Japanese institutional investors turning their eyes toward outbound investment

The GPIF (Government Pension Investment Fund, an independent administrative agency for pension funds management) is said to be one of the world’s largest institutional investors. It has launched a policy to invest as much as 5% of its approximately 156 trillion yen in investment assets (as of the end of 2017) into alternative assets—such as infrastructure projects, private equity (unlisted stock), and real estate. Japanese institutional investors are also following this trend. Until now, their investment policies were focused around low-risk bonds. However, with the current investment speed, a sense of impending crisis has surfaced, with worries that the pension system will fall apart in the future. As such, the GPIF has redirected their attention and started to invest more in risky assets with higher returns (alternative assets). In particular, the spotlights are centered on investment in international real estate, which may generate high returns. Besides the GPIF, other Japanese institutional investors, including Japan Post Bank Co., Ltd. and several major life insurance companies, have launched outbound investment.

According to a survey by JLL, outbound investment in FY 2017 amounted to 3.4 billion US dollars, a 70% increase from the previous year. This resulted from institutional investors such as pension funds and insurance companies seeking for opportunities to invest in international real estate, and the trend is still continuing. However, investing in real estate is dependent on local factors, and tests one’s insights more than bonds and stocks do. Japanese funds, in particular, have a bitter experience from the bubble economy, when many proactively purchased international real estate, but then faced forced withdrawal when the bubble burst. This is the biggest reason why public pension funds, which are widely concerned with public interest, have focused on low-risk bonds when investing their assets.

With the taste of failed international real estate investment still lingering on the nation's tongue, large-scale investments in Japan are not being made as much as before, but, on the other hand, the situation is still promising in overseas real estate markets, and large-scale investments are being made frequently as well. In the current climate, Japanese institutional investors cannot help but turn their attention to real estate overseas, in which they can invest a large amount at one time and expect higher returns than they could by investing in bonds and shares. Under these circumstances, the JLL Japan Capital Market Department has set out to strengthen their corporate finance services in order to satisfy the market's increasing taste for outbound investment. JLL, which has a network that extends across real estate markets worldwide, will commit its efforts to providing support regarding international real estate investment. At the helm of these efforts is Kenichi Negishi, who took office as the deputy manager of the Capital Market Department on June 1, 2018.

Assisting Japanese institutional investors in international real estate investment

Corporate finance refers to financing that takes the credit rating of a company that requires financing and uses that rating as collateral, and targets GK, TMK, fund companies, and other real estate entities as the direct recipient of funds. JLL mainly deals with arranging debts and equities, and researching credit ratings, including the value of real estate owned by real estate funds. The Japanese institutional investors mentioned above often invest indirectly in real estate through fund structures, and must evaluate which fund suits their requirements in investment. In regard to these practices, JLL also diligently checks the value and profitability of real estate included in a portfolio, as fund evaluation comes down to portfolios.

“There is infinite variation in investment policies a client might have, and it is important to understand the circumstances behind them, such as what kind of returns they're looking for, before introducing them to properties that are suited for investment,” notes Negishi. “Real estate is an investment product that is dependent on local factors, and you have to understand the investor’s conditions of investment and have a savvy partner with deep knowledge of local market conditions, of advantages of the real estate in question, of the competitiveness of local agents, and so on.”

For Japanese institutional investors, investment into bonds, shares, and real estate in Japan has reached its peak, and it is said that in order to see returns on investment, seeking alternative investments is imperative. In particular, overseas real estate is seen as a “ray of hope,” as many institutional investors find themselves running into difficult fund management. “Having deep knowledge of local information is indispensable when you invest in real estate managed by local agencies,” Negishi continues. “On top of having a worldwide network, JLL is well-versed in local real estate and situations surrounding investors. Why not make use of our knowledge?”