Japan's trading houses launch US property funds
Strategy targeting yield-starved investors allows unloading of assets
TOKYO -- Japan's general trading companies are establishing real estate funds in the U.S. to tap demand from Japanese institutional investors and raise money for new property development.
Sumitomo Corp. last month started managing a roughly 35 billion yen ($316 million) real estate fund whose assets include two U.S. office buildings that the company had owned, one in the state of Illinois and another in Florida. The fund, which has received investment from Japanese financial institutions and other businesses, projects annual returns averaging over 10% in the first five years.
The Japanese trading company has handled office building development in the U.S. since the 1980s. The operation covers 20 large American cities and knows how to attract high-quality tenants and secure stable, long-term leases.
Sumitomo plans to launch real estate funds, each with an asset size of 30 billion yen to 40 billion yen, at a pace of around one per year by selling them properties that the company developed. The trading house looks to accentuate its expertise ranging from property development to management, in order to attract a variety of investors including pension funds. The company aims to surpass 100 billion yen in total asset size for its real estate management funds in three years.
Quest for better return
Japanese trading houses are forming real estate investment funds as part of efforts to boost asset efficiency. Sumitomo, for instance, set its sights on raising 600 billion yen in the three years through March 2018 by selling its assets. In the real estate sector, the company aims to unload some holdings onto its newly created funds and use the proceeds to develop new properties.
Compatriot Mitsubishi Corp. also debuted a property fund worth the equivalent of roughly 27.5 billion yen in the U.S. in April, set to acquire some of the holdings that Mitsubishi group companies are developing with local partners. The fund is expected to hold those properties -- including rental residential units and distribution facilities -- for four years, generating profits by selling them as their construction completes. Mitsubishi plans to continue creating similar funds, looking to utilize its property development know-how in the U.S.
Mitsui & Co. in February took a stake in CIM Group, investing some 60 billion yen. The major U.S. property management company has solicited investment for its funds mainly from U.S. institutional sources, but the Japanese partner plans to start providing detailed information and selling shares in the funds in Japan as soon as this year.
Side effect of near-zero interest
Struggling to generate returns amid ultralow interest rates, Japanese institutional investors are increasing their exposure to alternative products. Their property investments have focused on domestic holdings so far, but trading houses are gearing up to expand their overseas real estate investment offerings, anticipating demand growth for them.
Such funds also create vessels to which trading houses can sell their existing real estate holdings. As some experts warn of an overheating U.S. real estate market, unloading properties to the funds will help trading houses reduce their downside risks as well.