ASIAVEW: Clamour before the storm

When it comes to talking about the largest and most active pools of Asian institutional capital currently being invested in private real estate globally, more often than not it centres around the activities of Chinese or Korean investors. Latterly, it has included Malaysian and Australian investors too. 

This summer, however, there was an increasing buzz about what Japanese institutions are going to do. A mounting headcount is predicting a wave of capital from the land of the rising sun not seen since the ill-fated onslaught of Japanese investors led by the country’s property companies back in the 1980s.

Things are largely anecdotal right now but the notion of Asia’s most sophisticated financial market preparing to spread its wings globally certainly is getting tongues wagging.

The Asian team of CBRE Capital Advisors, the capital advisory division of the world’s largest property services firm CBRE, is even predicting it could be the Japanese insurers and pension funds that provide it with most of its cross-border fund placement work next year. And, the firm reckons there’s around $1 billion worth of live demand for offshore, indirect placements in the Asia region to be placed in 2014 alone. The firm wouldn’t divulge details, but it claims to have a couple of live mandates from Japanese institutions.

The Asian team of consultancy The Townsend Group, meanwhile, thinks rising allocations among Japanese institutions could amount to between $30 billion and $50 billion of capital that needs deploying globally over the coming years. Townsend is advisor to a global fund of funds devised expressly to get investors Tokio Marine and Nichido Fire Insurance invested in core funds in developed countries, ex-Japan. 

Others are less convinced, however. Another advisor who preferred to remain anonymous told PERE he didn’t see Japanese institutions committing capital to strategies abroad as a trend. Moreover, for him, although a few non-institutional Japanese investors are looking to gain exposure to cheap markets in the region, conversations with them took up 0.5 percent of his week. He said he didn’t have many asking to bid on the Gherkin – the iconic London office at 30 St Mary Axe which currently is being marketed for sale – though he works for an advisor with a strong foothold in the capital.

Certainly, there is little tangible evidence of much institutional yen making inroads in Asian favourites like London or New York, beyond the big-name Japanese conglomerates and certain lenders. The J-REITs were permitted last summer to invest up to 50 percent of their assets in international property but you’d be hard pressed to find meaningful examples of them buying anything that wasn’t native. 

Nevertheless, the Japanese institutions are coming, insist some folk. And when they do come, they will buy differently to the Chinese. They too will favour core properties in prime gateway cities. But less for the allure of owning something iconic, Japanese institutions are rather more motivated by long-term, recurring revenue streams – think 20-year holds. They’ll want to diversify from and beat domestic fixed income products, so sales of properties with secure tenancy and management at 4 percent should do it. Like Norway’s colossal sovereign wealth fund, the Japanese institutions are unlikely to be traders. They won’t want to see their capital back. And like the Norwegian state fund, they will seek best-in-class joint venture partners to take care of the assets. 

In DTZ’s innovative First Steps investor modelling initiative, the advisory firm says that Japanese institutions with domestic exposure should supplement that with investments in Dallas and Milan first as these two cities offer the best correlations. If the fundamentals of a deal in these cities is compelling, don’t be surprised if that happens, particularly given how competitive the most popular investment destinations have become. 

Then again, they’ll be patient about things. That is ingrained in a culture not known for its risk-taking. Late to bidding processes they might be. They may take a while to approve investments at the committee level too. And they might even form a very orderly queue for assets not even on the market or for fully capitalized funds for as and when they become available. Remember, the analysts of the 1980s when Japan last heavily invested overseas are nowadays the managing directors and chief executives calling the shots. Operating in a world of more sophisticated allocation and stock selection, these guys will not have forgotten their past and will likely wait to ensure they get their stock selection right.

It is easy to recap why Japanese institutions should diversify. Beyond the forgotten decade when the country suffered from anaemic growth, its aging population is frankly a financial burden that the country’s economy cannot bare. And the first two arrows of leader Shinzo Abe’s economic reforms, broadly celebrated, have nonetheless precipitated a devaluing yen. While the trading J-REITs might see buying abroad as expensive and unnecessary while artificial stimulus plumps their domestic deals, institutions with longer-term liabilities should buy now if they are not to find oversees properties even more costly in the future.

The reasons for Japanese institutions to invest offshore have long been there and now they are compounding. And that is leading to growing predictions that 2015 will be the year Japan’s institutional sun truly rises. Now to see if anecdotes and foretelling become reality.