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March 21, 2018

The world is set for a fresh wave of Japanese outbound investment as the country’s developers and institutions seek better returns overseas.

Nearly US$3.5 billion of outbound real estate investment left Japan in 2017, 70 percent more than in 2016 and two and a half times the 10 year average to 2016, according to data from JLL.

“This is a kind of early stage for Japanese investors, who are once again looking outside Japan, after the “Bubble Era” back in 1990 when we saw huge capital outflows overseas,” said Takeshi Akagi, Head of Capital Markets Research for JLL Japan.

The largest Japanese developers such as Mitsui Fudosan and Mitsubishi Estate, already have extensive investments overseas but now more investors are following suit.

The change is being borne out of a need to expand and diversify their portfolios, which have traditionally been concentrated in their domestic market, says Akagi. “Institutional investors are also diversifying outside of domestic bonds and stocks into alternative asset classes – including real estate,” he said.

Last year, Japan Post Bank announced that it would invest ¥200 billion (US$1.88 billion) into foreign real estate funds while public pension fund Chikyoren has appointed UBS Asset Management to manage an overseas property mandate. Dai-Ichi Life, which was one of the biggest Japanese investors in overseas real estate in the 1980s, has allocated ¥10 billion (US$95 million) to investment in non-domestic real estate funds of funds.

One of the world’s biggest pension funds, the Government Pension Investment Fund (GPIF), which has ¥157 trillion (US$1.48 trillion) of assets under management, has appointed managers for foreign real estate and infrastructure investments in recent months.

The size of Japan’s largest institutions means that even a tiny allocation to real estate could make significant waves. For example GPIF has a target allocation of five percent to alternatives, including real estate. If, within this allocation, the overseas real estate portion was 0.5 percent, this would equate to more than US$7 billion of new investment.

Japanese developers have also been moving into new markets. Last month, Sumitomo announced a joint venture which will see it develop a US$2 billion multi-phase residential project in India’s National Capital Region. Sumitomo is also involved in the development of a US$4.2 billion smart city near Hanoi, Vietnam.

Meanwhile Mori Building is reported to be considering investing in India and teaming up with a local player in the same manner as Sumimoto.

Japanese developers are investing elsewhere in Asia in order to get high short-term returns by taking a development risk, according to Akagi.

He adds that geographic preferences have changed over time: until 2013, most capital was invested to Europe, especially the UK. However in the past three years, U.S. investments have been more popular.

“In developed markets, office is the preferred sector, followed by residential and hotels. In emerging markets, Japanese companies have also targeted condo and industrial park developments,” he says.

Japanese investors have also been investing in real estate debt overseas. Insurance company Tokio Marine has invested US$2.8 billion with ACORE Capital, a U.S. venture which originates and acquires senior debt, mezzanine loans and preferred equity.

Click to learn more about whether Japan’s real estate is set to stay bullish

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Akagi Takeshi

Head of Research, Japan

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