Japanese institutions deployed a record US$1.3 billion in global allocations in the first three months of 2019; almost matching their outbound spending for the whole of last year. The U.S. market has benefitted the most from the asset flow, receiving 62 percent of allocations.
But going forward, while still small, Europe is expected to gain more share of Japanese capital, says Hanako Tomimatsu, head of international capital for Japan at JLL.
“Europe is preferred by institutional investors due to its lower hedging costs, compared to other highly transparent markets. It is relatively stable in terms of politics and the economy, which is why both institutional investors and developers are looking at the region to diversify their assets.’
Japanese investors have been increasingly looking abroad with average annual outbound flows increasing by 39 percent from the start of 2015 to the start of 2018, from US$1.8 billion to US$2.5 billion. 2018 alone saw a huge 235 percent increase on the year before from US$201 million in 2017 to US$672 million.
Japan’s domestic market has long faced negative interest rates, and pension funds and other institutional investors are struggling to make returns while Japanese government bonds, their traditional investment destination, can no longer provide a viable solution, says Tomimatsu. “Investors have to look further afield for long term growth.”
The road to Europe
Japanese institutions have already made some inroads into the European market. In November 2018, Mitsui Fudosan announced the phase one completion of the redevelopment of Television Center – the former headquarters of the British Broadcasting Corporation. The project is largest development ever in London by a Japanese company.
While offices account for 96 percent of total outbound transactions from Japan, investors are increasingly looking to diversify into other sectors with their European allocations.
Earlier this year, Japan’s biggest house builder, Sekisui House, which is a pioneer in modern methods of construction, where homes are built in factories and then shipped to sites, made its first entry into Europe through the UK housing market. It made a £55 million investment into regeneration company Urban Splash’s ‘House’ development business, in a bid to use their technology to grow the UK affordable housing market.
Logistics, infrastructure, and alternatives are also proving attractive. In January, Japan’s MUFG Bank announced that it would set up a 100 billion yen (US$924.4 million) fund to invest in infrastructure projects overseas by the end of the year, particularly focusing on renewable energy and railroad projects.
While in March this year, the Polish subsidiary of Japanese conglomerate Kajima Corporation, entered into partnership with Griffin Real Estate Partners (GRE) and acquired Student Depot, Poland’s largest provider of student accommodation, for EUR 60 million.
Despite uncertainty around ‘Brexit’, some developers are also considering entering the London market, either for the first time, or by expanding their existing portfolios.
“We know that many groups are very interested in European markets, and are actively preparing to make investments,” says Pranav Sethuraman, Global Capital Markets Research at JLL. “With many groups already exposed in the U.S. and Asia Pacific, diversifying into Europe is the next step in expanding portfolios.”
Challenges to entry
But finding the right opportunities is not without its difficulties, according to Tomimatsu.
“Some investors would like to expand their business to both the UK and other countries in Europe, but regulation is different in each country. So it’s important to build a knowledge of local practices and requirements,” she says.
And for the moment, U.S. players have no reason to fear that outbound investment could be diverted. Developers are actively engaged in projects in the U.S. and continue to target assets in the country’s major cities. Alongside these developers, the investment management arms of trading companies including Mitsubishi and Sumitomo continue to be active in raising capitals and launching new funds, according to JLL.