To Invest or Not Invest in Japan: Survey of Private Real Estate Funds

Sumitomo Mitsui Trust Research Institute (SMTRI) conducts a periodic survey of asset managers that manage private real estate funds focused on Japanese property. This article summarizes some of the results from the most recent survey (January 2015).

SMTRI estimates that the market size of private real estate funds in Japan (which includes Japanese assets of global funds) is 15.1 trillion yen. The survey found that domestic private real estate funds shrank, but the market has been supported by an increase in global private funds, based mainly on overseas funds. According to SMTRI’s findings, overseas investors are attracted to the yield gap in the Japanese real estate market and are willing to allocate funds to real estate in Japan in their global portfolios. The yield gap is the spread between a property’s rental yield and the rate of the return on government issued securities.

Core investment

The majority of funds (57%) surveyed follow a “core” investment strategy. Core investment is an investment style in which stable long-term investments are targeted by investing in sound properties generating steady income flows.

By property type

By target property type, private funds are targeting: industrial (28%), retail (22%), office (20%), residential (17%), hotel (11%), health care facilities (1%), and “other” (1%). SMTRI notes that the share of “office” and “residential” as target property types declined from the previous survey, which was released in July 2014. This is because there is a limited number of “office” and “residential” properties meeting the funds’ requirements, and in order to achieve their planned cash flow targets asset managers have had to shift their investments to other categories.

Target Areas

In terms of target area, the share of “23 Wards of Tokyo” declined from 36% to 24% (July 2014 share versus January 2015 share). SMTRI explains that due to tight competition for properties in Tokyo’s 23 wards, funds have had to shift their focus to other areas such as “Tokyo metropolitan area,” which is defined as Tokyo except for the 23 wards, Kanagawa, Saitama, and Chiba prefectures (23%, up from 20%);  “Kinki area”, which is defined as Osaka, Kyoto, Hyogo, Nara, Wakayama and Shiga prefectures, (23%, up from 20%),  and “Nagoya” (15%, up from 13%).

Investment period

The average investment period of the funds currently under management is 7.7 years and the targeted investment period of the funds scheduled to be launched within a year is 6.9 years, suggesting that investment periods are getting longer in general.

Sources of capital

By sources of the capital being managed, the largest share came from Europe at 27%, then Asia (excluding China and the Middle East) at 25%, North America at 17%, Asia including Australasia at 11%, the Middle East at 9%, Australia at 8%, and “Other” at 3%.

Reasons for Investing or Not Investing in Japan

As for reasons that funds are investing in Japan, the majority of respondents chose “relatively attractive due to the yield gap” and “allocation as part of the global portfolio”.

Reasons for Investing in Japan

The main reasons that foreign investors gave for NOT investing in the Japanese property market include country risks, such as “lack of growth potential in GDP, consumption, population, etc.” and “earthquake risk”. “Lack of attractive investment opportunities” was also in the top three responses.

Reasons for not investing in Japan

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