ASIA VIEW: The ruse of Meguro Gajoen

The second sale of the iconic Arco Tower office and Meguro Gajoen wedding complex in Tokyo in the space of just five months has kicked the conspiracy theorists in the Japanese property market into gear. 

It is easy to see why. After all, we are talking about an asset that was, on and off, marketed for sale for such a long period of time that its holding vehicle needed to be extended twice. Suddenly it has commanded ¥270 billion (€1.98 billion; $2.25 billion) of capital in two transactions in less than half year.

And so a multitude of onlookers were caught out last month when Chicago’s LaSalle Investment Management issued an ironically benign announcement stating it had acquired the 1.67 million square foot complex from Mori Trust. The ink had barely dried on the Tokyo developer’s own purchase of the asset from Dallas-based Lone Star Funds in September.

To further color matters, it emerged that LaSalle had acquired the asset in a joint venture with China Investment Corporation (CIC), the Chinese sovereign wealth fund which was rumored to have been a rival bidder to Mori Trust, and in partnership with another real estate investment manager, back in September. 

With LaSalle, CIC and Mori Trust refusing to divulge further details, the tongues in the marketplace have been wagging furiously. “I smell a ruse,” declared one Tokyo-based property agent. “There is subterfuge at some level, I’m telling you,” he said. His firm struggled to recall a property that Mori had not held for more than a decade before selling, causing him to suspect the firm always had an arrangement in place to offload it immediately.

Then there was the issue of pricing. Mori paid ¥130 billion. Five months later, LaSalle and CIC paid ¥140 billion. “I’d like to figure out a way of making $100 million in a few months,” said a senior Asia-based private equity real estate executive. “What a coup for LaSalle,” he added.

And finally, there was the small matter of some rather ominous litigation concerning a parcel of land at the complex that was subject to claims from a previous owner. How did LaSalle and CIC get comfortable with that when it caused previous suitors to withdraw their interests, including another sovereign wealth fund, GIC Private, which was in pole position to buy it last summer? 

The most commonly-agreed conspiracy theory was that Mori acquired the Arco Tower and Meguro Gajoen complex with the intent of flipping it to CIC after either removing the threat of litigation. The ¥10 billion difference between the two acquisition prices, the theory goes, therefore constituted the value created when the threat was resolved.

In this most compelling of deal sagas the conspiracy theorists are a bit right and bit wrong, as PERE understands things. 

LaSalle’s joint venture partner is CIC. And the price they paid was indeed close to ¥140 billion. Secondly, if CIC were in the frame to inherit the complex when Mori originally purchased it from Lone Star, LaSalle were not in the frame as joint venture partners then. Its involvement has come later. And thirdly, if the threat of litigation has not been removed, it most likely has nonetheless been neutralized. LaSalle and CIC can comfortably hold the asset now for the long-term now. 

On the surface, such a price hike did seem dramatic. However, consider for a moment the movement in the yen-dollar exchange rate. When Mori bought the complex in September, ¥130 billion got you $1.25 billion. When LaSalle and CIC bought it, ¥140 billion exchanged for only $1.18 billion. LaSalle and CIC are denominated in US dollars while Mori in Japanese yen. Talk about a win-win.

Also, consider the asset: it is 99 percent leased and there is confidence that the largely tech-based tenant roster there will absorb any near-term vacancies. A wider spread belief that Tokyo rents have now bottomed, including in the ward of Meguro, thus makes an approximately 4.4 percent going-in yield a pleasant outcome for the buyers. The yield is at least 100 basis points higher than market comparables in the high-end office hub of Marunouchi.

Lastly, when thinking about the litigation, remember that Mori, a stalwart of the Japanese property scene, and its Japanese lenders, are highly unlikely to risk their reputations by assuming culpability for an asset exposed to meaningful legal proceedings. Whether or not it always intended to hand over the complex within months of buying it, risk taking like that is simply not in the Japanese psyche. Mori knew what it was doing even if we did not. Now whether Mori was right to flip it so quickly, is another matter and also a market call. Regardless, there is method in the madness surrounding this asset.