Global pandemic will potentially trigger new trends in the field of cross-border investments among Japanese real estate investors and markets
Reinstatement of Core Investments, especially for Japanese overseas investments
Emergence of Opportunistic Investments in Japan’s Travel & Hospitality Sectors
Monday, April 6th, 2020
With the global public health emergency getting serious globally over the past few weeks, The global stock and bond markets continued to tumble over the past few weeks, US, Europe, and Asia stock markets all showed high volatility and uncertainty.
Japan’s largest pension investor GPIF has a large percentage allocation to global stock markets. As the public concerns on health continue to increase, the concerns of GPIF’s fund performance is emerging. Public consensus to request GPIF to have less volatile asset allocation would increase. With the new fiscal year starts in Japan in April, Japanese companies will have new investment plans and asset allocation, it is expected that GPIF and many other major Japanese investors will consider rebalancing their portfolio and potentially increase their allocation to alternative assets with less volatility and more long-term stable income, such as real assets.
US Fed has announced a new round of emergency interest rate cut following its previous precautious rate cut within two weeks’ time in the middle of March, cutting its interest rate from 1.25% to the lowest possible 0-0.25% rate range, first time after 11 years following the 2008 crisis. As the interest rate moves to a historical low point, it will ease the burden of hedging cost of outbound investments for Japanese investors. Over the past few years, many leading Japanese investors have studied the US markets and investment opportunities, but slowed down due to increasing hedging costs; the unexpected market change may become a trigger for them to reactivate US and global investments.
Under such challenging timing and market uncertainty, factors including stability of income stream and asset class diversification are gaining more weight in investors’ consideration for future investments.
The portfolios of Japanese institutional investors, which are highly relying on traditional assets – stock and bonds, have been impacted and will potentially be exposed to more market risks due to the current high volatility of the global stock markets. The increasing VIX (volatility index) in the equity market could have a big impact on the performance and AUM of the Japanese pension Whale, GPIF, whose AUM has a total allocation of approximately 50% to the stock markets domestically and globally.
Alternative assets, including real estate investments which are traditionally considered as relatively illiquid but stable value investments, will look more attractive to investors, particularly to Japanese investors who have a more conservative risk profile due to historical investment experience. Core Strategies, which offer stable risk-adjusted returns with the characteristics of low volatility with stable value and stable long-term income, are expected to be more attractive to Japanese institutional investors. In addition, currently, lowest possible US interest rate could further encourage Japanese investors investing overseas, particularly to the core strategies in gateway cities which could demonstrate resilience and stability and as a way of diversification to mitigate risk in their traditional allocation in the stock and bond markets. Among GPIF`s JPY 170 Trillion AUM, GPIF`s asset allocation of alternative asset was just at 0.49% as of the end of 2019, although its target (maximum) is 5%, there is still significant space for additional investments.
In the coming April, it is the beginning of Japan’s new fiscal year, Japanese investors will also make new investment strategy plans and asset allocation. It is expected that many Japanese investors will reassess the risk of their portfolios and make adjustments on their portfolio allocation to reduce the risk exposure caused by global stock markets. Many Japanese investors currently still have a much lower allocation in alternative assets and may consider increasing the weight to secure more long term stable income from alternative investments, such as core real estate assets. This trend may increase and grow in the next few years.
The global market turmoil will potentially open new windows for opportunistic investments. Currently in Japan real estate market, tourism and hospitality are the sectors being impacted the most, there will potentially opportunistic acquisition opportunities. In the hospitality sector, average hotel occupancy rates are extremely low during the usually crowded winter season, some hotel assets which do not have a strong financial backup may trigger covenants from lenders, and may be forced for sale, such as assets like small Japanese ryokans. In particular, snow resort assets, which are strongly impacted due to historical low snow volume and current increasing tourism suspensions in this snow season. Some hotel companies and hotel REITs may also suffer from cashflow and performance challenges.
Hotel investors who are looking for more long-term investment opportunities could potentially have access to some opportunistic assets through the potential sector restructuring/consolidation and distressed sales during the downturn and recovery stages of the market cycles.
integrated resort) development opportunities. Particularly in Osaka, with the upcoming World Expo in 2020, government potential support
With the current global public health emergency and uncertainty in the global economies and equity markets, and Tokyo Olympics being postponed to 2021, Japan’s target on inbound tourism would be largely impacted in 2020, due to significant decrease in inbound Chinese tourism and limited global and domestic travel activities, the outlook and the original target of 2020 on inbound tourism and potential boost from Olympics would also be directly and indirectly impacted.
In 2018, Japan’s travel and tourism sectors contributed over 40 Trillion JPY to the country’s economy, representing 7.4% of GDP in Japan. The sector supported 4.6 million jobs or 6.9% of total employment. Furthermore, a bigger percentage of GDP is directly or indirectly related to tourism sectors and inbound tourism spending, which is crucial to keep the economic growth. The sector is an important and key portion of Japan’s economy. Japanese government is now taking further actions to protect the economy and support the businesses and tourism & hospitality sectors.
It is expected that more robust economic stimulus actions and government support actions would be taken to revitalize the tourism sectors to revise and improve on the target of 2021 and future growth. The government may potentially be more proactive on Expo preparation in Osaka, and other major world conferences and events in the coming years. Potential stimulus may also extend to the previously on-going IR developments, the IR regulations and policies may also be potentially revised, with possibilities of potentially loosened restrictions or larger scales of IR developments may be allowed to happen in a few more target locations.
Overall, it is a challenging timing for the markets and investors. With increasing investment risks across many sectors, alternative investments including infrastructure, and real estate – particularly core assets with stable long-term cash flow showed resilience and stability during the market uncertainty and volatility. Asterisk would like to continue to support the investors and fund managers across the globe, connect the bridges between global investors/fund managers and Japanese investors, and support the Japanese and global investors to identify alternative investments and assets to diversify their portfolio under the challenging market condition with higher volatility.
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