When MGPA first assessed an approach for the eight-strong, Tokyo-heavy office portfolio it purchased last month, the firm braced itself for the fray of a complicated multi-layered CMBS debt structure. As it turned out, the Asia- and Europe-focused private equity real estate firm was able to buy directly from the debt’s special servicer.
In fact, Tom Mills, chief executive officer for Japan, and managing director Rio Minami admitted to not even knowing how many noteholders there were. “We didn’t have to deal with them directly,” Mills said. “We were dealing with the servicer, and they got agreements from their side to sell the assets.”
The important thing to note was that the CMBS was in default and such instances are occurring more frequently in Japan, presenting groups that harbour opportunistic capital with the chance to obtain the underlying properties at attractive discounts. According to an estimate by Moody’s Investors Service, between ¥600 billion and ¥700 billion in Japanese defaulted debt must be redeemed over the coming two years.
Minami’s data suggested to him that, within the CMBS component of Japan’s real estate debt, the default rate is approximately 40 percent. As such, MGPA expects to be presented with more investable situations like the portfolio it acquired last month, even if the transactions aren’t as straightforward. “It depends on the situation,” he reasoned.
MGPA acquired the portfolio of 10-year to 20-year-old buildings for a reported ¥12 billion (€119.7 million; $152 million) using capital from the largest private equity real estate fund ever raised for Asia, MGPA Asia Fund III, which was established in 2007 and ultimately collected $3.9 billion in commitments. He explained that the assets had been “well cared for” and therefore would require little capital expenditure beyond “the usual amount for buildings between 10 years and 20 years” of age.
Moreover, this investment was driven by a dislocation between the entry yield and Tokyo’s rental market fundamentals. Tokyo rents are widely believed to be bottoming out (even rising in some quarters) and a lack of new office space beyond the summer – 30 percent below the long-term average, Minami said – indicates assets bought today should fare well tomorrow.
Mills warned, however, that competition had increased as more investors have grown savvy to the Tokyo office opportunity. “Some of the deals we’ve looked at are fully priced or more,” he said. “This one worked well for us, but there’s certainly interest in Tokyo offices now.”
Following this investment, Mills and Minami have further capital to deploy from MGPA Asia Fund III, which was granted an extension of 18 months on its investment period running until the middle of next year. John Saunders, MGPA’s chief executive officer for Asia, said: “We were the under-bidder three times on deals in Japan, where people underwrote rental growth before we were prepared to do so. Now, pricing has come to us a bit more.”