MIPIM Japan: Where Asian capital is flowing

At the real estate event in Osaka, investors provided insights into where capital is heading, and why.

At MIPIM Japan 2016, Asian investors came together to discuss the geographic direction of investment. They predicted a continued increase in outbound investment from Asia Pacific and also a shift to cross-border investment within the region despite slowing transaction volumes in the face of an aggressive real estate pricing environment. They also predicted an increase in outbound investment from Japanese investors, which have traditionally been conservative in their approach.

According to a statistic shown in a presentation, Asian investors are the biggest net exporters of domestic capital globally, having placed more and more capital outside of their home region into the US or EMEA markets over the last decade. There was almost $80 billion of outbound investment from Asia Pacific last year and London was the top destination, with 22 percent of investment from Asia.

Among Asian countries, Singapore is one of the most active with GIC placing close to $18 billion outside of its home country. Some insurance companies from China and Hong Kong have also been pushing into international markets with a particular focus on the US over the last 18 months.

“Investors are very focused on core. If you look at the fixed income market, with the rate going negative, and people still putting money into negative bonds, it tells you precisely what the mentality of these investors is,” said Frank Khoo, global head of Asia at AXA Investment Managers – Real Assets.

“They are just focusing on protecting capital and not worried about return…investments are really risk-off,” he added.

“On the core side, the definition of core side is changing. You can see an increasing number of traditional core investors going into gateway cities but not necessarily core locations,” Khoo pointed out.

“I see 2017 as a year for Asian capital to go more intra-Asia rather than outer-Asia,” said Terence Tang, managing director, capital markets and investment services, at Colliers International Asia.

Indeed, cross-border investment across Asia Pacific is actually at its highest level in the last decade with investors getting more comfortable about investing in their neighbouring countries. In the first quarter of 2016, Japanese offices are the most traded in Asia Pacific followed by offices in Hong Kong, Singapore, China and South Korea.

Japan

“In Japan, you are getting paid one percent domestically for 65 percent LTV loans. This is crazy. There is a bigger opportunity overseas. Even in the US, you get almost 50 percent more than what we get here,” said Ari Druker, head of global debt, hospitality finance department at Tokyo Star Bank.

“In the next five years you will definitely see a big increase in Japan’s outbound capital, you will see so many insurance companies and pension funds that are coming out to the market, such as Japan Post,” he added.

Druker went on to explain that the older generation of Japanese pension fund and corporate decision-makers are being replaced by the younger generation who are not as cautious.

Future opportunities

The presentation cited earlier also stated that Japanese REITS, which have traditionally been the biggest buyer in the market, have started to rein back their activities over the last six months. This is because pricing today is too aggressive for them to acquire certain properties.

“You either take some country risk or you go into asset classes like hotels and senior housing that are not very mainstream today. If you have the patience, maybe you will catch the opportunities,” said Khoo.

“Emerging markets such as Indonesia and Malaysia can satisfy the desire for higher return for those Japanese investors. It is hard to find enough return in mature markets like the US and Europe,” Tang maintained.

“We are looking at built-core. You have the ability to occupy your own space, rather than buying core. That’s one thing that we are doing,” Khoo added.