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The asset-inflated boom of the 1980s saw Tokyo’s Imperial Palace valued as much as the entire state of California. But the monetary authorities pricked the economic bubble in the early 1990s and values plunged, with land prices not posting positive growth until 2007.
Japan’s gradual emergence from the “lost decade” has seen the return of global investors, and in the first half of 2007 the East Asian powerhouse displaced the United States as the favourite destination for Australian offshore property investment.
According to some of Australia’s leading investors in Japanese property, the outlook for the so-called sushi REITs (real estate investment trusts) remains upbeat despite the global property market downturn.
One of the first Australian investors in Japanese commercial property was Babcock & Brown. The investment bank’s Japanese property fund, Babcock & Brown Japan Property Trust, listed on the Australian stock market in 2005 and has grown market capitalisation to nearly $700 million, with interests in 48 Japanese properties across the retail, office and residential sectors.
“Babcock & Brown started investing in Japan in 1998, which was relatively early – the market was still in a down cycle,” managing director Eric Lucas says.
“The market was running counter-cyclical to the rest of the world, and given its underlying very sound fundamentals of high population density and a wealthy and stable economy, we thought it was an interesting market and it has proven to be.
“The Japan market has definitely been in an upswing over the last few years.”
While the global property market has been hit hard by the US sub-prime mortgage crisis, liquidity levels remain high in Japan for property finance, Mr Lucas says.
“It’s definitely less affected by issues in the debt securitisation market, which is what seems to have brought some local players unstuck recently,” he says, pointing to the smaller size of Japan’s securitisation market compared to other developed economies.
“A good example of this is on December 20, when we announced the acquisition of $200 million of property, 100 per cent debt funded. Most of that debt funding came from a Japanese commercial bank - on balance sheet lending - and this reflects the amount of liquidity available in Japan.”
But despite strong market fundamentals, the share prices of Australia’s sushi REITs have been under pressure recently. Concerns over foreign exchange hedging have impacted on the Japan funds, according to Galileo Japan Trust’s Peter Murphy.
“I’d argue the market isn’t pricing the sector rationally – the short term pricing isn’t reflecting the long term value of the property sector. The Japanese stocks have suffered from an institutional investor viewpoint because the Australian dollar has been extremely volatile against the yen over the last 12 months, and it’s spooked some people away,” he says.
“The reality is in terms of the balance sheet impact of that volatile movement of the spot rate, it hasn’t had a material impact on the underlying net tangible asset backing of [Galileo Japan Trust] due to the income and capital hedging we have in place.”
Tony Dixon, chief operating officer of New City Australia Funds Management Limited (a subsidiary of Tokyo-based real estate merchant banking and investment management firm, New City Corporation), sees the growth continuing due to opportunities in a number of sectors, backed by a positive yield spread.
“If we were categorising the opportunity, a lot of the opportunistic buyers would struggle to find what they consider great deals, but we still see great opportunities in core and core plus real estate across office, residential and the logistics sector as well,” he says.
“Even good quality real estate you can acquire on a net yield of from four to five per cent, and even with increases to margins you can still borrow for below 3 per cent, so it creates a positive yield spread and the only one currently available among all the mature real estate markets globally.”
Japan’s gradual emergence from the “lost decade” has seen the return of global investors, and in the first half of 2007 the East Asian powerhouse displaced the United States as the favourite destination for Australian offshore property investment.
According to some of Australia’s leading investors in Japanese property, the outlook for the so-called sushi REITs (real estate investment trusts) remains upbeat despite the global property market downturn.
One of the first Australian investors in Japanese commercial property was Babcock & Brown. The investment bank’s Japanese property fund, Babcock & Brown Japan Property Trust, listed on the Australian stock market in 2005 and has grown market capitalisation to nearly $700 million, with interests in 48 Japanese properties across the retail, office and residential sectors.
“Babcock & Brown started investing in Japan in 1998, which was relatively early – the market was still in a down cycle,” managing director Eric Lucas says.
“The market was running counter-cyclical to the rest of the world, and given its underlying very sound fundamentals of high population density and a wealthy and stable economy, we thought it was an interesting market and it has proven to be.
“The Japan market has definitely been in an upswing over the last few years.”
While the global property market has been hit hard by the US sub-prime mortgage crisis, liquidity levels remain high in Japan for property finance, Mr Lucas says.
“It’s definitely less affected by issues in the debt securitisation market, which is what seems to have brought some local players unstuck recently,” he says, pointing to the smaller size of Japan’s securitisation market compared to other developed economies.
“A good example of this is on December 20, when we announced the acquisition of $200 million of property, 100 per cent debt funded. Most of that debt funding came from a Japanese commercial bank - on balance sheet lending - and this reflects the amount of liquidity available in Japan.”
But despite strong market fundamentals, the share prices of Australia’s sushi REITs have been under pressure recently. Concerns over foreign exchange hedging have impacted on the Japan funds, according to Galileo Japan Trust’s Peter Murphy.
“I’d argue the market isn’t pricing the sector rationally – the short term pricing isn’t reflecting the long term value of the property sector. The Japanese stocks have suffered from an institutional investor viewpoint because the Australian dollar has been extremely volatile against the yen over the last 12 months, and it’s spooked some people away,” he says.
“The reality is in terms of the balance sheet impact of that volatile movement of the spot rate, it hasn’t had a material impact on the underlying net tangible asset backing of [Galileo Japan Trust] due to the income and capital hedging we have in place.”
Tony Dixon, chief operating officer of New City Australia Funds Management Limited (a subsidiary of Tokyo-based real estate merchant banking and investment management firm, New City Corporation), sees the growth continuing due to opportunities in a number of sectors, backed by a positive yield spread.
“If we were categorising the opportunity, a lot of the opportunistic buyers would struggle to find what they consider great deals, but we still see great opportunities in core and core plus real estate across office, residential and the logistics sector as well,” he says.
“Even good quality real estate you can acquire on a net yield of from four to five per cent, and even with increases to margins you can still borrow for below 3 per cent, so it creates a positive yield spread and the only one currently available among all the mature real estate markets globally.”
