Secured Capital’s core predicament

Since 1998, Secured Capital Investment Management has acquired more than ¥1.3 trillion (€10.8 billion; $14.4 billion) of assets in Japan, predominately on behalf of four commingled opportunity funds.

However, when the Tokyo-based private equity real estate firm announced this week that its first fundraising for core office real estate – in conjunction with joint venture partner Aviva Investors – had produced an oversubscribed fund of $300 million, it became clear that certain groups regard the firm as more than a harbinger of high-yielding real estate vehicles.

Secured Capital’s deep knowledge of Tokyo’s office sector makes it an obvious bedfellow for international real estate fund managers like Aviva. Even before the launch of the Tokyo Recovery Fund in November 2011, the firm had been hired by others for its asset management capabilities.

There’s further demand from institutional investors too. While the Tokyo Recovery Fund was oversubscribed by $50 million, had the vehicle been left uncapped, PERE understands that substantially more capital might have been possible given the abundant interest from the 15 or so institutional investors approached during its 13 months of marketing.

Such investors want to take advantage of an office market showing signs of bottoming out and rebounding. According to third quarter 2012 research by property services firm Savills, Grade A rents in Tokyo’s central business district were up by 2.5 percent quarter-on-quarter, the first increase in four years. In that time, the city’s Grade A vacancy rate declined from around 10 percent to approximately 6 percent. Whether Tokyo’s recovery lasts longer than the 12- to 18-month investment period of the Tokyo Recovery Fund, however, will undoubtedly play its part in determining whether Secured Capital fancies participating in any sequels.

A stronger indicator will be how the firm fares with its current efforts to corral $1 billion for its fifth Japan opportunity fund, Secured Capital Real Estate Partners V. The fund was launched before the Tokyo Recovery Fund, and fundraising has not reached a second closing yet. It corralled $195 million in a first closing in July and is understood to be moving towards a second closing this quarter.

If Secured Capital does hit its target on Fund V, is it worth ramping up a core real estate platform as well? If the answer is yes, then is it worth doing it via a partnership, where it must share the fees? When compared to making fees from high-return investments made by a $1 billion opportunity fund, the prospect of taking half the fees from lower-return investments for a $300 million core fund surely cannot seem as attractive. And that’s before talking about the more lucrative promote and co-investment possibilities that come with opportunity funds and less so with core funds.

Secured Capital has a record of buying debt at attractive discounts, and there’s arguably a safety net in operating in the debt part of the capital stack. If the firm buys a property’s loan at 60 percent of its current worth, even if its value dips 10 percent, there’s still a 20 percent return to be had. If it increases, then even better.

One can understand why Secured Capital might appear an ideal partner for groups looking to make investments in Tokyo’s office recovery. It is less obvious is why the firm would want to stay a core real estate investor.