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Jonathan |
When global real estate investment management firms think about Asia, their thoughts invariably revolve around two areas. One area is how they can capitalize on the region’s growth prospects through investment. The other area is how they can attract the region’s capital into their own investment products deployed elsewhere.
Firms focused on the latter of these two considerations no doubt will have been tracking the regulatory news coming out of Japan, Asia’s largest investible real estate market, and Taiwan, the island nation off the east coast of China.
In Japan, regulators are expected to alter legislation this year at last giving J-REITs the ability to have up to half of their assets overseas. Similarly, at the end of May, Taiwanese authorities permitted their insurance businesses to enter overseas real estate markets for the first time.
Crudely put – and assuming certain theoreticals – these two decisions potentially mean upwards of $55 billion in firepower with hall passes for international bricks and mortar. According to the J-REIT association, the Association for Real Estate Securitization (ARES), the combined market capitalization of the currently 39-strong J-REIT universe was $60.5 billion as of last month. Meanwhile, CBRE reported how Taiwanese insurers controlled $450 billion of capital. The global property services firm told PERE that, while many had set 10 percent allocations to property, most had fulfilled no more than 5 percent stocking up on domestic properties.
To be clear, we are not talking about a new source of capital for private real estate opportunity funds. The risk profile of the J-REIT industry and the Taiwanese insurance industry – or Asian institutions in general for that matter – typically don’t point towards these two groups ploughing shareholder capital or policyholder money in that direction. They would be better considered as two new and potential exit channels for the managers of such funds.
Running the risk of deflating investment manager enthusiasm further, it should be made clear that, just because J-REITs and Taiwanese insurers can buy beyond the borders of Japan and Taiwan for the first time, that doesn’t mean they will to any great extent or even at all.
Starting with performance, ARES says J-REITs have outperformed the Tokyo Stock Price Index over the past 10 years, producing total returns of 100.1 percent versus 59.9 percent. While June saw somewhat schizophrenic behavior in the stock market as investors tussled with the ramifications of ‘Abenomics’, pushing returns from J-REITs into negative territory, these investment trusts have performed resiliently on a medium- to long-term basis. As a result, one has to question the value of J-REITs diluting their home stock with another layer of risk by investing overseas.
In addition, there’s the question of currency. One fund manager suggested to PERE that J-REITs would be among the best-financed buyers in international property given they can borrow from a slew of well-capitalized and open-for-business lenders. But what use is borrowing at a cosy 85 basis points when the yen has devalued by 20 percent or more against the dollar? International property as a proposition was probably more attractive for J-REITs in September, when the conversion rate was ¥77 to the dollar, not closer to ¥100 per greenback today.
There’s a third challenge that is arguably stickier than both those variable situations. That is the issue of appraisals. A J-REIT, which is bound by Japanese appraisal standards, is going to have a tough time drawing comparisons between a Tokyo office and a London office. Unlike in London, you would be hard pressed to find a 20-year lease subject to an upward-only rent review in Tokyo. There, a standard lease is negotiable pretty much six months after the tenant takes possession of its space. Having half the assets in Japan, accountable to Japanese appraisal standards, and half abroad, accountable to international standards, feels messy.
For these reasons, it is better to wager instead that Taiwanese insurers will be first out of the blocks putting their capital to work overseas. CBRE already has tipped Shanghai, London, Frankfurt, New York and Toronto as on the initial menu.
Compelled to invest abroad by ever-shrinking buying options at home, CBRE noted that domestic investment in real estate by Taiwanese insurers has grown 13 percent per year over the past six years to just shy of $20 billion, and today the group plays landlord to approximately one third of all of Taiwan’s Grade A office market. As a result, international forays increasingly seem necessary. CBRE also pointed out that the best Taiwanese property currently is yielding less than 2.5 percent, hardly thrilling. Whether a 4.5 percent yield seems steamy to property folk in London or New York, it is comparatively compelling in Taiwan.
As is the nature of new Asian entrants to international real estate investments – think about the Korean institutions, for an example – things will happen slowly. Therefore, to anyone selling to Taiwanese insurers, be prepared to wait around. Not only does each deal need to be vetted internally but also by regulators, so three months could be six months and six months might be nine months.
The flipside? PERE has heard that some Taiwanese insurers already are expecting to pay a premium to secure deals offshore as a consequence of this bureaucracy. Can anyone see shareholders standing for their J-REIT accepting that? Probably not.
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