Morgan Stanley raising about US$680 million for Japan real estate fund: sources

[TOKYO] Morgan Stanley is raising about 100 billion yen (S$910.8 million) for a Japan-focused real estate fund, two people familiar with the matter said, highlighting investor interest in property as the world’s fourth-largest economy emerges from years of deflation and standstill prices.

The Morgan Stanley-managed fund is due to close in June and expected to raise at least 100 billion yen based on current investor commitments, according to the people, both of whom declined to be identified because the information hasn’t been made public. The final size of the fund could change by the closing, the people said.

Investment will centre on offices and multi-family residential buildings in major cities, as well as logistics and hotels, one of the people said.

Morgan Stanley declined to comment. Details of the fund are reported here for the first time.

The US firm is the latest global asset manager to set its sights on Japanese real estate, an asset class that has come back into favour after years of stop-start economic growth, flat wages and zero inflation.

The investment case has changed sharply over the last year, most notably after the central bank raised interest rates for the first time in 17 years last March.

Prices, including of real estate, are now going up: land prices across Japan grew 2.7 per cent in 2024, the fastest pace since 1991, after which the country’s “lost decades” began, a land ministry survey showed.

“We see great potential in real estate investment in an inflationary environment,” said Ikushin Tsuchida, managing director at Brookfield Asset Management. “Market dynamics are changing,” he said.

At the same time, in a corporate governance push, Japan’s listed companies are looking to improve their use of capital and sell off some property holdings.

Global funds such as Asia-based Hillhouse Investment, Swedish firm EQT and US-based Warburg Pincus are hiring to expand their presence in Japan. The competition for talent is fierce, funds say.

Competition heats up

After peaking in 2020, global fund investment in Japanese property declined for several years as interest rates around the world increased, according to Shota Otani at Sumitomo Mitsui Trust Research Institute.

But the last quarter of last year appeared to be a turning point with investment rising 37 per cent year-on-year, a trend Otani expects to continue.

Domestic private equity fund Integral launched a real estate fund in January and is raising capital. Integral Real Estate Partner Hironori Nakai said the arrival of rising prices has nudged Japanese investors into taking more risk.

“Until now investors have looked for stability, but with the coming of inflation there’s demand for products that can generate sufficient returns that beat interest rates,” he said.

Fellow partner Tomohiro Sumiya, who was previously at Blackstone, said renovating or converting properties and then raising rent is a way to achieve those higher returns.

Back-to-work drives office demand

Investors say that while there are many deals to be had, there are some signs of overheating in some of the most popular sectors, such as hotels.

Hong Kong-based Gaw Capital Partners, which acquired Tokyu Plaza Ginza, a prime mall in central Tokyo in a deal worth more than US$1 billion in February, has lost a number of recent bids on hotels as the market as become too competitive, said Isabella Lo, its managing director and head of Japan.

“It creates a somewhat dangerous market for investors because of rising interest rates, a lot of liquidity and a lot of competition,” she said.

In contrast, large-scale office properties have been a bright spot, bucking a global trend as more Japanese have returned to the office following the end of the pandemic.

At the end of December 2024 Tokyo’s office vacancy rate stood at 3.5 per cent, versus 14.7 per cent in Manhattan and 7.6 per cent in central London, CBRE data showed.

Given Japan’s labour shortage, companies are using trendy offices close to train stations as a means of attracting and retaining staff. The promise of higher rents is drawing in investor money, said Natsuki Kitaguchi, managing executive officer at Sumitomo Mitsui Trust Bank.

This year, Brookfield acquired partial ownership of luxury hotel and office complex Meguro Gajoen in Tokyo and Blackstone acquired Tokyo Garden Terrace Kioicho from Seibu Holdings . Both properties include office buildings alongside wedding venues and hotels.

Activist investors have long targeted the property held by Japanese corporations, and some are having increasing success pushing for changes in corporate governance. In one high-profile example, US fund Elliott last year took a stake in Tokyo Gas.

When news of Elliott’s investment broke, Goldman Sachs’ chief Japan equity strategist Bruce Kirk received a rush of requests for analysis on Japanese firms with sizeable unrealised real estate gains on their books.

There was a total of 25 trillion yen in unrealised gains on real estate assets among Topix-listed companies at the end of March 2024, Kirk’s calculations show.

“In the past there was a belief that even though the value was there, it couldn’t be unlocked,” Kirk said. “It’s now more likely that investors can unlock some of that value or at least make corporate management do something.” REUTERS