Continued Asian demand…Japanese Capital?

In the same week that Japan’s biggest bank, Mitsubishi UFJ Financial, announced it was creating nearly 200 new investment banking jobs in London in the hope of boosting income outside of Japan, Westfield revealed its plans to open Europe’s largest Japanese food hall at its West London shopping centre. Complete with a sake bar, noodle bar and traditional Japanese bakery, the food hall will form part of Westfield’s £600 million expansion and enhanced F&B offer. Japan’s influence on the UK, whether it be culturally or financially, cannot be ignored and Japanese capital is set to become a global player.

According to our latest research, Japanese outbound real estate investment rose by 23% year on year to US$1.3 billion in H1 2017. While the majority of this targeted the Americas, 20% was allocated to EMEA, a figure which is only expected to rise as institutional investors look to diversify. Having visited Tokyo recently, there is a measured and strategic focus on outbound investment, but it is yet to be fully realised.

Capital held by pension funds, insurance companies and sovereign wealth funds globally, for investment in all assets, has grown strongly over the last decade and now stands at $94 trillion. We estimate that US$8.5 trillion of this is targeting real estate. This pool of institutional equity is continuing to grow, driven by the growth of the middle class. This group is forecast to hit 3.84 billion people by 2020, a massive 88% of which will be living in Asia. Moreover, the global average allocation to real estate is forecast to grow from 9% in 2017 to 10.1% in 2020, fuelled by an increasing preference for real estate by Asian institutions.

Allocations to real estate by Asian institutions are grossly underweight when compared with the global average. Asian capital has typically focused on its domestic market but investors are now starting to look at the global markets to fix their under allocation. Whilst we have seen a steady flow of capital from Hong Kong, China and Singapore over the last 18 months, the Japanese still have significant capital to deploy. There is currently close to $1.4 trillion dollars sitting in Japanese pension funds, with no current allocation to global real estate. Due to a negative interest rate, limited, low yielding stock locally, and the memories of the asset price collapse 20 years ago now weakening, we are starting to see an increased appetite for offshore real estate.

In addition to direct asset allocation, we expect that much of this outbound real estate investment will be allocated indirectly, through investment funds and other vehicles. As such, indirect investment from Japan could grow to more than US$15 billion in the next few years and we are seeing more Japanese real estate and general trading companies forming real estate funds to target overseas investment.

The UK and London remain an obvious target for Japanese capital to deploy. Increasingly attractive relative value compared to other European markets, along with healthy medium term economic fundamentals – despite short-term political uncertainty – continue to make it an attractive destination for overseas capital. It remains ones of the largest and most liquid real estate markets in the world, an important consideration, particularly for Asian investors, and a credential that provides a significant competitive advantage on a global scale. The historic trend of partnering with best in class local operators is already evident with Japanese investors and we expect real momentum to develop around this theme in 2018.

As in many of the major global markets, Japanese investors face stiff competition for assets in London given the current strength of demand for commercial real estate. Given the strength of the drivers behind the appetite to invest, and the way in which London ticks so many boxes for major investors, we expect Japanese institutions to be more active over the coming years.

2018 certainly promises to be another fascinating year as more international sources of capital appear.

By Chris Brett, Head of International Capital Markets, CBRE.