ASIA NEWS: Tightening up

The earthquake and tsunami that devastated parts of the Sendai region of Japan in March jolted the fundraising efforts for a number of real estate investment management firms in the country.

Indeed, PERE is aware of two separate examples of first closings at the due diligence stage that were put on hold when the earthquake struck.

One of those forced to apply its brakes was AXA Real Estate Investment Managers, the real estate investment management arm of French insurance giant AXA. Having brought a Tokyo office fund managed jointly with Osaka-based Sumitomo Trust & Banking to the market last year, the firm was poised to close on approximately $150 million of its $500 million target.

Hidetoshi Ono, who joined AXA in the summer as head of the Tokyo fund, said the closing was to coincide with a debut bid, a $60 million offer for an office in the Tokyo ward of Chuo. “Since we had to postpone the fund, we also had to cancel the investment,” he added.

Six months later, AXA is back on the road with the fund, albeit with certain adjustments. In addition to altering the fundraising target – $500 million requires significantly less yen than it did when the fund was marketed last year, thanks to its strong appreciation against the greenback – Ono said the fund will be invested with tighter geographical investment parameters. From an initial focus on all the 23 wards that make up the most populated part of Tokyo, AXA will now channel its efforts into just the central five, namely Minato, Chiyoda, Chuo, Shinjuku and Shibuya.

“We think [tenants] are getting more selective in choosing their locations, especially after the earthquake,” Ono said, pointing to an enhanced desire to be in quake-resistant buildings. “Tenants have choice and are tending to go for more convenient locations, more central locations.” Indeed, the average vacancy rate in Tokyo offices is nearly 10 percent, but it is just 6 percent to 7 percent in the central five wards.

With yields moving out from recent peaks below 4 percent to higher than 5 percent today, AXA believes there is an investment opportunity in Class A- to B+ offices, for which the firm plans to invest between $40 million and $100 million per investment. The Tokyo office fund has a core to core-plus return expectation of between 10 percent and 12 percent over a five-year life.

“It’s difficult to call the bottom of the market, but I think it is now,” said Ono. AXA will be hoping to convince prospective LPs of the same thing. If it does, a first closing, similar to its aborted previous effort in March, should happen by year end.