Private capital targets Tokyo property post-quake

HONG KONG Thu Nov 24, 2011 12:02am EST

HONG KONG Nov 24 (Reuters) - Private property investment companies from outside Japan say Tokyo is one of their top targets for the next 12 months, with the most active players set to invest close to $1 billion.

Tokyo's property market has made a surprisingly rapid recovery from the shock of the quake-induced disasters in March. Although the market has been a perennial laggard in recent years, it now looks set to provide stable growth as other markets slip, investors say.

"The top thing on everybody's mind is Tokyo," said Tom Mills, chief executive for Japan at private equity property fund manager MGPA. "If that's because of weakness elsewhere, that's fine."

The company has $250 million to invest in Tokyo and says it is poised to put that to work through the end of 2012.

"We are seeing more deal flow, and we're optimistic we can get a fair number of deals done relatively soon," Mills said.

MGPA is not alone. LaSalle Investment Management, GE Capital , Deutsche Bank AG -backed RREEF and CBRE Global Investors all say they are actively looking to invest fresh capital into Japan. Fortress Investment Group LLC, Aetos Capital and Blackstone have in recent years set up offices to look at deals in Japan, and KKR & Co LP and TPG are also expected to be active in the market.

Opportunistic investors started sniffing around Tokyo's property market soon after the March earthquake and subsequent Fukushima nuclear disaster, but they were frustrated by a lack of sellers. Starwood Capital even closed its Japan office.

Now buyers are being more realistic about their expectations, market watchers say, and sellers are beginning to open up. The number of deals coming to market is also improving, with banks getting more aggressive on loans and some portfolios of properties being shopped around.

Given intense competition from listed Japanese real estate investment trusts for quality buildings, it is not easy for overseas players to find good deals. But risk-averse core investors and riskier opportunistic players could be set to close deals now they are more realistic about what they'll pay.

"We need to control the expectations of investors," said Koichiro Obu, head of research for Japan and Korea at RREEF, the property-investment arm of Deutsche Bank. "People are looking for distressed assets, yes, but they are not easy to find. If you want to buy an asset at a fire-sale price, that's not going to happen."

For long-term core investors looking to buy stable holdings with good tenants, the numbers look good. With property borrowing costs at 1 to 2 percent, and Tokyo real-estate yields at 4 to 6 percent, the profit margin on real estate is one of the widest in the developed world.

DRY POWDER

RREEF says it expects to invest between $100 million and $300 million in Japan next year, making two to three large acquisitions for its clients, mainly pension funds and large European property funds.

"We like Japan very much," Niel Thassim, head of Asia-Pacific for RREEF real estate, said in an interview with Reuters. "There's a really interesting series of opportunities over the next 12 to 24 months."

Tokyo is one of the few Asian markets that has not seen much recovery from the global financial crisis. Office rents may be set to turn after falling for 3-1/2 years.

"Some of the most interesting times to invest in places like Tokyo is in the 12 months leading up to that trough," Thassim said. "Once you've reached that trough, you do see a wall of capital coming from overseas."

GE Capital Real Estate plans to launch an office property fund to invest in Japan in 2012, according to Francois Trausch, its chief executive in Asia.

"We're working on an office strategy," Trausch said, declining to discuss details of the fund. "We see a fair amount of demand from foreign investors in office."

GE Capital Real Estate, the property-investment arm of General Electric Co, this year set up a joint venture with Aberdeen Asset Management Plc to invest $400 million in Tokyo apartments. GE Capital already has a portfolio of 10,000 apartments in Japan.

Richard Price, Asia chief executive of CBRE Global Investors, identifies Tokyo as one of the company's top prospects as it looks to double its $5 billion Asian property portfolio.. Japan accounts for the largest chunk -- $2 billion of its Asian property holdings.

"We're seeing quite strong interest in our Japan exposure," Price said, with conservative investors being drawn by secure rental yields.

"Cyclically, Japan looks interesting again for income-focused investors," he added.

More adventurous plays are attracting private-equity investors. Opportunistic investors believe they can profit from redesigning and repositioning older buildings. Government figures show 35 percent of buildings in Tokyo were built before earthquake standards were improved in 1981.

Price said CBRE would likely invest $150 million to $300 million in equity in Japan during 2012. The company is newly active in Asia after 18 dormant months as CBRE took over the bulk of ING's property-investment business.

"The impact of the earthquake has made a lot of older stock obsolete, and is causing a real flight to quality," Price said. "I think there is opportunity in Japan."

Mills said the busiest time for deals in Japan was normally the three months ahead of the end of the fiscal year in March, adding that MGPA could be involved in as many as 10 deals next year.

"The first quarter of next year could be a good one," he said.