Japan-based institutions have a history of favouring traditional investments and allocating larger proportions of their portfolios to government bonds and listed equities. The introduction of Abenomics in December 2012 with its three arrows – fiscal stimulus, monetary easing and structural reforms – has seemingly brought about a wave of cautious optimism among domestic investors. Additionally, with Japan facing an ageing population, there is greater pressure for institutions such as pension funds to achieve higher returns. In April 2014, Japan’s Government Pension Investment Fund (GPIF) announced a target allocation to alternatives and cited the possibility of making private real estate fund investments. In light of all these factors, this move by GPIF could potentially encourage an increase in Japan-based investors’ risk appetite for higher and more stable returns.
Preqin’s Real Estate Online service currently tracks 57 Japan-based institutional investors that are either active or are considering private real estate fund investments, constituting a noteworthy 24% of the Asian private real estate LP universe. At least $17bn of capital has been allocated to the real estate asset class by this pool of Japan-based institutions, including $5.1bn committed to private real estate funds. In terms of firm type, pension funds form the highest proportion (35%) of institutional investors in Japan, followed by insurance companies (16%), banks (14%) and asset managers (14%).
The Far East region garners the strongest interest (64%) among Japan-based private real estate investors. This could be attributed to the familiarity and domestic bias frequently demonstrated by investors. Forty-three percent of institutions located in Japan have a global preference, with the same proportion expressing an interest in North America. Europe is favoured by 36% of the private fund investor pool, while 31% are inclined towards opportunities in Asia.
The fact that private sector pension funds and insurance companies – firms that require stable income revenues – make up almost half of the investor pool may explain why the core strategy (74%) is the preferred fund type among institutional investors based in Japan. The presence of quality core assets in Japan, such as commercial properties, could also provide an explanation as to why core real estate funds are targeted by Japan-based LPs. Debt (45%), opportunistic (42%), value added (39%) and core-plus (37%) funds make up the remaining strategies preferred by Japan-based firms.
Official government data published this month revealed that the third largest economy in the world has just slipped into a recession after consecutive quarters of contraction, but whether this will affect Japan-based investors’ continual hunt for higher yield investments remains to be seen.