Japan is the largest investable market in the region and Tokyo the largest and one of the most liquid markets. DWS estimates 28 percent of transactions in Tokyo in the first half of 2018 involved foreign investors. Due to the low cost of borrowing, Japan offers one of the best yield spreads of any mature market. The office yield spread was 2.9 percent in Tokyo in the second quarter of 2018, compared to 2.7 percent in London, 1.8 percent in New York City and 1.6 percent in Sydney, according to DWS. With bank finance widely available, cash-on-cash returns are attractive for core investors and less risk-averse buyers are able to borrow up to 85 percent of value with senior debt and mezzanine.
Eyes on Japan
PERE data show a total of $17.55 billion of capital raised for Japan-focused private equity real estate funds. Japan is also a focus for Asia-Pacific funds, particularly core vehicles. The two largest Asia-Pacific core funds, managed by M&G Real Estate and Invesco Real Estate, have both invested heavily in Japan.
The largest deal this year involved a consortium of private equity investors including PAG Asia and Asia Pacific Land selling the Shiba Park Building to local investors for ¥150 billion. Both PAG and APL are long-term players in Japan; PAG raised $1.9 billion for its latest fund, which will be approximately 65 percent invested in Japan, last year.
Fortress Investment Group, now owned by Japan’s Softbank, is another long-term private equity investor in Japan and recently closed its latest fund on $1.5 billion. Fortress traditionally focused on distressed debt opportunities but has more recently been acquiring large property portfolios from the Japanese government and corporations.
Offices difficult, but opportunities aplenty elsewhere
Private equity buyers have been active in all sectors, with the exception of Tokyo prime offices, which remain the preserve of the big developers such as Mitsubishi Estate and Mori Building.
3
Number of Japan-based funds in market
$900m
Capital targeted by Japan-based funds in market
The hospitality sector has become popular in recent years, as visitor numbers have grown substantially to 28.7 million in 2017 from 10.4 million in 2013. Nearly 16 million visitors arrived in the first half of 2018, suggesting another record-breaking year ahead. Private equity investors in Japanese hotels include Gaw Capital Partners, GIC Private and LaSalle Investment Management, which bought Hotel Ibis Styles Tokyo Bay in June. In the short term, the Rugby World Cup is expected to bring one million extra visitors next year while visitor numbers are expected to hit 40 million in 2020, Tokyo’s Olympic year. In the longer term, tourists are expected to explore more of the nation, which will boost hospitality assets in provincial cities.
Logistics remains a popular sector with both foreign and domestic investors. Sector specialists such as e-Shang Redwood have raised significant capital recently: ESR raised $1.2 billion in May while LaSalle Investment Management raised $350 million in November 2017 for its fourth Japan logistics vehicle. Niche sectors are also attracting more interest: investors are looking at data centers, student accommodation, self storage, senior housing and other healthcare real estate investments.
Untapped capital pool
Perhaps the largest opportunity for private equity firms in the long term will be the export of capital. Japan has some of the world’s largest financial institutions but they have invested both cautiously and domestically for the past three decades. However, investors such as the ¥162 trillion ($1.5 trillion; €1.29 billion) Government Pension Investment Fund and Japan Post Bank, with ¥210 trillion of assets under management, are now allocating more to real estate domestically and internationally in order to boost returns. For example, Japan Post plans to spend ¥3 trillion on real estate by 2021, small in the context of its overall portfolio, but enough to make it a significant global property player.
Meanwhile, Japan’s Pension Fund Association for Local Government Officials, known locally as Chikyoren, has awarded international real estate mandates to UBS Asset Management and Invesco Real Estate and issued a new round of request for proposals for real estate managers in Japan and overseas markets in June.
So far, the numbers involved are small, but the sheer size of Japan’s financial institutions means they will be an increasingly important port of call for capital raisers in the future. 
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