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Property

Global funds binge on Japanese real estate

Rather than single properties, buyers target companies with attractive portfolios

"Easy" financing is attracting foreign real estate funds to Japan.   © Reuters

TOKYO -- International property funds are pouring money into Japan's real estate, racking up investment values not seen in a decade.

Figures from the Japan Real Estate Institute show that the value of Japanese property acquisitions by foreign investors came to about 1.3 trillion yen ($11.4 billion) in 2017, the highest amount since a record-setting 2007.

"Favorable financing circumstances are luring foreign investors," said Koji Naito, director of Japan capital markets research at JLL in Tokyo.

In some cases, funds are going after companies or real estate investment trusts with attractive property portfolios, rather than hunting for properties themselves.

"Real estate funds are more likely to think that buying companies that own properties will save them time and trouble, versus buying individual blue-chip properties," said Kaoru Yoshino of the Japan Real Estate Institute.

In 2017, U.S. private equity group Blackstone Group bought Australia-listed and Singapore-listed REITs for roughly 100 billion yen each. Both REITs had invested in choice properties in Japan. Croesus Shinsaibashi, a commercial building ranked as this year's most valuable property in the Osaka area, is owned by the Singapore-listed trust.

Croesus Shinsaibashi was ranked Osaka's most valuable property this year. It is owned by a Singapore-listed REIT acquired by U.S. private equity firm Blackstone Group.

Japanese companies sense they are in the crosshairs and are beginning to play defense by selling properties or buying their own investment units.

In October, Nippon Telegraph and Telephone and Orix announced they would launch takeover bids to make their listed real estate units wholly owned subsidiaries. Both companies said they wanted to strengthen their real estate businesses, but Junichi Tazawa of SMBC Nikko Securities said the spate of acquisitions might have prompted the two companies to act.

The action in Japan is part of a global boom in which real estate acquisitions reached a record $530.4 billion in 2017, up 47% on the year, according to research company Refinitiv. There was a correction in this year's January-October period, with a 14% on-year decline, but the market remains brisk.

Investment money set aside by real estate funds around the world hit $289 billion as of October, according to research company Preqin. The active investment has pushed up prices of office buildings in major cities by 1.5 to 2 times, from 2010.

Japanese banks are fueling the flurry. As of the end of March, the banks' outstanding loans to real estate funds stood at nearly 12 trillion yen, up 40% from a decade earlier.

A survey on private real estate funds by Sumitomo Mitsui Trust Research Institute in July found that the average loan-to-value ratio of funds to be launched within a year was 65.3%, up more than 7 percentage points from a year ago. A total of 55% of respondents said debt financing circumstances were either "easy" or "very easy."

"Apartment loans are tightening, but loans to real estate companies and funds are increasing," said an executive of a Japanese real estate company. Some market experts said that while a scandal over Suruga Bank's inappropriate lending has prompted tighter screening of retail investors, screening for loans to "professional investors" has been relaxed.

Aozora Bank is bucking the trend and imposing more rigorous screenings, believing the market is overheated. Although the bank focuses on real estate loans, its outstanding loan tally has barely budged for two years.

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