Aberdeen Standard Investments and Sumitomo Mitsui Trust Bank (SMTB) have delayed the launch of a closed-end fund focused on Japanese multi-family rental property, even as other investors have been busy pouring money into that sector.

The British firm had originally hoped to launch the strategy by the end of 2019, but the target had already slipped and now has been postponed to an unidentified date over pandemic-related worries. The move underlines the challenges fund managers face in raising money amid the Covid-19 outbreak. 

“We took the decision at the beginning of the crisis in Japan to delay the launch,” said John Lee, head of value-add real estate investment management for Asia Pacific. In light of the pandemic, he added, market opportunities would take some time to materialise fully in a sector comprising “typically more resilient residential assets”.

The firm declined to comment on how much the fund has raised or how much it was looking to bring in.

When their partnership was announced in June last year, ASI and SMTB had put tens of millions of dollars of capital into the joint venture, Kang Puay-Ju, ASI’s then Asia-Pacific head of real estate, told AsianInvestor at the time. And they were hoping to persuade international asset owners to supply hundreds of millions more when they launched the closed-ended fund, Kang (who has since left ASI) added.

The move followed Aberdeen’s acquisition in February of Hong Kong-based real estate investor Orion Partners as it moved to ramp up its property investment presence in the region.

DEMAND STILL STRONG

While ASI has hit an obstacle, capital is still pouring into Japan’s multi-family sector, which has bucked the trend of falling Asian real estate inflows this year.

Total investor flows year-to-date to June 2 were $4 billion, up from $2 billion in the same period in 2019, according to Real Capital Analytics. Overall Asian real estate inflows halved from $73 billion to $37 billion over the same period. Japan dominates the regional sector: $23 billion of $36 billion total flows into Asian multi-family property between the start of 2016 and June 2 went to Japan, by RCA figures.

Big players have been committing substantial sums.

On May 29 Allianz Real Estate, the property investment arm of German insurer Allianz, said it had acquired a portfolio of prime multi-family assets in Tokyo for €110 million. That followed its acquisition in November 2019 of a €1.1 billion multi-family portfolio spread across Japan.

Louise Kavanagh, Nuveen

And Nuveen Real Estate, the investment arm of the US Teachers Insurance and Annuity Association of America (TIAA), has added $364 million to its residential allocation in Japan this year.

At the end of February, Nuveen acquired a portfolio of multi-family properties across Tokyo and Osaka for $140 million via its Asia Pacific Cities strategy. This followed the $224 million it spent in January on seven multi-family properties in Tokyo via the multi-family partnership it has with Japanese asset manager Kenedix.

“Demand for multi-family [in Japan] has continued to rise. Both foreign and domestic institutional investors continue to chase multi-family assets for income durability and capital value support,” said Louise Kavanagh, Hong Kong-based head of Nuveen Real Estate’s Asia Pacific Cities strategy.

But Kavanagh said pricing assets in Japan would remain difficult until sales volumes recovered, predicting they would fall in the second quarter. “The problem that many investors, valuers and vendors are facing is that there really isn’t transactional volume trading. Price discovery is hard.”

DEMOGRAPHIC, MACRO SUPPORT

Following two quarters of declining GDP, Japan is in recession (6.4% and 3.4% for Q4 and Q1). However, Kavanagh said she didn’t expect prices or occupancy in Japan’s major cities to fall thanks to demographic trends including strong population growth, inward immigration to cities and shrinking household sizes.

Among the 600 units acquired by Nuveen at the end of February, occupancy had increased 7% by the end of March with moderate rental increases in the new leases, said Kavanagh.

“In Japan, there has been very limited or no impact to rental collections and occupancy levels in the multi-family rental sector as a result of Covid thus far,” Robert Johnson, managing director and Asia Pacific real estate portfolio manager at JP Morgan Asset Management in Hong Kong.

Certainly, the chief investment officer of a Hong Kong-based insurer expressed confidence in its Japanese real estate assets despite the coronavirus outbreak.

“We have various direct property investments spread around Japan, and I’m sure we can continue with our holdings there,” he said. “[Japan] is the least of my worries. I would like to think that there are good opportunities to buy more at better prices.”

ASI’s Lee made a similar point: “A medium-term economic downturn [in Japan] could result in pressured sellers and improved tactical buying opportunities for well-capitalised buyers over the medium term.”

Nonetheless, net population growth, increasing urbanisation and higher incomes in the major Japanese cities of Tokyo, Osaka, Nagoya, Fukuoka and Sapporo is driving residential demand ahead of supply, he said.

Japanese residential property prices have held up far better than those in, say, the office market across Asia Pacific.

Japan-listed residential real estate investment trusts (Reits) have seen average premiums to net asset value (NAV) fall from 3% on December 31 to 1% on May 28, according to property broker CBRE. Over the same period, Asia-Pacific listed Reits in the office sector saw their values fall from a 5% average premium to NAV to a -18% discount.