The shocking results of Brexit opened the door to the uncertain future. How will the UK leaving the EU affect Japanese real estate and alternative investments to the UK and global real estate? With so much of the debate around the possible impact of Brexit, the consequences of Brexit to Japanese investors may differ from other international investors. We expect that Brexit may accelerate Japanese investors overseas real estate investment rather than slowing down.
Thursday, 30th June 2016
Facts of Japanese investors
- Stronger JPY is advantage and pressures for Japanese investors to invest overseas.
- No negative legacy asset in UK: Japanese investors haven’t had large investment exposure to UK yet.
- Japan’s negative interest rate policy and the global “risk-off money” is expected to inflow into Japanese real estate, which will compress yield in a domestic market.
- Overseas real estate investments have recently become a long-term trend, which will continue to grow slowly and powerfully in a long-run.
- Japanese investors are targeting mature markets: major cities/markets in US, UK, EU, and AUS.
Stronger JPY and inflow of global risk-off money
On June 24th 2016, the outcome of the referendum resulted Japanese Yen appreciated to 133 for 1 GBP. The currency had dropped drastically (over 30%) in a year – which was 195 JPY for 1 GBP. In other words, this stronger JPY indicates Japan’s slowdown economy and lower investment profitability in domestic market continues to suffer Japanese financial institutions more.This can be a strong push for Japanese investors to invest in overseas markets.
Global investors’ view of Japanese real estate market is suitable for risk-off market after Brexit. Therefore, it is expected that more international capital will come into Japanese real estate market including listed REIT markets. This will lead to a further increase in property value and yield compression.
Japan’s negative interest rate policy
Furthermore, the adaption of the negative interest rate policy is another strong pressure for Japanese investors. Japanese financial institutions, including insurance companies and regional banks, are suffering from very low profitability because of the negative interest rate policy. This policy has been one of the main reasons why they started looking overseas real estate for higher income after starting investment to domestic core real estate. The implications of negative interest rates and inflow of global risk-off money fuel Japanese real estate markets to boom and further yield compression.
The triple wave – the strongest pressure ever
Strong currency, inflow of global risk-off money and a negative interest policy are 3 waves that push Japanese investors to invest in overseas real estate, who are risk averse but strong preference with long term income.
UK and US were considered to be the first destinations for Japanese investors targeting mature markets
Most of Japanese financial institutions, who were just planning to start diversified overseas real estate investments, were assuming ⅓ to ¼ of initial oversea portfolios were to the UK. Will the Brexit result affects those Japanese financial institutions to go in different directions and not to include UK?
So what is a negative impact on Japanese investors?
Uncertainty remains a concern for both UK and EU markets. In UK, re-emerging Scotland’s exit from UK may make Japanese investors hesitate to make an investment in uncertain time. On the other hand, EU markets will be easier for Japanese investors to entre UK/EU real estate markets in the short-term.
Overall, it is impossible for them to avoid both UK and EU for a while because most of their investments will be diversified, and these markets are the world’s largest market. So, the main consideration for Japanese investors is: when and where to start investment.
Where to start? US, EU and Australia… UK?
Surely, Brexit is casting uncertainty to Japanese investors. Outbound capital may targets US and Australia for a while. The Brexit result cleared Japanese investors’ direction for UK and EU investment, as they will be investing separately focusing on EU for now. It seems that their investment will flow more to EU, US, and Australia for short-term.
Uncertain systemic risk of “EU exits” has been concerned, yet, we assume Scotland’s signal to stay in EU will deliver credence, even if it’s a vice-versa for UK.
Japanese investors tend to prefer to invest in core assets in gateway cities. Considering Japanese and Asian standard of city size, only several European cities can attract Japanese investors. Although allocation size should be reconsidered, London should stay in the top of the list even after Brexit. The UK’s exit may sharpen their preference to see European markets not by the union level or country level. Perhaps, by the city and the sector levels.
When to start investment?
Most of Japanese investors, who are new to the global real estate markets, weren’t affected by Brexit as they didn’t have much exposures in UK. “Opportunistic capital driven strategy” is not an attractive word for Japanese investors who are seeking long term income outside Japan. Yet, “opportunity to buy a long term income generating asset at reasonable price” is an ideal strategy for Japanese investors and they are facing that situation without negative legacy assets. This fact may lead Japanese investors to make different approaches and speed for UK, comparing with other investors who have already invested in UK.
Short-term
Higher possibilities of Japanese investors shifting its investment direction to other countries, such as US and Australia, and may postpone its investment to UK. Soon, EU will be a target for Japanese investors depending on the rest of EU members.
Medium-term & Long-term
It is essential for Japanese investors to diversify their investment overseas based on market share and index investing. Once they are clear with the global economic path of individual countries, it is likely that London would make the investment allocation much more than the market share. Considering EU, individual cities/countries will be evaluated as diversified investment model.
Japanese investors are craving for a leader and a navigator for global real estate
It is clear that Japanese investors need to invest in overseas immediately, whether today’s market is uncertain or not after Brexit as there are more reasons to invest than to leave. However, realistically speaking, it seems that it is difficult for the most Japanese investors to have their own investment strategy for uncertain markets. For that reason, Japanese investors need market leaders that take a first action and to follow. The market leaders are: GPIF, Japan Post Group, and Major financial institutions. Also, these market leaders need a navigator as well for the global markets, which is a overseas fund manager or a co-investor.
For fund managers, they will be expected to show a clear and a rational navigation for Japanese investors.
How to navigate Japanese institutional investors?
Currently, there is a demand for long-term investments in a mature market with stable income from Japanese investors. Somehow, covenants and tenants’ credit will be the key factors rather than opportunistic factors.
Fund managers that put more effort to the risk assessment for Japanese investors’ view may gain more credence than the ones who explain returns and opportunities.
Tailored fund for Japanese investors may be interesting idea and universe of Japanese investors is potentially large enough for that consideration.
Conclusion
Can Japanese investors wait for 2 years or more? As mentioned earlier, the reason that Japanese investors who are generally very conservative starting overseas real estate is internal pressures pushing them for outbound capital deployment . In other words, Japanese investors are pushed out from a marginal point. These pressure will be stronger due to strong JPY, negative interest rate, less profitability in dementia market, etc.
In a short term, we expect Japanese capital will rush to US and Australian markets – where markets are matured enough for new Japanese investors’ standard. But the question is, does these market have enough room for new capitals of Japanese investors? If not, it is impossible to pass UK and EU markets where the biggest matured real estate market. Japanese investors need to invest in overseas real estate right now and cannot stay “conservative” for a long time.
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For further details about this newsletter and our services, please contact: Yukihiko Ito (yuki@asteriskrealty.jp) / Yokaze (yokaze@asteriskrealty.jp)
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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.
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