ASIAVIEW: Mind games

Jonathan Brasse

Tokyo is a far happier place than it was two years ago. Talk in its financial markets has shifted from the country’s recovery following the world’s costliest natural disaster to hopes of healthier economic climes thanks to Prime Minister Shinzo Abe’s reforms.

Last month, Japan’s spirits were enhanced further by winning the Olympic Games, the world’s pre-eminent sporting event. Although the event doesn’t arrive until 2020 (Rio de Janeiro has the honor in three years’ time), great things already are predicted in the wake of Tokyo’s victory. The Economist, for example, is saying Tokyo’s ‘windfall’ will be as much as ¥3 trillion (€22.7 billion; $30 billion), while NBC News is more bullish still, projecting a ¥4 trillion godsend.

For a country renowned the world over for restraint, at least among its elders, the general reaction to winning the Games was very Western. As the BBC News’ Tokyo correspondent commentated on the Japanese people he saw upon the announcement: “They went berserk, jumping and shouting, crying and laughing.”

That, however, is not quite the same reaction coming from private equity real estate firms currently active in Japan. In the week following International Olympic Committee chairman Jacques Rogge’s announcement, two senior executives that PERE spoke with admitted to feelings closer to consternation than joy.

One executive said his firm already has discussed the Games – even though investors have yet to ask about it – and, in those discussions, “worry” was one word used. Why? Because of rocketing construction and land costs in the city.

The other executive was in little doubt that the Olympics would provide a welcome stimulus in terms of domestic consumption. Japanese quarter-on-quarter GDP was revised upwards to 0.9 percent from 0.6 percent last month. However, amid the Abenomics-affirming data behind that, consumption was actually down from 0.8 percent to 0.7 percent, so it needs a jumpstart.

The executive admits that indirect property benefits will come in the form of things like improved infrastructure. However, he also argued that, unless you control large swathes of land in the vicinity of one of the Games’ 37 planned venues or you are a construction company, there’s little tangible profit to be made by firms such as his, whose main purpose is to find broken assets and fix them for a buyer happy with taking a lower but stable return. In fact, he predicted construction costs would soar by between 30 percent and 50 percent, although capital values, even for residential, and rents would not increase anywhere near as much.

Still, that is thinking too tangibly about the Olympic Games. As London demonstrated last year, there can be intangible benefits too. Take Henderson Global Investors, for example.

In October 2010 in the run-up to the Games, Henderson acted as investment adviser to two big clients, Algemene Pensioen Groep (APG) and the Canada Pension Plan Investment Board (CPPIB), on their £871.5 million (€1.04 billion; $1.38 billion) purchase of a 50 percent stake in the Westfield Group’s new Stratford City shopping center at the mouth of the entrance to the main stadium and the Olympic Village. This is the center that 70 percent of the 10 million-plus spectators at the Games ultimately passed through.

The deal was important to Henderson as an investment manager. Although it didn’t put in any equity, the firm’s role comprised the negotiation of terms and documentation; underwriting of the valuation; coordination on due diligence; splitting title between retail and non-retail elements; and managing the letting process in tandem with Westfield. “To have been appointed by CPPIB and APG is a great endorsement of the strength of our asset and investment management skills, as well as our expertise and capability,” the firm said at the time.

Henderson still advises on decisions between the owners and Westfield to ensure maximized returns for investors. It earns a modest management fee, but the decision to get involved was more of a ‘strategic’ move. And in so doing, the firm has proven that it can add significant value by acting as investment adviser on bespoke investments, where larger investors have the capital but lack the local experience and expertise to fulfill their requirements.

As everyone knows, many institutional clients are looking for bespoke investment solutions, with larger stakes and more of a say in strategy. Still, they don’t know everything, so a firm like Henderson is more than happy to step up to provide advice.

In the same way, when large investors get around to wondering whether they can buy an asset likely to benefit from Tokyo’s Olympics wave, why shouldn’t firms with boots on the ground look forward to it? They might not walk away with any carried interest from a transaction, but firms with local experience could prove their skills and knowledge, which could lead to working with some of the world’s largest institutional investors on future investments or funds.

It would be reasonable to suppose that the world’s largest institutions might engage again on a similar scale when this outsized athletic event comes to Tokyo. Why would a private equity real estate firm not want to be part of that?