It has been a very long time coming but the logic of Japan’s giant trading houses using their knowledge of overseas property markets to create packages in which institutions at home can invest for income and/or capital appreciation has finally borne fruit according to an article in the Nikkei.
Sumitomo Corp, Mitsubishi Corp and Mitsui & Co have entered, or are entering, the field by offering investment in US real estate assets to Japanese pension funds and others.
Simply by conducting their day-to-day business these conglomerates have accumulated vast knowledge of the world’s requirement for silos, warehouses and other trading infrastructure – often seeing the early signals of demand before of others do.
Meanwhile on the home front, building and managing large real estate projects has become a staple activity and the companies have been transferring this expertise abroad.
Yet they may now need to move with caution if they are to continue securing worthwhile properties in markets where prolonged low interest rates mean prices for all types of asset are looking toppy.
A complex business
Stakes in property packages offer a buyer the opportunity for both income and capital appreciation on the assets held in real estate investment trusts (REITS) — vehicles which enjoy widespread recognition among investors even if their details differ.
By contrast the nature of infrastructure projects means that while they provide only income, which is often guaranteed at some base level by governments, as the asset reverts to public ownership at the end of a fixed period. Moreover the nature of the initial structures may rule out their all being eligible for the same type of tax treatment or the same tax advantage as REITs. Putting together packages of these undertakings is thus a complex task which may require new structures and, if they are to be liquid, new trading platforms (see archive 2011-11-19 Mitsubishi Corp to build infrastructure debt platform in US).
Japan’s dire demographics and its pension funds’ need for income may yet prove sufficient incentive for this to happen. Most of the country’s job-based retirement schemes have passed the tipping point at which they begin to have, in perpetuity, more going out in benefits each month than they have coming in as contributions.
For the trading companies, redirecting inhouse expertise and buying in any missing skill sets (see archive 2011-10-31 Mitsubishi gears up pension product power) makes more sense than ever — now that their commodities businesses are no longer flying as unsustainably high as they once were.
The Rockefeller débâcle
The distortions which have arisen in the Japanese banking sector over the past two decades (see ‘Reference points’ in column at right, Japan’s Consolidating Banking System) and the lack of demand for credit from the country’s many cashed up companies, mean that financial institutions have had to find other ways to make money and one result has been their very large presence in the aircraft leasing business.
These assets too could be packaged and sold on to outside institutions but this is unlikely as the banks would then have to find other holdings which earn as much.
With life cos, pension funds, banks and cash-rich companies all looking for the same thing, demand for quality income-generating assets is mounting and supply is finding it hard to keep up. The danger along the way is another Rockefeller Centre débâcle
© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.
This blog would not exist without the help and humour of Diane Stormont, 1959-2012