By 2015, an estimated 13 percent of all Japanese citizens will be 75 years old or older, according to Japan’s Statistic Bureau of the Ministry of Internal Affairs and Communications.
By then, Hong Kong-based private equity real estate firm Orion Capital expects to have made considerable inroads into investing a ¥25 billion (€189 million; $250 million) commingled fund focused on acquiring aged-care accommodations in the country. The firm, formerly known as Ajia Capital, currently is on the road marketing the six-year vehicle and believes it can capitalize on the property type because demand is expected to far outstrip supply.
Since entering the market in 2007, Orion Capital has raised about ¥29 billion for its Ostara Japan Age Care Real Estate Fund series and has built up a portfolio of 26 properties (five have since been sold) able to offer 2,800 beds. That is a modest total when compared to portfolios of some care home landlords in Europe or the US.
Nevertheless, it makes Orion one of Japan’s largest owners of accommodation for the elderly, and the incoming investment vehicle is intended to see the firm expand upon that position.
Steven Bass, one of Orion’s real estate partners, told PERE that his firm is operating in a space with little competition, particularly when compared to more traditional property types likes offices, which he thinks actually are a riskier proposition. “Aged-care real estate is a secular story,” he pointed out. “It is not cyclical like offices, where rents doubled before the global financial crisis but halved immediately afterwards.”
Orion is determined to buy existing care homes in Japan operated by different companies “to mitigate against the risk of partnering with just one operator.” In the process, the firm wants to take advantage of the stable and consistent growth they offer. Less an opportunistic play, Orion sees the investment as more core-plus in nature and therefore expected to produce net IRRs of between 12 percent and 14 percent.
Although Orion’s income is derived from master leases, there are in fact two income streams. The first is a straight room-and-board charge subject to market forces similar to other property types, and the second is a state-provided nursing fee that comes from compulsory payments made by Japanese residents throughout their working lives.
Bass noted that one of Orion’s rooms might fetch $2,000 from the first stream and $2,000 again for the second. “We underwrite those payment streams,” he added.
A nascent market
Up until 2000, nursing homes in Japan largely were controlled and provided by the government. In the 13 years since the country opened up the market to private investors, the proportion of Japan’s population over 75 year old has leapt from 7.1 percent to more than 11 percent. Bass pointed to a waiting list for accommodation some 400,000 strong and predicted demand for another 50,000 assisted-living beds per year through 2025, by which point the country’s population over 75 years old should have grown to 18.1 million people.
Nonetheless, while a market has been in place for a while and occupancy demand is growing, little additional senior-living accommodation has materialized by Bass’ reckoning. One reason, he suggested, was that the market still is in its infancy and there are few portfolios of any notable scale that might interest an institutional buyer. The global financial crisis in 2008 and the Tohoku earthquake three years later only served to stem any market blossom.
Furthermore, since Prime Minister Shinzo Abe ignited radical economic reform with his return to power last year, the latest concern has been a devaluing yen (about ¥100 to the US dollar at press time). However, Bass believes these fears will dissipate and that the property type’s macro picture eventually will prevail. “Some investors who didn’t want to come in because of the one-way trade in the yen are okay now,” he said of the latest concern. “It seems to have stabilized.”
Increasing interest in senior-living accommodation from listed property companies should further comfort investors. Indeed, certain Singaporean REITs already include the property type within their strategies. Likewise in Japan, enthusiasm for investment is increasing. Hulic Co, one Japanese developer, was reported by Bloomberg to be including care homes within its plans for a ¥100 billion J-REIT. These pockets of enthusiasm should be supplemented by further Japanese economic reform, which could lead to J-REITs dedicated to senior-living accommodation being permitted as early as next year.
With the number of exit possibilities for Orion’s second fund growing, the firm’s investment strategy has become an increasingly viable proposition. Although Bass would not discuss the firm’s fundraising activities, you can bet that he will be hoping the potential investors he visits on the fundraising trail agree with that assessment.