UBS Asset Management has raised $175 million in equity from the Dutch pension fund asset manager APG Asset Management in the first close of its debut Japan multifamily real estate investment strategy.

The launch comes as the sector in the country becomes increasingly institutionalized.

Including the cornerstone investment from APG and UBS-AM’s own equity commitment, the firm is targeting a $330 million total equity size for the club vehicle, after further commitments from one to two other investors. The capital is being corralled for a build-to-core investment strategy, with some allocation for positioning income-producing operating assets in Tokyo and Osaka. UBS is targeting a low double digit leveraged return from this strategy.

After considering institutional investors’ preferences, the Swiss bank’s Real Estate and Private Markets business has chosen to focus on the multifamily sector in Japan and halted capital raising plans for its hotel strategy. In September 2017, PERE had reported on the UBS’ plans to raise $400 million for value-add and development-related investments in limited services hotels through UBS AM’s joint venture with Mitsubishi Corp.

On the decision to “review the strategy,” Graham Mackie, head of real estate for Asia-Pacific at UBS Asset Management, told PERE that even though there was strong conviction in the hotels sector from a “fundamentals” perspective, the asset class is less favorable for investors given the relative perception of risk when compared to other asset classes.

He explained the hospitality sector was considered by investors to be more of a niche strategy versus the likes of multifamily, office, retail and industrial.

“[It] may take investors a bit more time to get more appreciation of the hospitality sector,” he said. “We see there being much more familiarity and conviction for the multifamily space.”

Commenting on the investment in a statement to be issued this week, Patrick Kanters, APG’s managing director and global head of real assets, said the investment is “consistent with APG’s strategy to selectively target sectors in the early stages of becoming institutional in Asia-Pacific, but which provide superior risk-adjusted returns potential.”

“Approaching the Japanese multifamily sector through a build-to-core strategy allows us to achieve strong yields on cost and ensure that the assets that are built meet the latest occupier and environmental requirements,” added Graeme Torre, managing director and head of private real estate for Asia-Pacific, at APG.

With multifamily, UBS-AM and the likes of TH Real Estate, which raised first capital from the Dutch investor Bouwinvest for a $450 million Tokyo multifamily fund in July, are betting on the sector’s strong fundamentals and defensive attributes. Demographic trends, including strong population growth, shrinking household sizes and late marriages, are creating more demand for rental accommodation in a country that has historically had more individual home ownership.

The low volatility of income and attractive income profile of the asset class are also seen as positive attributes. As Mackie explained, occupancy in multifamily assets has been stable even during events like the 2011 earthquake in Japan and the global financial crisis three years earlier.

UBS-AM will be implementing the multifamily strategy locally though its fully-owned real estate management platform called UBS Japan Advisors. In addition, the firm also runs a real estate joint venture in the country with Mitsubishi Corporation called MC-UBS that helps source deals for the multifamily vehicle.

Globally, UBS-AM has around $20 billion of multifamily assets under management in the US, Switzerland and Australia.