What to expect from Japanese investors in global real estate in 2019
There are strong motivations by all types of Japanese institutional investors including pension funds, financial institutions, insurance companies, listed REITs, and real estate developers for global real estate investments, according to Asterisk. The domestic markets and Japanese investors’ appetites have changed significantly since 2012.
Due to the U.S. interest rate hiking, more investors are gradually widening their investment scopes, adjusting their strategies and target markets. Currency hedging is also a common proposition for most Japanese institutional investors now.
Major players such as Japanese public pensions, GPIF, Japan Post Group, and other major financial institutions are leading the outbound investment trend; and other players, including insurance companies, leasing companies, regional banks, and corporate pension funds are following the momentum.
GPIF, the world’s largest pension fund with assets under management (AUM) of ¥165.6 trillion ($1.46 trillion as of end of September 2018), appointed Nomura Asset Management as gatekeeper and Pantheon and DBJ Asset Management as fund of funds (FoF) managers for its core strategy global infrastructure mandate during the first half of 2018. In September 2018, GPIF, announced its decision to appoint Asset Management One as a gatekeeper, and CBRE Global Investment Partners as its FoF manager for its core strategy global real estate mandate.
Throughout the year, GPIF have also emphasized on promoting ESG investments, steadily repeating its importance, and moving Japanese investors to follow this trend.
Chikyoren (Pension Fund Association for Local Government Office, aka. PAL) the second-largest public pension fund in Japan with AUM of ¥24 trillion ($211 billion as of end of September 2018), announced that it added private debt for its RFP for alternative investment managers in July 2018.
Shichousonren announced an RFP for infrastructure and private equity in the first half of 2018. The public pension as of June 2018 had AUM of ¥12.1 trillion ($107 billion). As of last year, it had three product categories for a real estate RFP: domestic, U.S., and global (all core strategies).
Japan Post Group also started overseas real estate investments during 2018. Both Japan Post Bank and Japan Post Insurance have announced plans to increase their overseas allocations in alternative investments, including real estate.
Led by such large Japanese institutional investors, the amount of potential capital to deploy to global alternative assets by Japanese investors in the next few years could reach ¥10 trillion ($92 billion), and global real estate is expected to be the biggest asset class in alternatives.
Regarding direct investments, Asterisk reports Japanese developers and real estate companies strongly advancing into Southeast Asia markets. Different from the developers’ appetites, Japanese LP investors are still focusing on the mature global gateway markets including the United States, Europe and Australia.
Asterisk Outlook for 2019 – Increasing Diversifications and Thematic Strategies
In 2019, Asterisk expects to see continuing outbound investments with more diversifications and thematic strategies from Japanese investors.
Geographic – Shifting to Europe and Australia
Geographically, Asterisk observed some investors shifted from United States to Europe markets during the past year. In 2019, Asterisk expect more investors will start to look at gateway cities in Europe and Australia markets, due to the concerns on interest rate hiking, currency hedging and market pricing in the U.S. markets. However, it will not impact the position of United States as a major destination for them, especially for the investors who aim to build up their global portfolios.
Asset Classes – More Debt Investment
In terms of asset classes, Asterisk observed various investors keep debt funds on their watchlist over the last year. Asterisk expects there will be more capital going into debt investments in the next year.
Investment Strategies – Shifting to Core-Plus/Value-Added
Due to interest rate hiking in the United States, the investment yields have been compressed, the returns of core strategies will be challenging to meet the investors’ requirements. Asterisk expects more investors will shift to core-plus and value-added strategies.
Some investors will potentially be more actively looking for new thematic strategies for investments in 2019, including ESG, and macroeconomic changes such as demographic changes, urbanization, etc.
Potential Challenges – Lack of Professional Human Resources
Although many Japanese companies are planning to offer global real estate investment services, only limited numbers of FoF managers/gatekeepers might be available to provide services for Japanese institutional investors on global real estate investments. Even though the Japanese institutional investors have strong appetites for overseas investments, the lack of professional human resources could lead to potential delay in their overseas investment progress.
Reliance with fund managers/local partners with well-established brand and reputation in overseas markets are essential for Japanese investors. As it is challenging for Japanese investors to invest in new markets overseas without enough experience and resources, it is safe options for them to invest through reputable asset managers as navigator/gatekeeper for overseas markets.
It is important for overseas fund managers to spend sufficient time and efforts to establish brand recognition and build trust with Japanese investors. Furthermore, if the fund manager has enough resources and business commitments in Japanese markets, offering tailored reporting and services to cater to the investors’ needs could be a good way to approach Japanese institutional investors.