Secured Capital, the Tokyo-based real estate investor, has held a first close at $175 million for its latest vehicle, a Japan-focused opportunity fund that has a target of $1 billion.

Secured Capital Real Estate Partners V will focus on distressed and debt opportunities primarily in Japan, although about 30% of its capital can be invested in China if suitable deals arise.  

Most of the allocations in the fund’s first close stem from the Tokyo-based firm's existing investors, including pensions and endowments in the US, says JP Toppino, CIO of Secured Capital. The re-up rate among the firm’s limited partners is high, he adds, at “close to 100%”.

The fund will invest in a diversified range of real estate, ranging from residential to commercial and retail, says Toppino, although hospitality will not be a focus.

On the distressed debt side, non-performing and sub-performing debt will be targeted. Sellers in the market include European banks, institutions and mortgage-backed securities holders. “What we’re going after are good companies,” says Toppino, “good-tier distressed sellers.”

“Unlike the US and Europe, there’s not a lot of competition” for such assets, says Toppino. “There is more supply than there is capital available.”

Although he would not disclose the expected internal rate of return for the fund, opportunistic real estate vehicles generally have higher yields than core property funds, which typically have an IRR of about 10%.

The latest vehicle is a follow-up to the Tokyo-based firm’s Japan Real Estate Partners IV, which closed at $525 million in 2009. Given the post-crisis market downturn at the time, it was able to invest in prime Class A property and as such is expected to have a greater portfolio of physical real estate assets than Fund V.

However, Toppino adds, “there are better risk-adjusted returns on the debt side” at the moment, with yields on physical property assets for Fund V expected to be slightly lower than on distressed debt holdings.

At $1 billion, the fund is among the largest distressed private equity property funds being raised in the region, according to data provider Preqin. A similar target has been set for Aetos Capital’s Asia IV fund, which focuses on distressed and opportunistic properties in China and Japan.

The Secured Capital fund is “sized relative to the opportunity sets that we see”, says Toppino, who adds that the use of leverage is likely to be low, at less than 50%. Fund V is expected to hold a final close in Q1 2013, he adds.