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June 20, 2017

As U.S. pension giant, TIAA, reportedly sets its sights on Japanese real estate, demand from foreign funds remains strong, but potential buyers have varying levels of success.
TIAA’s real estate unit, TH Real Estate, recently told Bloomberg of its plans to invest about US$1 billion in retail and logistics sites in Tokyo and Osaka. TIAA manages about US$938 billion of assets, including US$24.6 billion in real estate.

In 2016, TH Real Estate, on behalf of TIAA, acquired the Ginza 1 Chome Building, a 4,539 square meter retail and office property from the Standard Life Investments Global Real Estate Fund for US$82 million.
TIAA’s real estate account plans to have between 75 percent and 85 percent of its net assets invested directly in real estate or real estate-related assets with the goal of producing favourable long-term returns, according to a company statement.

While general buying interest stays strong, transactions in recent months have been capped due to the limited number of assets for sale, says Akihiko Mizuno, Head of Capital Markets for JLL Japan. Following the Bank of Japan’s negative interest rate move in January 2016, improved refinancing terms have deterred owners from putting their assets on the market.

“Many investors were offered top ups on their existing loans. This limited deal flow in 2016 as we saw a number of deals pulled from the market,” says Mizuno.

“Japanese investors are generally very well capitalised and tend to have a lower cost of capital; this often makes them more competitive on pricing,” says Nick Wilson from JLL’s Japan Capital Markets team. “

However, under Abenomics, property transaction volumes in Japan soared from US$19 billion in 2011 to more than US$34 billion in 2015, while the proportion of foreign buyers climbed from four percent to 22 percent over the same period, according to JLL data. The first two arrows of the Prime Minister’s signature policy – fiscal stimulus and monetary easing — have caused the inevitable asset price inflation. Prime office yields have eased from 3.8 percent in 2012 to now below 3 percent as of June 2017, reflecting rising capital values rather than falling rents.

Although Abenomics has driven down interest rates, improved financing terms and boosted real estate returns, it has also pushed up equity market prices (including J-REITs), says Mizuno. “This has allowed J-REITs and listed vehicles to raise capital above their underlying asset backing to make accretive acquisitions,” he adds.

Higher equity market prices have also led to higher price-to-earnings ratios. Teamed with record low fixed income returns , many investors started to look at allocating capital to other asset classes such as real estate.

Total Japanese property transactions jumped 16 percent in the first quarter from a year earlier to US$11.1 billion, according to JLL data. “While transaction volumes were up in the first quarter, we’re expecting deal flows to be fairly flat in the year,” explains Wilson. Investment opportunities are limited due to an ongoing scarcity of assets. “Landlords remain relatively unmotivated to sell down as it’s difficult to source new deals to recycle capital. There’s plenty of capital but few options.”

As a result, investors have shifted up the risk curve into more non-core locations and assets with “alternatives picking up in interest as investors chase yield following a sustained cap rate decompression cycle.”

Separately, neither Wilson nor Mizuno believe Brexit or Trump’s Asian policies will have any significant impact on real estate in Japan.

“Investors who have been able to find investment opportunities are probably not going to change their high degree of orientation to the Japanese real estate market,” says Mizuno. “UK and EU investors may be more circumspect given the short-term market instability, and choose to adopt a wait-and-see approach,” he adds.

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Akihiko Mizuno

Head of Capital Markets, JLL Japan

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