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Seven good reasons to invest in Japanese real estate now
2017 has been a good year for Japan – First German Spezialfonds for Japan Estate launched
The spirit of optimism sparked by Prime Minister Shinzo Abe in 2013 has now spread throughout Japan. All sectors of Japanese society are pulling together to once again make their nation a leading economic force.
Japan’s leading share index, the Nikkei 225, rose by 19% in 2017, thanks mainly to foreign investors, who helped propel it to its highest level since the beginning of 1992.
It was amid this positive atmosphere that the Kenzo Japan Residential Fund was launched in July – the rst German real estate Spezialfonds (fund targeting institutional investors) interested in Japanese residential properties.
In our opinion, 2018 will be another good year for Japanese real estate.
First, some important background information: Even though Japan real estate prices have recently reached levels similar to that seen during the 2007/8 real estate boom (see below chart), the environment then contrasted dramatically from the one of today. Those differences are illustrated by the following
1. Japan’s elite pursues a vision of the future
For the rst time in decades, Japanese bureaucrats, managers and politicians share a common vision – 3 to modernize the economy and establish Japan as a leading global player.
Under the slogan “Society 5.0”, Japan intends to harness digitization as a means to accelerate globalization and to address the challenges posed by the country’s rapidly aging population.
Once a consensus has been reached among, there is every indication that it will be implemented smoothly and consistently in terms of policy. By contrast, the Japan of ten years ago was politically weak and divided.
An example of this new, consistent, approach is the decline in the proportion of reciprocal shareholdings held by enterprises. According to the investment bank Nomura, the rate had shrunk to around 10% by the end of March 2017.
By contrast, the gure stood at 50% a decade ago. This means that the companies of today are almost free of con icts of interest as they plan their future strategy.
2. The long economic upswing will continue
In each of the seven quarters from Q1 2016 to Q3 2017, Japan’s real gross domestic product (GDP) grew compared to the previous quarter, marking the second longest period of recovery in the post-war period.
In 2017, nominal GDP rose to a record high, and Japan’s government expects real GDP growth of 1.8% in 2018.
In just under ve years, the Bank of Japan has bought more than 40% of Japanese government bonds and, in so doing, chased away the specter of state insolvency. Contrast that with the situation ten years ago, when high levels of government debt made headlines around the world.
3. Japan’s economic strength nally recognized
Japan’s experience proves that economic growth is possible in a country with an aging and declining population, according to Daniel Gros, Director of the Centre for European Policy Studies (Source).
As evidence, Gros cites gures showing that since 2000, Japan’s GDP has risen annually by just under 2%, if calculated per person of working age (15-64 years). This growth rate was twice as high as in the US.
Gros says Japan accomplished this feat because almost 80% of its working population is in employment. In Europe and the US, the share is lower, at about 70%. The situation in Japan was very different ten years ago, when it was regarded as the “sick man” of the global economy.
4. Political stability expected beyond the 2020 Olympics
Prime Minister Abe’s Liberal Democratic Party won a resounding election victory in October 2017 – a result that again gave his coalition government a two-thirds majority in both houses of parliament.
Voters have given Abe another four years to continue his economic reforms – known as “Abenomics” – up to and beyond the Tokyo 2020 Olympics.
For investors, this means a stable economic and political landscape over the long term. This contrasts with the instability of a decade ago, when Japanese prime ministers came and went so frequently that people were barely given enough time to remember their names.
5. Japan shakes off de ation
Despite rising US interest rates and the European Central Bank’s decision to taper monetary stimulus, Japan’s central bank intends to maintain its extremely expansionary monetary policy until de ation is nally erased. The in ation rate climbed to 0.9% in November, the 11th consecutive monthly rise.
As a result of the continuing labor shortages, 2018 is expected to see stronger wage increases than before, and the long coveted virtuous cycle of higher prices, rising wages and healthier household consumption and capital expenditure is expected to be set in motion, albeit slowly. Ten years ago, by contrast, the Bank of Japan raised interest rates too early, and was later forced to correct itself.
6. Long-term oriented real estate investors dominate
Domestic investors are shaping Japan’s real estate market. Increasing in ows of capital come from domestic institutional investors, including insurance companies and pension funds, both of which invest in the long term.
This trend is supported politically, as the government calls on pension funds to change their risk orientation. This demonstrates a signi cant departure from the situation 10 years ago, when the market was dominated by short-term investments by overseas players.
7. Real estate investments are nanced conservatively
For some time, borrowed funds have nanced 60% to 70% of real estate transactions in Japan, which means they rest on solid foundations. That is a signi cantly lower proportion than the 80% to 95% of deal volumes nanced with outside funds and securitized on the capital market seen ten years ago.
The current investment environment for Japanese real estate is far better than that during the mini-boom of ten years ago. There can be no talk of a bubble in the current context.
Rather, we expect a further rise in real estate prices in the coming years and a decline in risk premiums on real estate investments, despite rising rents in the residential and of ce sectors.
Our con dence in this environment is re ected by the Kenzo Japan Residential Fund, which on December 21 successfully acquired four more properties and increased its investment volume by JPY 4 billion (EUR 33 million).
As part of our Active Asset Management Strategy, we acquired three residential properties in Tokyo comprising 80 residential and ve retail units. The fourth property containing 90 apartments, at risk class core, is located in Osaka.
The investment pipeline is already primed with up to JPY 6 billion (EUR 50 million) for our next purchase, scheduled for the rst quarter of 2018.
Kenzo Japan Real Estate Fund successfully launched
The Japanese investment adviser and asset manager focusing on German investors, Kenzo Capital Corporation Inc., Tokyo, successfully launched the Kenzo Japan Residential Fund on July 28, 2017, with an initial investment in four apartment buildings for approximately EUR 30 million equivalent. Capital commitments by two initial investors over EUR 45 million are the cornerstone: a large Frankfurt investment management and consulting firm and a professional pension fund.
The Kenzo Japan Residential Fund invests in the major metropolitan areas of Japan, mainly in Greater Tokyo and Greater Osaka, as well as in Nagoya and Fukuoka. Modern residential properties of the core risk class are supplemented by objects with an active management approach (Core Plus and Value Add). With this allocation of the fund plans an average annual distribution of 5% and a return on investment (IRR) of 8%, after sale in approximately 7 years. The total equity target volume of the fund is expected to reach around EUR 250 to 300 million, the investment volume is around EUR 480 to 550 million. The fund is denominated in yen, and is directed to institutional investors in Germany, mainly capital collectors such as utilities and insurance companies.
Kenzo Capital Corporation Inc., Tokyo, is closely working with Haseko Real Estate Investment Management Inc., a member of Haseko Corporation, the largest Japanese residential construction company. In Germany, Kenzo is represented through “Kenzo Japan Real Estate GmbH” in Munich and was able to attract the leading real estate fund provider specialized in residential real estate, PATRIZIA Wohninvest Kapitalverwaltungsgesellschaft mbH, as the administrator of the fund.
“Building upon the know-how and experience of our team, this mandate strengthens PATRIZIA’s competitive position in a market that is increasingly attractive to investors due to strong Japanese economic growth and political stability,” reports Dr. Sven Olaf Eggers, Managing Director of PATRIZIA WohnInvest Kapitalverwaltungsgesellschaft mbH, Augsburg, “We are planning a further expansion of our fund administration with the experience of this collaboration of specialists, who in part already know each other through Japanese investment business for more than a decade.”
In the establishment of the Kenzo brand in the circle of German investors, Metzler Real Estate GmbH advises and assists Kenzo with regards to marketing strategy, set-up and management of the fund business. “Metzler’s good networking in both the German and Japanese capital and financial markets helps to do this,” says Bernd Sommer, Managing Director, Metzler Real Estate GmbH, Frankfurt.
The investment structure – an open special AIF – has been developed by Rödl & Partner from a tax perspective. Clifford Chance has examined investment law compliance and KPMG’s tax concept in Japan.
“The Japanese market offers a wide selection of excellent investment opportunities in residential real estate in its metropolises. In the case of core objects, we can, as a matter of experience, rely on stable earnings. Collaboration with Haseko gives us access to good opportunities to develop residential real estate in prime locations through active management back to core real estate. We are delighted to be able to provide such investment opportunities to German institutional investors with the Kenzo Japan Residential Fund,” says Dr. Leonard Meyer zu Brickwedde, President & CEO, Kenzo Capital Corporation, Tokyo. Since the end of the 1990’s, he has played an important role in the development of the institutional quality of the Japanese real estate market and today states: “The deal pipeline for possible further acquisitions is well filled”.
Tokyo advances to Top 3 among Global Cities
The latest revision of the Global Power City Index (GPCI) has ranked Tokyo in 3rd place in its evaluation of the world’s major cities. Tokyo overtook Paris to make it into the top 3 for the first time.
The GPCI first published in 2008 by The Mori Memorial Foundation’s Institute for Urban Strategies evaluates major cities in 6 categories, main functions representing city strength (Economy, Research and Development, Cultural Interaction, Livability, Environment, and Accessibility)
The GPCI is created by a international research team of two groups of individuals: 1. The Committee, chaired by Heizo Takenaka (Professor of Toyo University) supervises the ranking creation process. It is comprised of six members, with the late Sir Peter Hall (Professor, University College London) as Principal Advisor. 2. The Working Group with experts from London, Amsterdam and California, headed by Hiroo Ichikawa (Professor Meiji University) performs the data collection and analysis to create the rankings for the cities
London retains its top position, with New York in 2nd place.
The institute says Tokyo’s score was boosted by an increase in the number of foreign visitors and more direct flights connecting the city with overseas destinations.
Japan Real Estate rewards its investors
Analysis of IPD confirm a total return (income return and capital growth) by 86% over the 12 year period since January 2004 to December of 2015 in local JPY currency
1. Office and Residential Markets
The vacancy rate of Tokyo CBD 5 Wards reduced steadily since 2012 and reached to 4.0% at the end of 2015 despite of a large supply of new class A buildings in 2015.
The decrease paused in Q1 of 2016 while the rent continued to increase, mainly because of the relocation of some huge occupiers to better and larger spaces. The vacancy rate started decreasing again in Q2 of 2016.
New supply of Class A buildings in 2016 is expected to be almost the same level as in 2015 and many occupiers, such as trading companies and financial firms, are now planning to move to higher quality and larger spaces.
We believe, that the continuing solid demands of occupiers will keep the vacancy rate at low levels and rents will continue to grow.
Residential occupancy maintained at healthy levels above 95% and rent of each area in Greater Tokyo kept stable with some rent growth seen in some areas.
2. Investment Market
Asset under Management (AuM) of J-REITs and Private Funds continued to grow, reaching to JPY 28.8 trillion in December 2015 and increased by JPY 1.1 trillion (4%) for the year.
Real estate transaction volume in 2015 was JPY 4.3 trillion, remaining at a high level though decreasing by JPY 0.7 trillion from 2014 which saw the highest level since 2008. J-REITs’ acquisition power weakened in Q4 of 2015, however J-REITs became active again in Q1 of 2016, with a transaction volume of JPY 552 Billion compared to Q1 2015 with JPY 496 Billion
J-REITs dominated the market in Q1 of 2016, closing 23 deals priced at more than JPY 10 billion. In 2015 J-REITs closed 11 transactions priced over JPY 10 billion in the first Q, and 17 deals from Q2 to Q4.
The largest J-REIT Transaction in Q1 2016 was a logistics facility in Greater Tokyo executed by LaSalle Logiport REIT at JPY 26.6 billion. All top ten transactions in Q1 2016 were either logistic and hotel properties.
The largest office transaction in Q1 2016 was made by Hulic REIT. Hulic REIT, sponsored by a Mizuho Group, acquired a additional 30 % share of Hulic Kamiyacho Building in Minato Ward at JPY 16.7 billion.
J-REITs acquired 12 apartment buildings all together amounting to JPY 42.3 billion in Q1 of 2016.
Private finds and companies were less active, with only 4 deals priced at more than JPY 10 billion in Q1 of 2016 reported by Japanese media. They closed 13 deals priced over JPY 10 billion in the same quarter 2015, and 31 large transactions during Q2 to Q4 last year. US firm, Lone Star, acquired a residential portfolio from Saizen Real Estate Investment Trust at JPY 44.7 billion in Q1 of 2016. With this transaction, Saizen, a Singapore stock exchange listed REIT, soled its total portfolio consisting of 136 apartment buildings all over Japan. This deal followed soon after US Blackstone’s similar deal in Q4 last year. Blackstone acquired Japan Residential Investment Company, listed on the AIM section of the London Stock Exchange, who invested in 57 properties worth JPY 47 billion in Japan.
Private Households and Corporate Investment bring Japan back on Growth Track
All figures in %, annualized
Japan is back on growth track. Following a weak Q2 2015 with negative growth, Japan returns to positive territory supported by a solid domestic demand.
All areas of private domestic demand have seen growth in Q3 2015. Also exports have recovered well. Only the reduced inventory put pressure on the GDP result.
The consumption and investments from private households was supported by overall growth in salary payments to employees which at the end of Q3 stood at an annualized JPY 262,6 trillion which was 0,7% more than in Q2 and 1,4% higher than one year before.
A further indication of the overall confidence in the domestic market is the growth in bank lending which at the end of November 2015 stood at a total of JPY 493 Trillion, an increase of 2.4% compared to November 2014.
According to a survey by the Bank of Japan among the 50 largest banks in Japans, lending demand from none-producing mid and small size companies is especially high. These firms serve to the domestic market.
The government expects a 1.5% growth for the fiscal year 2015 (April to March 2016). Following a slow first quarter (Q2 2015) this may look optimistic, though the strength of the domestic demand will enjoy further backing by wages benefitting from increased seasonal bonuses again in Nov/Dec.
New Tax Treaty between Japan and Germany to promote Investment Flow between both Countries
On July 16, 2015 Japan and Germany communicated an agreement in principle on a new Tax Agreement.
The Ministry of Finance Japan published on its homepage: “The new Agreement reduces taxes withheld at source on investment income (dividends, interest and royalties) to further promote the investment exchanges between the two countries.”
Strong Labor Market:
Success Ratio of Job Hunting by University Students hit Record High
On August 7, 2015, Japanese Ministry of Education and Science and Technology (MEXT) announced that the success ratio of job hunting by university students graduated in March 2015 hit 72.6%, highest in the past 10 years. The last peak was 69.9% for students graduated in March 2008. In terms of volume, 409,754 newly university graduates secured job by March 2015, compared to 375,957 newly university graduates by March 2013. This confirms the labor market improvements triggered by the policy of the Abe government in the last two years.
In fact, overall labor market in Japan has been improving considerably since Prime Minister Abe took office in December 2012. According to the labor market survey by the Government Statistics Bureau, employed persons (employees and self-employed) were 63.9 million in June 2015, compared to 62.5 million in December 2012. Thus, the number of employees has increased by 1.4 million in the past 2.5 years. The labor force (employed and job seekers) also increased significantly. The labor force in June 2015 was 66.1 million, compared to 65.3 million in December 2012. Unemployment rate declined to 3.4% in June 2015, compared with 4.3% in December 2012.
Japanese Female flock the Labor Market as the Government promotes female Carrier and Management Opportunities
Of particular note is the increasing role of female in the Japanese labor market. Of the 1.4 million increases in the employment above, female accounted for 1.2 million and male accounted for 0.2 million. Of the 0.8 million increases in the labor market participants, female accounted for 1 million and male accounted for minus 0.2 million. The increasing contribution of female in the recent labor market improvement is encouraging for the Japanese economy. It indicates the potential success of the government’s policy, motivating a significantly higher female contribution to the economy through improved carrier and management opportunities.
Real Estate Market:
Office demand remains strong with vacancies decreasing and rents improving
The vacancy rate of Tokyo CBD 5 Wards descended to 5.1% in June 2015, still having further room to decrease considering the previous low of 2.7% recorded in 2007. The rents have increased 7 % from the bottom in 2013, remaining at a level of 80% from the 2008 peak.
According to Japan Office Market View Q2 2015 by CBRE, rents rose in nearly all regional cites in Japan.
Central Tokyo Grade A rents continue to rise at an accelerated pace. In our view this trend will continue and spread to other markets in Tokyo and regional cites as well.
Residential Rents on the upswing
The rent of Greater Tokyo started to grow in 2013 and continuedgrowing through June 2015.
According to an apartment rent index prepared by Sumitomo MitsuiTrust Research Institute, rents in Greater Osaka, Nagoya, Fukuokaand Sapporo were stable and gradually increasing in Q1 2015.
Transaction Volumes continue to grow; foreign Investors increase activities; growing investment activities reach regional cities
In December 2014, J-REITs and Private Funds collectively held JPY 27.7 trillion in Assets under Management (AuM; a plus of JPY 300 billion since June 2014), While J-REITs grew by JPY 700 billion, Private Funds decreased AuM by JPY 400 billion. The outlook for Private Funds though is positive, according to Sumitomo Mitsui Trust Research Institute, there are a number of overseas investors looking to increase real estate investments in Japan.
According to CBRE, Q1 2015 total transaction volume rose by 8.6% y-o-y to JPY 1.1 trillion. The increase was driven by a jump in acquisitions by overseas investors who along with a rise in transactions in the Greater Tokyo Area invested in regional cities. Acquisitions by J-REITs continued to drive market activity, accounting for 45% of all transactions by value. Overseas investors transaction volumes doubled in Q1 2015 from Q1 2014 to JPY 158 billion.
A report named issued by CBRE shows J-REITs share of regional investments increased again to over 40% in 2014 (from 30%). Overseas investors increased their regional investment to 18% in 2014 (from only 8% in 2009).
Great Success for the first MIPIM Japan coincides with solid economic development news
The inaugural MIPIM Japan in Tokyo on May 20/21 attracted more than 2,500 attendees from 30 countries. 335 investors and delegates from financial institutions focused their attention on the real estate investment opportunities available in Japan. 596 companies were represented, including some 222 from outside Japan.
It was by far the largest real estate specific event devoted to the Japanese real estate market. The success will confirm the organizer (Reed Midem) in its strategy to establish MIPIM Japan as an annual event.
Prior to MIPIM Japan a Japan German Real Estate Investment Round Table Meeting, engaging representatives of the Japanese real estate elite and German real estate investors was hosted by the German Chamber of Commerce in Japan, initiated by the Ministry of Land, Infrastructure, Transport and Tourism was organized and moderated by Dr. Meyer zu Brickwedde, President and CEO of Kenzo Capital Corporation.
Link: Japan Journal & Japanmarkt
Transaction volume in FY 2014 close to 2007 record high with foreign investments sharing 23% of the transaction volume
According to Urban Research Institute, a Mizuho Group company, the real estate transaction volume during the fiscal year 2014 (April 2014 – March 2015), reached to JPY 5,289 Billion. It increased by 15 % compared to 2013 and thereby was almost at 2007 record volume (JPY 5,328 Billion) and the highest after 2007.
Foreign Investor’s acquisition volume went up from JPY 429 Billion to JPY 1,195 Billion in 2014, the share of foreign investments increased from 10 % to 23 %. Among those foreign investments Germans accounted for JPY 60 Billion, mainly from institutional investors. J-REITs purchased properties worth JPY 1,804 Billion, down by 4 %. Its share decreased from 42 % to 34 %.
Noteworthy transactions: GIC from Singapore bought Pacific Century Place Marunouchi, a Class S office building in the Tokyo CBD, at a price of JPY 170 Billion from a fund managed by PAG in Hong Kong, who acquired Commerzbank’s real estate finance subsidiary in Japan last year, that had originally financed the property. Blackstone Group from the US acquired a nationwide portfolio of residential properties from General Electric Group at JPY 200 Billion. Mori Trust, a Japanese developer, bought Meguro Gajoen, a complex consisting of offices and a hotel outside the Tokyo CBD, at JPY 130 Billion from Lone Star Group of the US. The US investment group Green Oak bought Aoyama Building, a Class B office building in the central Tokyo, at a price of JPY 46 Billion from a fund managed by Mitsubishi Estate Investment Advisor.
Interview: Vice Minister for Land, Infrastructure, Transport and Tourism Ishii Kisaburo about real estate investment in Japan, the government’s policies for urban development
Link: Interview Vice Minister Ishii
Q1 2015 real GDP (seasonally adjusted) was up by 3.9% on an annual rate, compared to +1.1% in Q4 2014.
Japan annualized GDP change compared to previous Quarter and annualized contribution by sector
Q1 GDP released on June 8, 2015: corporate investment contributed 2.4%, compared with -0.8% contributions in Q4. It seems the drag in investments, both in residential and non-residential, that followed the consumption tax hike in April 2014, is finally over and its contribution turned distinctly positive. Net export contribution is -0.7% due to strong import. The trend of economic activity is clearly positive. Even after deduction of inventory and net export, final demand of Japanese economy is up 2.3%. Large inventory pile-up in Q1 may not be a bad sign. It could be interpreted as positive mind-setting among corporate sector given strong corporate investment.
Japanese Exports increased 8.2% in April 2015 while trade balance in April 2015 was negative with JPY 53 billion, compared to the surplus of JPY 227 billion in March
Released in May 25, 2015: Exports were up 8.2% from the same month last year (JPY 6,551 Billion). Since September 2014 monthly exports have been up from the same month one year ago. Monthly imports have been lower compared to last year’s months since January due to weaker oil prices. From here on, we expect imports to increase due to stronger domestic demand and higher oil prices.
Japan’s tax revenues up in FY2014 by 12,5% hitting a 17-year high for fiscal 2014 (ending March 2015)
According to NHK News on June 1, 2015, Japan’s tax revenues rose to a record high in over 17 years, benefitting partially from a hike in consumption tax that has been raised in April 2014 from 5% to 8%. Consumption tax revenues were up by 30%, but also income tax revenues increased by 8.2% and corporate tax revenues were higher by 14.8%. Income and corporate tax together contribute over 50% to the tax income of the Japanese government. The positive development of tax income in both areas will support the government’s intention to postpone a further consumption tax hike.
Property Market Japan at the Global Stage – The successful Japanese presentation at Cannes is now being followed by MIPIM Japan
“Unrecognized by many or at least not noticed in its full dimension, Japan is experiencing a remarkable globalization wave. Perspectives, weight and priorities develop increasingly different from those of European companies. With high emphasis and speed Japanese companies expand their positions in target markets, especially in Asia.” from a paper of the delegate of the German business community, Mr Manfred Hoffmann, Managing Director German Chambers of Commerce in Japan
The same is true for the real estate industry of Japan. Following a strengthening of the business in Europe and the US by companies like Mitsui Fudosan and Mitsubishi Estate, further investment and development focus is put on Asia. Besides the landmark development ‘Shanghai World Financial Centre’ by Mori Building many further investments and developments have been made and many more are to come to Asian and Pacific markets. A few days ago, Sekisui House Ltd. won the ‘Best Innovative Green Building’ Award at MIPIM for its ‘One Central Park Building’ development in Sydney.
This trend of foreign investments and developments is going to grow further. According to Naoki Umeda, Managing Director & CEO, Mitsubishi Estate London Ltd., Mitsubishi Estate plans to increase the share of foreign investments from 10% to 20% by 2020, as stated in a panel discussion during the ‘Focus on Japan’ conference at MIPIM.
At the same conference event, Mr Kisaburo Ishii, Vice Minister of Land, Infrastructure, Transportation and Tourism introduced over 20 large ‘landmark’ projects only for Tokyo alone, besides several mega infrastructure projects. “Each of these projects has its development position established and land the land bought but needs a lot of money from now on.” said Mr Ishii at the conference.
Prime Minister Abe successfully motivates pensions funds and insurance firms to increase their allocation to risk assets within their investment portfolio, part of such investments will benefit the real estate sector.
Nevertheless Japan is intensively approaching foreign investors to participate.
At MIPIM Japan informed about the real estate market during three conferences and various presentations at the Japan Pavilion, including one by Mr Yoshifumi Iitsuka, Director at Tokyo Metropolitan Government, on Tokyo’s plans as a world financial centre. Events like these and MIPIM Japan in May (20th to 21st) demonstrate the intention to promote the Japanese market for investments. The growth strategy of the Abe government is based on foreign investments as one major pillar. The ‘Buy Japan’ initiative of the Prime Minister is being followed up by the administration actively supporting measures that lead to increased interaction between Japan and foreign investors and professionals.
Vice Minister Ishii taking leadership of a 120-member delegation from Japan at MIPIM and Ministry for Land, Infrastructure, Transport and Tourism sponsoring the MIPIM Japan convention in May are concrete examples.
Shuji Tomikawa (Managing Officer, Mitsui Fudosan Co., Ltd.; President Mitsui Fudosan Investment Advisors, Inc. from April 1st, 2015) promoted MIPIM Japan during ‘Japan Breakfast’ at MIPIM: ” ‘Cross-Border Investments (Inbound and Outbound)’, will become one of 4 key subjects at MIPIM Japan.” In his presentation he explained that in the first 7 months of the fiscal year 2014 (Nov. 2014: FY 4/2014 to 3/2015) foreign investments had a share of close to 19% of the total transaction volume in Japan. In order to maintain and increase this share MIPIM Japan will provide the platform for an open dialogue about investment opportunities and product access.
On the Japanese Economy:
Jesper Koll, Managing Director, Head of Equity Research, JP Morgan Securities Japan Co., Ltd. sees the Japan age pyramid at a sweet spot. “The baby boomer ‘Mick Jagger’ generation that has been dragging the household income is no longer part of the countries labor force and the younger next generation with a large population share is approaching a stage of income growth.” He continued at the ‘Japan Breakfast’ at MIPIM that companies shift from part time employment to a stronger share of full time employees among their workforce. For the employees this results in very significant income rise. Considering the large share of part time workers among the Japanese working population this is another significant source of income growth likely to feed consumption growth.
Germany’s Bankhause Metzler summarises under the headline “The end of deflation in Japan”:
“For months bank lending volume has increased by 2% per month and wages have grown, the labour market is in a solid situation (unemployment in February 3,5% and ratio of open positions to job applications stands at 1.15%). Consequently inflation reached over 2%.”
(Edgar Walk, Chef Economist, Metzler Asset Management GmbH, Frankfurt am Main)
During MIPIM in Cannes the question “Why to invest now” has been answered with good arguments and facts.
At MIPIM Japan in May the focus will be on discussions about opportunities and ways to invest in Japan and on concrete measures of execution.
Kenzo Capital Corporation will proudly assist the shaping of MIPIM Japan in a same manner as at MIPIM in Cannes. We are looking forward to guiding the discussions on the market entry and to supporting the execution of resulting possible investments.
Detailed GDP Information suggests Japan’s Economy is now out of tax hike shock and of deflation
The flash Q4 real GDP released on February 16, 2015 shows an annualised growth rate of 2.2%. Of particular note is that nominal GDP growth rate is now annualized 4.5%, and GDP deflator is +0.5% compared with -0.3% in Q3 and +1.9% in Q2. While deflator may still be affected by consumption tax hike in last April, the trend of deflator and strong nominal GDP show that Japan is on track out of deflation.
Household spending (Consumption and Investment) contributed 1.0%, compared with 0.1% contribution in Q3. It seems the drag in household investment due to consumption tax hike is also finally over. Net export contribution is robust 0.8%, thanks to strong export (up 2.7% from previous quarter) and not so strong import (up 1.3% from previous quarter). Weaker yen and cheaper crude oil price finally bear fruit in Japan.
The drag in GDP growth is a result of a too early tax rate hike
As the above table clearly shows, the drag in GDP growth is the result of too early consumption tax hike. Prime Minister Abe understood this and called election on December 14 with Mr Abe and his party ‘asking for a mandate’ to postpone the second step of a consumption tax hike from October 2015 to April 2017 and the election result was overwhelmingly supportive to Prime Minister Abe and his economic policy. As uncertainty over consumption tax has cleared, Japanese economy is now on track to robust growth in 2015.
Japanese fiscal condition is improving due to higher tax revenue
Though many international observers of Japan argue that Japan should reduce its public debt, which stands at close to 2.5 times GDP (Japan’s net debt though stands at 140%), this issue cannot be the centre of economic attention at present. Japan’s debt is financed almost exclusively internally (by Japanese investors).
It is important to note that the public debt can also be reduced by nominal GDP growth and resulting tax revenue increase rather than tax rate hike. On February 10, the Japanese government (ministry of finance) announced that nominal government debt as of the end of 2014 is JPY 1,029 trillion, JPY 9 trillion decline from the previous quarter end (Sept. 2014). The consumption tax hike contributes at most JPY 2 trillion in 3 months. Thus decline in public debt is due mostly by tax revenue increase due to higher nominal growth rate.
Corporate Expansion Plans continue to stimulate Office Rents in Tokyo
Rent for new space in Class A buildings continued to grow since 2Q 2012. The average year on year growth rate from the same quarter the year before was 11 % for the time Q2 2012 to Q4 2014. With supply in the coming years a stable moderate levels and increase office space demand, we expect office rent to continue on its upwards trend.
Investment Market: J-REITs continue to be the domination investor group throughout 2014, regardless of stronger demand from foreign investors. Investment returns compressed to 3.4% for prime Tokyo office and 4.0 to 4.5% for top Tokyo residential property and we expect such compression to continue during 2015 due to steady strong demand for investment products from J-REITs, private REITs and an increasing investment interest from foreign investors.
Detailed GDP Information suggest Japan’s Economy still on Track to Recovery
While the Q3 real GDP growth result at an annualised minus 1.6% leads to the initial interpretation that Japan may be in recession, a look at the details suggests differently.
Household spending (Consumption and Investment) was up, though in aggregate only by a disappointing 0.1% and so was Government spending (contributing +0.7%) and Export (+0.3%).
The overall result has been triggered mainly by a reduction in corporate inventory. Corporate Japan reduced inventory to balance the reduced private consumption that was dragged down after the April 1, 2014 consumption tax hike from 5% to 8%. Since inventory overall has decreased during 2014 it is generally expected that such inventory will increase again in Q4.
On the other hand December salary bonus is expected to be the highest in 5 years. Japanese corporate pay salary bonuses of 1.5 to 4 month of salary equivalent twice a year (June and December) depending on corporate business developments.
Consequently we can expect a further stimulation of household consumption and investment as a result of the increased available income of private households.
The drag in GDP growth is a result of a too early tax rate hike
The government under Prime Minister Abe has understood the message and reacted. The parliament has been dissolved, elections will take place on December 14 with Mr Abe and his party ‘asking for a mandate’ to postpone the second step of a consumption tax hike from October 2015 to April 2017 and for the economic policy under Mr Abe called ‘Abenomics’.
Though many international observers of Japan argue that Japan should reduce its public debt, which stands at close to 2.5 times GDP (Japan’s net debt though stands at 140%), this issue cannot be the centre of economic attention at present. Japan’s debt is financed almost exclusively internally (by Japanese investors). Japan needs to focus on the denominator of such debt to GDP ratio. The economic policy therefore has to focus on growth and controlled inflation. With the private and the corporate sector trusting in the economic policy and the likelihood of the policy to achieve its target, private households will spend and corporate will invest.
Corporate Expansion Plans stimulate Office Space Search in Tokyo
The result of a annual survey on office needs in Tokyo, by Japanese developer Mori Building shows that for the first time in 5 years Expansion is the top reason for companies to search for new office space. In past years the dominating reasons were rent expenses (no. 1 reason in 2009 to 2011; now no. 4) seismic design.
We trust that Q4 2014 figures will confirm that the economic growth is on track.
First indicators are encouraging: The industrial output published on Friday November 29 showed an improvement by 0.2% over the previous month. This is the forth increase in a row. Experts expect a further increase by 2.3% in November. Consumption improved during October by 0.9% from the previous month. Also here figures confirmed an improvement over 3 month in a row, although consumption was still 4% below the previous year’s figure. We expect consumption to increase further, with December’s salary bonus expected at a 5 year high and the plan of the government to postpone the next hike of consumption tax by 18 months.
Land of rising Wages
As of May 2014 total wages (average wage per capita x number of employees) in Japan increased by 1.4%, while nominal wages increased by 0.8% compared to May 2013. Although this means that employees are losing out at an inflation rate of 2.3% (June core inflation rate) job data looks favorable for further wage improvements as corporate need to compete for employees. Job-to-applicant ratio further improved to 1.10 from 1.09, the highest in 22 years. Results released on July 29 show unemployment at 3.7% as of June 2014. The increase in unemployment by 0.2% (from 3.5%) is due to an increase in job applicants as they see the labor market conditions improving. Especially women starting to look for jobs, encouraged by the Abe administration to enter the job market and seek a carrier.
Robust growth lifts hopes for Japan’s economy
Real GDP for the first quarter of 2014 is estimated at plus 6.7% p.a., up from an initial reading of a 5.9 percent rise and above market expectations for a 5.6 percent rise.
However, economist’s consensus on the second quarter (Apr-Jun 14) is estimated at minus 4.9%. Consumption, industrial shipments, housing starts are weak due to consumption tax hike in April 2014. The Bank of Japan remains confident about the economic growth for the fiscal year March 2014 to March 2015 at 1.0 percent and a growth of 1.5% for 2015 and 1.3% for 2016. At the same time it forecasts an inflation (excluding the effect of the tax hike) of 1.3 percent this year, 1.9 percent in 2015 and 2.1 percent in 2016.
IDERA launches second private fund for residential properties
IDERA Capital Management, a Japanese real estate asset management company, announced that they launched a second private fund for investing in residential properties in major cities in Japan. The first closing of Japan Urban Residential Investment Club II (JURIC II) was successfully completed with two unnamed European institutional investors. The fund acquired two rental residential properties for middle income families located in Osaka-city and Kyoto-city. IDERA closed the first fund, JURIC I, in March of last year.
IDERA used to be an independent real estate asset manager in Japan. In May of this year, however, IDERA was acquired by Fosun Group, one of Chinese investment group based in Shanghai and listed in Hong Kong Stock Exchange.
Nikkei Newspaper reported in May that Fosun Group, acquired 98% interest in Idera Capital Management for JPY 6.8 billion. At that time Idera had AUM of JPY 163 billion. The portfolio comprises mostly office properties in metropolitan Tokyo. Fosun envisages Idera as avenue for their further active real estate investment in Japan.
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Invincible raises JPY 23.8 Billion, acquires 18 hotel properties
Invincible Investment Corporation, a J-REIT sponsored by US based Fortress, announced that they will raise JPY 23.8 billion by secondary offering and will acquire 18 hotel properties for the aggregate purchase price of JPY 40 billion. The J-REIT has been investing mainly in residential properties in the past. The J-REIT currently has AUM of JPY 78 billion, approximately 75% of which comprises residential properties with the remainder, office, commercial and hotel properties. Prior to the proposed acquisition, however, they revised their investment guideline and defined hotel properties, on top of residential properties, as their core assets.
All of the 18 hotels are lodging specialized hotels, not full-service hotels. They offer overnight, weekly and monthly stay for business travellers and sightseers with limited amenity.
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Mitsui Fudosan announces first capital increase since 32 years – largest capital market transaction in the real estate sector since 40 years
Mitsui Fudosan announces a capital increase by JPY 325 Billion, their first capital increase since 1982. According to a company comment, the dramatic market changes since their 2012 midterm financial planning have triggered this decision.
Over the past decades Mitsui Fudosan depended on bonds and bank lending. Companies have raised about $17 billion in Japan so far this year through equity-linked deals, compared with $19 billion during the same period last year and just $5.7 billion in 2012, according to Dealogic.
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LaSalle acquires a large suburban shopping mall in from BlackRock
According to Nikkei Real Estate Market Report, a fund established and managed by US based LaSalle Investment Management acquired a large shopping mall in suburban Gifu-city, near metropolitan Nagoya. The shopping mall was built in 2006 and has gross floor area of 117,219 sqm. It also accommodates around 5,000 parking lots. It is a typical large-scale suburban shopping mall. The seller is an SPC associated with US based BlackRock. The purchase price was not disclosed. According to an investor familiar with the mall, however, the current value of the property would be around JPY 21 billion.
Invesco sells a commercial property in Osaka-city for JPY 13 Billion
According to Nikkei Real Estate Market Report, US based Invesco sold a commercial building in central Osaka-city. The property, “Prime Square Shinsaibashi”, built in 2007, has 13 floors above ground and one below with gross floor area of 9,729 sqm. It is located in Shinsaibashi in the center of Osaka-city and along the Midousuji Street, the most popular shopping/retail street in Osaka-city. The key tenant of the building is Dolce & Gabbana, an Italian apparel brand, who occupied 1st and 2nd floors. The sales price is around JPY 13 billion. Although purchaser was not disclosed, it is believed to be an SPC associated with US based Elliot Management. Other details are not known.
Kenedix Office REIT raises JPY 10.9 Billion, acquires 3 office properties
Kenedix Office REIT, a J-REIT sponsored by Kenedix, an independent developer/investment manager, and specialized mid-sized office properties, announced that they will raise JPY 10.9 billion and acquire three office properties for the aggregate purchase price of JPY 14.7 billion. Two of the three properties are located in metropolitan Tokyo and the other one is located in Utsunomiya-city in northern Kanto district. Before these acquisitions, The J-REIT has AUM of JPY 336 billion with 89 mostly mid-sized office properties.
The sellers of these three properties are SPCs associated with Kenedix, the sponsor of the J-REIT.
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Japanese life insurers recommenced real estate investment in serious manner
Nikkei Newspaper posted an article stating that Japanese life insurers are seriously looking for opportunities for developing and investing real estate properties as an investment alternative.
According to the article, Daiichi Life acquired six rental apartment properties in Tokyo for JPY 12 billion, jointly with Goldman Sachs. The price tag of each property ranges from several hundred million to JPY 3 billion. They envisage investment yield of high 3% handle. They believe that, although investment yield of rental apartment properties is relatively low compared with office property, they are relatively stable and easy to diversify because of each size being relatively small. They envisage in enlarging the rental apartment investment to JPY 100 billion in 2 to 3 years.
On the other hand, Nippon Life, together with Obayashi, a major constructor, acquired a land parcel in Tokyo for developing office property for JPY 80 billion. They also acquired a logistic property in suburban Tokyo.
AXA acquires a large office property in metropolitan Tokyo.
According to Nikkei Real Estate Market Report, an SPC associated with AXA Life acquired a large office property in 23 wards district of metropolitan Tokyo. The property, “Nakano Central Park East”, built in 2012, has 10 floors above ground with 2 below with gross floor area of 39,000 sqm. It is located in Nakano-ward, western rim of 23 wards district of metropolitan Tokyo, and within a few-minute walking distance from JR Nakano station of Chuo line whereby direct train access to both JR Tokyo and Shinjuku stations is available. Although purchase price was not disclosed, this is one of the largest real estate acquisitions in Japan by AXA Group. The seller of the property was an SPC formed by Tokyo Tatemono, Hulic and other investors.
Nippon REIT Investment will be newly listed in TSE in April
Sojitz, one of the major trading companies in Japan, announced that Nippon REIT Investment, a J-REIT sponsored by them, received approval from Tokyo Stock Exchange to list its investment units. They will be listed on April 24. This will be the second new listing of J-REITs since the beginning of this year.
According to the research report prepared by ARES (Association of Real Estate Securitization), the J-REIT envisages raising JPY 38 billion by initial public offering and their initial AUM will be approximately JPY 70 billion comprised by 13 office properties (JPY 52.4 billion) and 7 residential properties (JPY 18 billion). All the office properties are located in the 23 wards district of metropolitan Tokyo whereas residential properties are located in Nagoya (4 properties), Sapporo, Fukuoka and Tokyo. The average NOI yield on appraisal basis is 5.0%, comprised by 4.8% (office properties) and 5.4% (residential properties).
Tightening labor market shows effects, First Retailing converts 16,000 part time workers to full-time employees
Nikkei Newspaper posted an article stating that First Retailing, Japan’s largest casual wear retailer running Uni Qlo stores, will start converting their 16,000 part time workers to full-time employees in the coming 2 to 3 years commencing this April. First Retailing currently employs approximately 30,000 part time workers in 850 Uni Qlo stores in Japan. Thus, the plan is to secure about half of their part time workers by providing better compensation in view of forthcoming labor shortage.
The rationale behind such a move is the current tightening of labor market in Japan due to improving business sentiment. According to a survey by Recruit Jobs, an employment agency, average hourly wage of part-time workers increased by 0.4% in January to JPY 948 per hour, highest in record. This is 7th consecutive increase on a month-over-month basis.
Other retailers such as Starbucks Coffee follow such a move. They decided to convert 800 contracted workers to full time employees.
Sovereign Wealth Funds have been aggressively investing in equities of Japanese Companies; Norwegian fund doubled its holdings
Nikkei Newspaper posted an article stating that sovereign wealth funds have been expanding the holdings of equities of Japanese companies in the past one year. According to the article, their investment scope is mostly long-term and they view Abenomics as positive for the restructuring of Japanese companies and for enhancing potential growth rate of Japan.
Of particular note is the Norwegian Wealth Fund. It is one of the largest sovereign wealth funds in the world with total AUM equivalent to over JPY 80 trillion. According to the disclosure by Norwegian Central Bank, their holdings of equities of Japanese companies amounted to JPY 3.77 trillion as of the end of 2013, almost doubled compared to JPY 1.94 trillion one year ago. Their holdings include Toyota (JPY 161.3 billion) and Softbank (JPY 120 billion)
Other sovereign wealth funds such as SAMA (Saudi Arabian Monetary Authority) and GIC (Government Investment Corporation of Singapore) are also aggressive in Japanese equities. SAMA held JPY 230 billion of Japanese equities as of September 2013, the amount doubled within 6 months. GIC held JPY 100 billion as of September 2013.
SEB Asset Management acquires an office/retail complex in Tokyo and a hotel in Yokohama
Nikkei Real Estate reports the purchase of a hotel in Yokohama by SEB Asset Management. The operator of this hotel that opened in 2011 is Hotel Aipha One, a budget hotel company, operating around 50 hotels mainly in regional cities. This Yokohama hotel is their first hotel in the 6 major cities: Greater Tokyo, Yokohama, Nagoya, Osaka, Sapporo and Fukuoka.
SEB Asset Management announced that they have acquired an office/retail complex at the edge of the central 5 wards in Tokyo for their SEB Asian Property Fund II, an investment fund under Luxemburg law specializing Asian real estate assets. Acquisition price is JPY 5.5 billion.
The property, “Primegate”, built in 2013, has 10 floors above ground and one below with gross floor area of 4,621 sqm of which 2009 sqm over 4 floors is for retail use and 1.551 sqm over 7 floors is for office use. It is located within one minute from JR Takatanobaba station of Yamanote line, the most popular commuter line, and also from the nearest subway station.
According to Nikkei Real Estate Market Report, the seller of the property is Secured Capital Investment Management.
For further details on the property:
GE acquires a newly built residential property in Osaka
According to Nikkei Real Estate Market Report, GE acquired a newly built rental apartment property in Osaka in October of last year. The property, “Serenite Kitahama”, built in January 2013, is 140-unit rental apartment property. It is located in Higashi Koraibashi, CBD Osaka, and has convenient access to business/commercial areas in Osaka city via municipal subway system. The seller and the builder of the property is a regional real estate developer. The price and other details are not known.
The private REIT of Mitsubishi Estate acquires a residential property in Osaka
According to Nikkei Real Estate market Report, Nippon Open Ended Investment Corporation, the private REIT of the Mitsubishi Estate Group, acquired a rental apartment property in Osaka-city in September of last year.
The property, “Nostel Court Shin-Osaka”, built in 2007, is a 48-unit rental apartment building. It is located in northern part of Osaka-city and only one stop away from Shin-Osaka bullet train station and also three stops away from JR Osaka station through Osaka subway line. The property was owned by SBI Holdings, an investment company formerly associated with Softbank, until March 2013 from the completion of 2007. Other details are not known.
Grosvenor acquires a luxury residential property in CBD Tokyo
UK based Grosvenor announced that Grosvenor Asia Pacific, the regional arm of the UK developer and investment manager, has acquired a majority stake in the luxury apartment complex in Minami-Azabu, CBD Tokyo.
The property, “Opus Arisgawa Terrace and Residence”, built in 2004, has gross floor area of 25,511 sqm and accommodates 99 apartment units comprising studio and 1 to 4 bedrooms. The property is located in one of the well known upscale residential areas in CBD Tokyo and within eight minute walk from a nearby subway station. Grosvenor’s stake corresponds to 77 of the building’s 99 units.
Private REITs doubled their AUM from one year ago: Strong demand from institutional investors
Nikkei Newspaper reported that, the aggregate AUM of the Japanese private REITs had doubled since one year ago, totaling JPY 500 billion as of the end of 2013. Institutional investors such as pension funds and regional banks have poured their funds into private REITs in view of their stable investment returns. Six private REITs have been established so far and several more will be established this year. They would help supporting Japanese real estate market.
Private REITs are for institutional investors only. Retail investors can not invest in private REITs. Unlike listed J-REITs, value of private REITs will not fluctuate day to day since they are not traded in the exchange. Value of private REITs will be based on net asset value at the semi-annual book close. Such characteristics attract institutional investors.
Average investment yield of private REITs is around 4% currently, higher than that of listed J-REITs, somewhat north of 3%. According to one of the private REITs who made secondary offering last year, investor demand was so strong that they could not accommodate all the investors’ demand at the secondary offering last year. Some of the investors are queuing for secondary offering this year.
Private REITs are getting quite aggressive in procuring real estate assets by their abundant funds. DREAM Private REIT sponsored by Mitsubishi Corporation, for instance, acquired four commercial and logistics properties for JPY 50 billion, doubling their AUM, in December last year. Kenedix plans to establish new private REIT in March of this year, envisaging JPY 30 billion as its initial AUM. The private REIT sponsored by Mitsui Fudosan plans to make secondary offering soon.
Sumitomo Mitsui Trust Research Institute forecasts that the aggregate AUM of Japanese private REITs would reach JPY 1,400 billion within 3 to 4 years.
Conforia Residential REIT raises JPY 21.5 Billion, acquires 22 properties
Conforia Residential REIT, a J-REIT sponsored by Tokyu Land and specialized in residential properties, announced that they will raise JPY 21.5 billion by secondary offering and will acquire 22 residential properties for the aggregate purchase price of JPY 37.4 billion. Before these proposed acquisitions, the J-REIT has AUM of JPY 74.6 billion with a portfolio of 55 rental apartment properties mostly in metropolitan Tokyo.
All of the 22 properties are located in the 23 wards district of metropolitan Tokyo, except for one that is located in Yokohama-city. Including this Yokohama property, locations of the 22 properties are convenient for commute to any major business districts in metropolitan Tokyo. All were built in between 2003 and 2013. The largest property is one in Kita-Sando, CBD Tokyo that has gross floor area of 7,667 sqm accommodating 144 rental apartment units. The purchase price is JPY 4.27 billion. The price tags of the other 21 properties are between JPY736 million and 3.2 billion. Occupancy rates ranges between 89% and 100%, except for one built in April of last year were occupany stand at 72%.
The sellers of the 22 properties are either sponsor of the J-REIT or SPCs associated with the sponsor or its affiliates.
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