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Super low revenue in Japanese market, and BoJ’s negative interest rate policy pressure Japan’s regional bank to shift its portfolios allocation more to international alternative assets, including core real estate.

Monday, 22nd February 2016

There are 105 regional banks in Japan (64 first-tier regional banks and 41 second-tier regional banks), and total AUM of all first-tier regional banks are JPY 292 trillion (USD 2.4 trillion) and total AUM of all second-tier regional banks are JPY 72 trillion JPY (USD 600 billion) by the end of November 2015. The sum of all the regional banks AUM is close to 3 times the GPIF, the world’s largest public pension fund.

Japan’s regional banks have been struggling with Japan’s declining population, limited demand for loans in regional markets, and low return from traditional assets. However, announcement of the Bank of Japan (BoJ) on Jan. 28, 2016, adopting negative interest rates have made theses struggles even worse this year. Now, regional banks are asked to “pay the interests” to their reserve deposit required by BoJ, and super low return from Japanese government bond is fatal for regional banks. For instance, by looking at first-tier regional banks’ asset allocation, excluding major assets such as direct loans and deposits, more than 73% of their securitised assets are domestic public and corporate bonds.

New directions to alternative and real estate assets

Comparing with Japanese major financial institutions, regional banks tend to have smaller number of human resources, and passive investment management. Therefore, regional banks as a whole tend to move to same directions as one big wave, and it have a significant economic influence on institutional market.

For a while, regional banks have been looking for alternative asset as a way to gain stable income – to offset low interest rates of Japanese government bond. Today, there is more pressure from lower interest rates.

Demand for core real estates from regional banks have already appeared significantly thorough investment to Japanese private REIT (core open-end fund). It is estimated that around 30% of capital in Japanese private REIT market is from Japanese regional banks.

Estimated market size of Japan’s private REIT is at least 15 billion USD. After the debut of Japanese private REIT in 2010, Japan’s regional banks are soon be attracted to this 4% income producing asset with a long duration – while, interest rate of 10-year Japanese government bond had been around 1%.

Considering today’s rate at minus 0.005%, Feb.22. 2016., while there are more demands for Japanese private REIT, still limited investment opportunities for domestic market.

Moreover, regional banks grew its consideration for investing in overseas growth market and alternative assets.

For instance, Chiba Bank and Shizuoka Bank started overseas PE investment program with DBJ (Development Bank of Japan) last year. Each banks will invest maximum JPY 10 billion, and this was a new approach by Japanese regional banks to overseas PE. That is, to achieve stable long-term income in overseas markets, while revenue from domestic markets decreases because of super low-interest rates and Japan’s declining population. Shizuoka Bank explained this aim as “to achieve returns without influence from domestic economy and interest rate.”

Next target will be overseas infrastructure and real estate

Recently at a major real estate conference for Japanese institutional investors, Mr.Araki Noboru from the Gunma Bank responded to Yukihiko Ito (Asterisk) at a panel discussion that “regional banks are now having strong demand for long-term, income driven, and real asset. Overseas infrastructure and real estate asset backed with long & stable income strategy, and secured contracts are exactly what regional banks want to invest to.”

 

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For further details about this newsletter and our services, please contact: Yukihiko Ito (yuki@asteriskrealty.jp) / Yokaze (yokaze@asteriskrealty.jp)

 

About Asterisk Realty & Placement Agency

Asterisk is a private fund placement agency for global alternative in Japan. Through our unique and extensive network of Japanese investors, we support global fund managers in accessing Japanese and Asian institutional investors (pensions, financial institutions, real estate developers, other business companies, etc.).

We provide access and strategies for overseas fund managers to bridge the gap between them and Japanese investors.

 

Asterisk Inc.,

3-29 Kioicho Gluckheim Suite 2003 , Chiyoda-ku , Tokyo , Japan

Telephone: 03-3263-9909

Email : info@japanplacementagent.com

Website : https://japanplacementagent.com/en/

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Real Estate License / Governor of Tokyo (2) No.89094

 

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