Until recently, the investment portfolio of Japan’s Government Pension Investment Fund had only consisted of a mix of domestic and international stocks and bonds. But, in November 2014, GPIF announced an allocation of 5 percent to alternatives. Since then, the private real estate industry has watched closely for the world’s largest pension fund, with around $1.3 trillion in assets under management, to make its first deployment of capital in the space.
The wait goes on, but last month GPIF gave its strongest signal yet that it is about to dip its giant toe into the property markets. The investor hired former Mitsui Fudosan managing director Hideto Yamada as its first head of real estate.
Yamada has been described as “the most successful and experienced Japanese player in overseas real estate investment and development” by Japanese real estate placement agency, Asterisk Realty & Placement Agency. While at Mitsui Fudosan UK, he led the company’s large-scale urban redevelopment projects. This included the redevelopment of BBC Television Centre and White City Place in London, one of the largest-ever overseas building developments undertaken by a Japanese real estate company.
Yet, while the hiring of Yamada is its first real estate-specific announcement, it is worth noting that GPIF has already made considerable strides in the other alternative asset classes.
In infrastructure, one of the earliest checks GPIF wrote was for a co-investment agreement with Ontario Municipal Employees Retirement System and the Development Bank of Japan in February 2014. The arrangement sets out a plan under which both GPIF and DBJ will be offered participation in deals sourced and managed by OMERS through its various investment units. Its first direct outcome will be a combined $2.5 billion commitment by GPIF and DBJ in the Global Strategic Investment Alliance, an unlisted co-investment infrastructure fund set up by OMERS and a consortium of Japanese pension funds led by Mitsubishi Corporation. Expect GPIF’s real estate blueprint to look similar under Yamada. Back in 2014, the state fund put out its original request for proposals for external investment managers. However, the pension behemoth had many hurdles for investment managers to jump before a commitment or deal could be struck.
But at the start of the year, GPIF president Norihiro Takahashi reaffirmed that the investor needs to have access to the best performing asset managers, and their expertise, if it is to grow its alternatives AUM. Alternative assets accounted for just 0.04 percent of GPIF’s total portfolio as of December 2015, according to a regulatory update from Deloitte in November.
As such, GPIF is now taking a more proactive stance to working with external investment managers. Previously, the investor could only hire three external managers in one selection cycle, but now it has adopted what Takahashi calls the “asset manager acceleration system,” in which it can add or increase commitments to managers much more dynamically.
GPIF also has introduced an “information-only scheme,” which allows foreign external managers to work with the investor more easily. Previously, asset managers needed to be licensed by the Japanese Financial Services Agency, but now anyone that does not have such a qualification can still submit their fund information for review.
Additionally, the investor introduced a performance-based fee structure to provide greater financial incentive for external managers. Moreover, although GPIF is currently prohibited from investing directly in limited partnership funds, amendments are expected to be made to remove this restriction. This would provide GPIF with another avenue for investing in alternative assets, Deloitte said in its update.
GPIF’s pension fund peers in Japan have already made their first steps to making an overseas property investment push using external managers. The $185 billion Pension Fund Association for Local Government Officials selected UBS Asset Management as its first manager of overseas real estate in July last year. With Yamada now at the helm of its real estate group and a smoother process for working with investment managers being implemented, it will not be long before GPIF makes its foray into the global private real estate markets.