Japanese financial institutions have hit the headlines in recent months as they took first steps into overseas real estate markets. Most notably, in June the second largest Japanese public pension fund, Chikyoren (Pension Fund Association for Local Government Officials) announced its first fund manager selections for both domestic and overseas real estate, as well as domestic and overseas infrastructure investments.
To better understand the significance of Chikyoren's decision to invest in overseas real estate, we need to understand prior Japanese forays into the asset class. For this let us go back to the late 1980s and early 1990s when, during Japan’s economic bubble, Japanese investors invested in trophy assets overseas through direct channels. This resulted in serious capital losses when the bubbles burst later on in 1990s which led to a decline in overseas real estate investment. Those ill-fated forays left a significant impact on Japanese investor sentiment.
A considerable portion of key decision making figures in the Japanese institutional investment industry are those who experienced this sorry episode firsthand. For this reason, it has been a slow and steady process to rebuild their trust in the market.
Having been burned before, even the bolder Japanese investors have strayed from the offshore trophy assets favored by their neighboring Asian investors. They have instead opted for diversified approaches —such as committing capital to commingled funds, portfolio investments and the like.
However, Chikyoren’s decision to invest in overseas real estate will be regarded as an early justification for other Japanese investors to venture across borders too.
Further propelling Japanese institutions to build greater exposure to overseas real estate are three major pressures: Japan’s negative interest rate policy, the limited forecast growth of the Japanese economy, and the strong Japanese yen.
Japanese financial institutions, including insurance companies and regional banks, are suffering from very low profitability because of the country’s negative interest rate policy. Due to this factor, they are looking externally to bring in higher income from other sources. Secondly, the limited growth of the Japanese economy is casting a shadow for long term investment on the domestic property market. Thirdly, the strength of the Japanese yen indicates a slowing down of Japan’s economy, and, subsequently, low investment profitability in domestic markets. As such, we predict other public pensions will soon follow suit, creating greater reassurance for smaller Japanese investors that now is the right time to look at overseas real estate.
Yet, many Japanese investors do not have enough experience or access to the relevant information to create a platform to invest overseas currently. This poses the challenge of properly assessing risks – including credit and operational factors in overseas markets. For this reason, support from local experts with experience in overseas investment, business management, and more localized communication is increasingly important. Our joint venture with one of Japan’s leading hospitality companies is an example of a platform created by the demands of investors to invest overseas through a Japanese manager and operator.
On the flipside, overseas fund managers looking to work with these new sources of capital need to keep in mind that the Japanese require a finely tuned, tailored approach. For overseas managers to successfully build trust with Japanese investors understanding their characteristics is key. To name a few stand out points: brand image, for example, is a major factor when Japanese institutions come to choosing managers.
Also, they are not seeking the highest returns; rather they want to see a manager can demonstrate proper risk assessment. Another difference from their overseas contemporaries is that decision making processes, though quicker than before, are generally more time consuming. Key decision makers typically are non-English speakers and that must be considered.
So, while there is still work to be done as both the Japanese institutional investor market and global real estate investment managers get to know each other better, the trigger has been pulled and another movement to invest overseas has begun, even if the going will be steady. We predict more activity later this year, and, gradually, even more over the coming years.
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