A second multi-family investment platform in Japan could come naturally for Allianz Real Estate as soon as a year from now after the first is deployed, as it steps up partnerships with developers in addition to buying assets from funds.
Danny Phuan, head of acquisitions, Asia Pacific, and head of China, at Allianz Real Estate, the captive investment and asset manager for the Allianz Group, told AsianInvestor, the proposed new fund launch may follow the deployment of the remainder of a $2 billion closed investment platform, Allianz Real Estate Asia-Pacific (AREAP) Japan Multi-Family Fund I, which targets multi-family residential assets across Japan’s four major cities (Tokyo, Osaka, Nagoya, and Fukuoka) and which closed in December 2021.
AREAP is a joint venture between Allianz Real Estate, which also manages it, Canadian pension manager Ivanhoé Cambridge and a third, unnamed investor.
Since AREAP's first investment in March, when it acquired a portfolio of prime multi-family residential assets in Tokyo for approximately $90 million, it has completed several more deals between $30 million and $50 million, Phuan said, although he declined to give further details. He said AREAP was focusing on finding buildings with adequately sized living units close to subway stations and other amenities, given Japan’s traditionally small apartment sizes.
“In terms of deployment we are doing well; there have been lots of deals done that have not been announced,” he said.
Greg Hyland, head of capital markets, Asia Pacific at CBRE in Hong Kong, told AsianInvestor that low interest rates and a cheap currency mean that international investors are likely to continue to pour money into Japan, like they have over the last year.
“Japan is an attractive option for international investors with its low cost of finance and positive cash-on-cash yield across all asset classes. While other major markets are facing yield expansion pressure, yields in Japan are expected to remain stable,” he said.
Before the launch of AREAP in December, Allianz Real Estate already owned 130 multi-family assets in Japan, including a $1.1 billion portfolio bought in 2019. Today it manages a residential portfolio of $2 billion there.
According to CBRE, international and domestic investors have allocated $80.52 billion into Japan’s property sector since the start of 2020, of which $15.3 billion has gone to the multi-family sector.
Total AUM for Allianz Real Estate in Asia increased from $9.2 billion at the end of December 2021, invested across 50 investments, to $9.4 billion at the end of June across 56 investments.
Shift to development
Allianz Real Estate has increased its focus on partnering with local developers, rather than buying completed assets from funds, as international investors flock to Japan and the competition for deals increases.
“In the past you would typically pay a premium for portfolio deals but this has enlarged over the last six months. So, we have widened our sourcing strategies: with boots on the ground, now we can also go direct to the developer rather than just buying from managers who have already accumulated stock,” said Phuan, adding that while Allianz Real Estate had engaged developers in this way since first investing in the sector in Japan in 2020, it had stepped up the activity in recent months.
Phuan said working with developers in building from scratch rather than buying completed buildings or portfolios from funds has several advantages.
The first is cost. “Going direct to developers allows us to buy at better price, allowing us a buffer [to protect] yields,” he said. Working with developers also provides opportunities to get protections, such as defect liabilities [where faults in the build are guaranteed], which it was hard to obtain for existing buildings bought from a fund.
Phuan said that Allianz Real Estate was exceptional among international investors in that it can harness economies of scale from small and mid-sized deals, where transaction costs can be large relative to the size of the deals.
This feature makes this type of transaction unappealing to most international investors, although this is starting to change as the sector becomes more popular with international investors. By contrast, Allianz Real Estate, has this year completed a number of deals of this size, providing economies of scale.
“We have done a lot of these smaller and mid-sized deals, meaning we save on transaction costs,” he said, pointing to reusing documentation templates for equivalent deals. “It almost becomes an assembly line,” Phuan said.
This story has been edited to clarify that Allianz Re sees opportunity for another platform, and not that it plans to launch a second one.