Aberdeen Standard Investments (ASI) has teamed up with Sumitomo Mitsui Trust Bank (SMTB) to create a real estate joint venture that will seek hundreds of millions of dollars from asset owners to target Japanese multi-family residential buildings, AsianInvestor can reveal.

The JV, which will be officially announced today (June 4) aims to take advantage of the appetite of international institutional investors for real estate by offering them an approach that eschews traditional core property investing in Japan for a riskier but potentially more rewarding value-add approach.

Kang Puay-Ju, ASI’s global head of multi-manager real estate, argued that the JV intended to stand out from existing Japanese real estate funds due to both its focus and the strength of the local partner.

“A lot of capital chasing multi-family [investments] is focused on core [property, or commercial buildings in the most expensive areas of cities]. They don’t want to take the market risk [of a value-add strategy],” she told AsianInvestor. “Secondly, Japan is a very relationship-driven market and for somebody to form a relationship with SMTB offers an edge that only they can have.”

Kang Puay-Ju,
Aberdeen Standard

The creation of the JV marks the latest step in ASI’s ambition to build its capabilities in Asian real estate, particularly after a tough few years in which its traditional emerging market funds have struggled. The 2017 merger between Aberdeen Asset Management and Standard Life gave the combined entity an opportunity to build a robust index business, and ensured it had a $44 billion Europe-focused property division.

Kang, who has been with Aberdeen since 2006, was tasked last year to create an Asia Pacific real estate team. She made ground in February when ASI acquired Asian specialist real estate investor Orion Partners, and this JV marks its next step to build out its regional property capabilities.

DEMOGRAPHIC DIVIDENDS

ASI and SMTB have big ambitions for the JV. Kang said both partners have put tens of millions of dollars of capital into the JV to date, and they hope to persuade international asset owners to supply hundreds of millions more when they eventually launch a closed-ended fund – ideally before the end of the year. 

At first glance that seems a big ask of a strategy focused on Japan’s real estate market. While the country has a very large and well established property market and a huge economy, its population is both aging and declining, while local interest rates are virtually at zero.

But the country’s demographic changes have caused a hollowing out of Japan’s countryside and led to immense urbanisation, causing great rental demand in cities such as Tokyo and Osaka. In addition, Japan’s property market offers much less overall investment and default risk than emerging markets.

Multi-family real estate has gained in appeal among some institutional investors as the valuation of traditional core commercial property has soared. But while the real estate investment strategy is relatively well established in Europe, in Asia it is still gaining traction. 

However, other asset owners and asset managers have spotted the opportunity in Japan. Dutch pension fund APG combined with UBS Asset Management in December for a $175 million fund that looks in Japan's rental market.  

But Kang said the ASI/SMTB's value-added approach was relatively unique for Japan. To maximise potential investment returns the JV intends to use closed-end fund strategies to buy so-called multi-family properties, or buildings with rental apartments. These will particularly focus on older buildings with fixer-upper potential.

She argued that there the rental and yield gap is increasing between new and older residential buildings, so the JV could quickly increase its rental yield by buying older buildings for a cheaper amount that it then refurbished and improved. Then, in two to four years it could sell the property for a far higher valuation and reinvest into other buildings.

This is a relatively risky investment approach, and it typically involves leverage too. However, Kang estimated that the strategy could offer investors a return in the low double-digits. The JV is currently still in the research stages but is likely to seek to launch a fund before the end of the year. She said it’s possible that it would be open to co-investments from asset owners, once it’s ready.

LATE CYCLE STRATEGY

Another argument for the investment strategy, at least according to Kang, is that a value-add multi-family strategy better fits a late-stage economic cycle.

“Core is tricky to navigate now as the pricing so steep and given we might be hitting a peak in the market, I think investors will be curious how to invest in this tricky phase,” she said.  

Kang argued that the multi-family investment approach was more flexible than typical core because it aimed to acquire, improve and then sell assets over two to four years apiece. This means it would be less exposed to individual building price fluctuations over long periods of time, and could adjust if there were large property valuation corrections.

The JV is set to be staffed by existing professionals in ASI (Kang has built a team of around 20 personnel) and SMTB’s real estate investment division. The JV also intends to incorporate environmental, social and governance principles when it starts investing, to ensure the buildings it acquires are environmentally sound – and thus appealing to ESG-conscious institutional investors.

Investors interested to know more about the plans of Japan's asset owners can learn more at AsianInvestor's 8th Institutional Investment Forum Japan, to be held on June 18 in Tokyo. Please click here for more details.