With ¥500 trillion (approximately US$4.4 trillion), Japanese investors are a significant source of capital for investment into Australian real estate, according to AMP Capital.
Investors from Japan are primed to play a key funding role and the Japanese institutional investment environment is undergoing a transformation.
AMP Capital’s report, Generational Shift Sees Japanese Investors Flock to Real Assets, found Japan’s demographic profile as an ageing society combined with their desire for yield to fund retirement means direct real estate represents a compelling proposition for many Japanese investors.
When compared to Japan’s Government Bonds, local and international real estate is attractive on a relative income yield basis.
The opportunity for Japanese pension funds to allocate 5% to alternatives potentially means approximately US$230 billion worth of capital could be directed to direct real estate over the long term.
The report found Sydney offered the best global prime office yields of around 5.25% compared to Tokyo’s real estate’s 3% and the Japanese government’s 10-year rate of almost 0%.
AMP Capital said over the medium-term, it expects to see some of this Japanese capital deployed into funds and separate account mandates with best-of-breed managers in each of the regions.
Japanese investors have already started teaming up with local experts in Australia. In January this year, the country’s biggest property company Mitsubishi Estate teamed up with China’s Ping An Real Estate and committed to fund Lendlease’s $1.5 billion Circular Quay Tower project, Sydney’s tallest office building development.
The deal struck was by Emerge Capital. Partner Nathan Parris told the Australian Property Institute (API) inaugural National Property Conference in November last year, that some of the recent deals his firm has concluded has actually been with Japanese investors.
“To be frank, we actually find the Japanese to be some of the most attractive and interesting investors because they’ve got very limited growth in their home market, they’ve also got negative interest rates – so what that means is that they’ve got very cheap equity, cheap debt and therefore cheap cost of capital,” Parris said. “Don’t be surprised to see the Japanese coming in a much larger way. Me, personally I’m spending a week in every quarter in Japan at the moment,”
“We expect the strong interest of Japanese institutional capital in the global real estate markets to continue as Japanese institutions and funds continue to look for both growth and yield abroad,” he added.
AMP Capital managing director, Japan, Toshiaki Yamashita said the unique characteristics of the market in Japan have impacted investor sentiment and behaviour as few other economies have experienced as long a period of low growth and low yield.
“Japanese investors, both retail and institutional, are broadly seen as conservative, with more than 50% of financial assets in deposits and approximately 5% in investment trusts. This allocation may change, however, as government policies encourage investors to shift from deposits to investments, investors begin seeking higher-yielding assets after a prolonged period of low growth, and an easing of institutional investors’ aversion to risk,” Yamashita said.
Japan’s institutional investment market, comprising corporate pensions, public pensions and financial institutions, are near universally arranged as defined benefit schemes, which further underscores the need for the consistent income streams that may be offered by real assets investment.
Infrastructure debt is expected to be one of the beneficiaries of a growing thirst for alternatives with the asset class rising to prominence in a relatively short period of time. It represented just 6% of infrastructure funds that completed fundraising in 2009 compared with almost a quarter of funds in 2015.
Japanese investors are also expected to play a bigger role in the listed real estate arena.
AMP Capital head of global listed real estate James Maydew said Japan has been the second biggest market for asset exchange-traded fund flow in listed real estate in 2016 behind the US, and given the Bank of Japan has increased its allocation to Japanese REITs from 5% to 10% during 2016.
“We don’t expect this trend to change any time soon. Even as cash rates start rising, the demand for listed real estate and its characteristics of diversification, stable cash flows and income yield will continue to be sought by Japanese and global investors,” Maydew said.
Yamashita said Japanese institutional investors show a clear preference for assets that are lower risk and can consistently generate a low to mid-single-digit yield.
“Having experienced decades of low growth and limited domestic opportunities, these investors are hungry for investment alternatives. It’s a natural step for Japanese institutions to begin deploying capital to global infrastructure projects, which is a positive development for liquidity and will continue to support the globalisation and maturation of this market,” Yamashita said.
Australian Property Journal