TOKYO, Sep 1 (Reuters): A new wave of big private equity players including KKR & Co is moving in on Japan's property market, drawn by attractive yield spreads with Japan's low interest rates and by prospective deals with companies that hold under-utilised assets.
Property investors worldwide are flush with cash and emboldened by stablising vacancy rates and rents after disruption by the pandemic, and some are setting their sights on the buildings, real estate subsidiaries and other property assets cluttering up Japanese companies' balance sheets.
"The Japanese market presents a huge opportunity," David Cheong, managing director at KKR, told Reuters. He noted wide scope to help corporations bolster their property-related operations and boost returns on property assets.
KKR's Japan investments have for years focused on acquiring companies, but in March it signalled a move into the local property market when it announced a 230 billion yen ($1.66 billion) acquisition of a Japanese real estate asset manager.
Now it has four people dedicated to Japanese real estate and is hiring more to hunt for deals in hotels, office buildings and multi-family apartment buildings, Cheong said.
Hong Kong-based Baring Private Equity Asia has also positioned Japan as a top priority, said Atsushi Takeiri, head of Japan real estate. He joined the firm last November from Fortress Investment Group, which along with Blackstone Inc has already built a thriving property investment business in Japan.
A key attraction for new private equity entrants is the standout returns Tokyo's office market has delivered so far this year.
Tokyo's yield spread for high-end office towers in prime locations, measured as the gap between the cap rate - or average return - and benchmark borrowing rates, was 2.063 per cent in the first quarter, higher than the spreads in New York, London, or any other major Asian city, according to CBRE, a property research firm and broker.
This reflects Japan's persistently low interest rates, as the Bank of Japan sticks with its ultra-easy money policy while other central banks raise rates to fight inflation.
Tokyo's cap rate, on the other hand, is expected to ease to 2.3 per cent by the end of this year from 2.4 per cent in 2021, according to data from Jones Lang Lasalle (JLL), a brokerage and research firm.
In 2013, when former premier Shinzo Abe's aggressive "Abenomics" stimulus policy sparked a turnaround in Japan's property market from the great financial crisis and a recovery in foreign investment, the cap rate was 3.7 per cent.
