Japanese real estate becomes new feast for global funds

Japanese real estate: A feast for global investors

The Japanese real estate market is receiving investments from international property funds. Such interest in Japan’s realty has not been witnessed in the last 10 years.
The numbers from Japan Real Estate institute show that the value of foreign investment in Japanese property acquisition stood at about 1.3 trillion yen ($11.4 billion) in 2017. This is the highest amount since a record setting 2007.

Koji Naito, director of Japan capital markets research at JLL in Tokyo, said, “Favorable financing circumstances are luring foreign investors.”

Funds, in some cases, are now going after companies or real estate investment trusts with attractive property portfolios, instead of hunting for properties themselves.

“Real estate funds are more likely to think that buying companies that own properties will save them time and trouble, versus buying individual blue-chip properties,” said Kaoru Yoshino of the Japan Real Estate Institute.
A renowned name in the market, USA’s Blackstone Group bought REITs listed in Australia and Singapore for around 100 billion yen each. Both the REITs had investments in selected properties in Japan. Croesus Shinsaibashi, a commercial building ranked as the most valuable property in Osaka area this year, belongs to the Singapore-listed trust.

Sensing that they are in crosshairs, the Japanese companies have started playing defense by selling their properties, or buying their own investment units.
Nippon Telegraph and Telephone and Orix announced in October, that they would launch takeover bids to make the real estate units listed by them into wholly owned subsidiaries. Both the companies mentioned that they look forward to strengthening their real estate businesses. However, Junichi Tazawa of SMBC Nikko Securities said that increase in number of acquisitions might have prompted the companies to take this decision.

The changes in Japan’s real estate market are a result of the global boom in acquisitions that reached a record $503.4 billion in 2017, 47 per cent higher than before, according to research company Refinity. Although there was a correction in the January-October period this year with a 14 per cent decline, market remains brisk.
According to research company Prequin, as of October, the investment money set aside by real estate funds around the world reached $289 billion. The active investment is also the reason behind the rise of office prices in major cities by 1.5 to 2 times.

The Japanese banks are aiding the market and as of now, the total loans to real estate funds are around 12 trillion yen, which is 40 per cent more from a decade earlier.
A survey by Sumitomo Mitsui Trust Research Institute in July on private real estate funds found that the average loan-to-value ratio of funds to be launched within a year was 65.3 per cent, which is more than 7 percentage points from a year ago. 55 per cent of respondents mentioned debt financing circumstances as “easy” or “very easy.”

“Apartment loans are tightening, but loans to real estate companies and funds are increasing,” a Japanese real estate company executive said. Some market experts also mentioned that while a scandal over Suruga Bank’s inappropriate lending has brought tighter screening methods for retail investors, screening for loans to “professional investors” has been relaxed.
Keeping things in control, Aozora Bank is using more rigorous screenings, saying that the market is overheated. Although the bank is centered on real estate loans, the total loan tally has not changed for around two years.