higher risks to achieve higher absolute returns. That modus operandi, Wood argued, does not work today and is unlikely to work in the immediate future. Investing using high gearing levels or in areas such as development is “fine”, Wood said, “but you are not delivering alpha”. True opportunity investing, he argued takes advantage of distress situations to achieve higher risk adjusted returns.
Wood continued: “If I can buy something for less than it is worth and sell it for what it is worth then I have an alpha return. That is taking advantage of an opportunity. That is opportunistic investing.”
Applying Wood's definition, and listening to the two-day conference's varying country advocates, it became evident that GPs with ample dry powder should see the land of the rising sun as the must-buy location for the immediate future. Why? For one, Japan has ample forced sellers of real estate in waiting as bankruptcies soar to record levels. For example, in the listed sector, Tokyo Shoko Research recorded that 25 of a record 33 Japanese companies forced into bankruptcy in 2008 were property companies. Distressed selling, of course, often leads to assets trading for less than intrinsic value.
In October last year, this column discussed the potential attractiveness of looming fire sales by J-REITs. Then, companies such as Urban Corporation RE-Plus Residential Investment were early targets for opportunistic investors. Los Angeles firm Oaktree Capital Management, which courted RE-Plus then, was at it again less than five months later when it entered a $1.1 billion auction with the likes of Goldman Sachs and Lone Star for the J-REIT New City Residence Investment Corp.
The fall in share prices among Japan's leading banks (Nomura shares fell to their lowest value in more than 25 years last month, for example) is predicted to lead to further asset fire sales and with that, investment opportunities for seekers of core property sold at opportunity prices.
This view was endorsed by delegates on and off the stage at the PERE Forum: Asia. On stage, Simon Treacy and Jack Chandler, the heads of Asia's largest two opportunity funds, MGPA's $3.9 billion Asia Fund III and LaSalle Investment Management's $3 billion Asia Opportunity Fund III respectively, both signalled Japan out as an immediate target. The former even predicted investment activity as early as the second quarter of this year: “If you can get good real estate in the centre of Tokyo below its replacement cost you can ensure you are getting value for money.”
The value-for-money endorsements were not heard in praise of India, which during the two-day event was repeatedly slammed as too risky an investment destination. China, however, kept its positive long term investment destination status, but failed to win enthusiasm in the short term.
But for those reading this with a mind to embark on a new deployment strategy for Japan, prepare to be hit by a contradicting caveat. Speakers agreed that the country has a good three to five years of positive economic indicators in the bag, such as a strengthening Yen (an average of ¥91.3 to $1 for 2009 and 2010, according to the Economist Intelligence Unit), before negative factors such as its aging and non-replenishing population (EIU: 0 percent growth between 2003 and 2007) and its diminishing exports sector (EIU: merchandise exports are predicted to fall by 17 percent in Yen terms this year), begin to kick in.
Couple that limited investment horizon with the fact that the country, despite its maturity in real estate terms, is still regarded as lacking in transparency. Jones Lang LaSalle's Real Estate Transparency Index 2008 ranks Japan as only the 26th most transparent country to invest globally and only the 6th most transparent in Asia. The weak transparency caused delegates to agree that those best placed to benefit from Japan's current predicament are those already with an established network of contacts on the ground.
One delegate who shall remain unnamed said: “Land in China and you will see 40 deals coming at you. In Japan, you could be there for two months and see nothing.”
LaSalle has an office in Tokyo. Wood's MGPA has one in Tokyo and one in Osaka. Based on the evidence on show at the PERE Forum: Asia, both are well placed to take advantage of Wood's opportunity to seek Alpha. Those not there already might just regard the notion of such a tight investment window as too risky after all.
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